Viewed as a stable asset class that is uncorrelated to the pandemic-related risks, Japan’s multi-family housing sector provides resilient income and attractive risk-adjusted returns with rising demands, says real estate private equity firm Q Investment Partners (QIP) co-founder and CEO Peter Young.
Due to Japan’s stable inflationary environment and reliable macroeconomics, the multi-family housing sector has been seen as very attractive to institutional and sophisticated investors alike, says Young, citing Blackstone and Allianz Real Estate as examples.
He adds: “In Singapore, the rising inflation is directly correlated with material rental growth and capital value appreciation. Due to this, investors are looking for real estate opportunities and adjusting their portfolios to hedge against market risks, including inflation. This is why the real estate opportunities in Japan are attractive through the investors’ lens.”
To capture opportunities in this space, QIP is now raising US$100 million ($135 million) to acquire multi-family housing assets in Japan. The core real estate strategy will look for assets within the country’s metropolitan cities, aiming around 8% to 10% internal rate of return with a 5% cash-on-cash return.
Young explains that Japan is a country with a dwindling population, which is dropping by a million a year. The Japanese Statistic Bureau estimates that the population count would fall to just over 100 million by 2050, from about 125 million today. The decline in population is more acutely felt by the rural areas, as urban cities have a positive net migration data of between 3% to 8% over a five-year period.
He is upbeat that there is growth potential in the market segments he has identified, adding: “Of course, in today’s environment returns have moved various ways. But these are normal people’s homes in urban cities that have positive employment growth and positive net migration. Additionally, it is not impacted by the Covid-19 pandemic unlike other assets as people will continue to need homes, pandemic or not.”
See also: OpenAI raises US$6.6 bil in funds at US$157 bil valuation
Demand in Japan
Apartment prices in Japan’s metropolitan areas have seen record high figures in recent years. Statistics released by the Real Estate Economic Institute sighted by Bloomberg show that the price of new apartments in Tokyo toppled the 30-year-old record in 2021, due to rising demand from dual-income households and increasing construction costs.
The mean prices of new condominiums in Tokyo as well as surrounding areas hit JPY62.6 million ($701,427) last year, topping the JPY61.2 million watermark set in 1990 at the peak of the economic bubble.
See also: Alibaba-owned hypermarket chain Sun Art said to draw PE interest
Currently, QIP has three multi-family housing assets in Japan, which are expected to be fully operational in the second quarter of the year. The first property is Luxe Shin, a 89 unit multi-family apartment located in Osaka, Japan’s second largest metropolitan area. The other two assets are located in Japan’s fourth largest city, Nagoya: Porta Niagra Osu has a total of 62 units while Porta Niagra Chikusa has a total of 56 units.
“What we are trying to do is to buy rental buildings that typically have operating income. They may not all be fully occupied, could be between 80% to 90%, but the demand for the relatively new buildings should be predictable for the next up to 20 years,” says Young.
Opportunities in student accommodation and co-living spaces
Based in Singapore, QIP invests mainly in the “living spectrum” of purpose-built residential housing which includes co-living properties, multi-family housing and senior care centres. The lion share of its current investment portfolio comprises student housing, or purpose-built student accommodations (PBSAs).
Before it made moves into the Japanese market, QIP was already invested in five PBSAs located in the UK: Four are operational, while the property in Egham — a university town 31km west of central London — is in development. The four operating properties are Straits Manor in Sheffield with 284 beds, Straits Village in Nottingham with 300 beds, as well as Straits Meadow and 65 London Road in Edinburgh, with 198 and 76 beds respectively.
Diversification opportunities
Young says that the firm has evolved over the past year, having looked at diversification opportunities within the real estate sector. “Our primary set of expertise is specifically developing student accommodation assets in the student housing sector. This is a stable asset class that does very well and is very much in demand, which explains why names like Mapletree and Far East Organization are heavily invested in it. ”
For more stories about where money flows, click here for Capital Section
“But we have evolved from simply doing development. Entering our sixth year, we have moved from that risk spectrum. From a development-only strategy with private wealth and family office capital to a core strategy of low-risk and predictable stabilised income,” he adds.
While QIP had previously expressed interest in exploring student accommodation and co-living assets in Singapore, it has yet to start investing in the city state. The co-living sector, especially, continues to be appealing with the growing number of institutional and sophisticated investors viewing it as stable and rental-growing assets for their portfolios. However, Young says QIP is now “laser focused” in its existing markets which are the US, UK and Japan and is not planning to penetrate any other markets in the near future. Currently, the firm has only one co-living asset: 633 LaSalle Street in Chicago. “The Singapore market is quite different from other developed markets that we are in. The policies that are in place in Singapore makes it quite a different proposition.”
Market still very liquid
On Feb 22, QIP announced that it has exited from two PBSA projects in Edinburgh. The deal for both projects is valued at approximately GBP40 million ($71 million) and are initial assets to be exited into QIP’s core plus equity fund, which aims to invest capital in the acquisition of established PBSA projects across the UK. The initial assets under management target of the fund is GBP150 million by end-2022.
Together, the exit of both projects is expected to deliver annual returns of over 18% — well above the initial targeted annual returns of 16%.
While the exit landscape had been described by many private equity investors as challenging due to the pandemic, Young believes the commercial real estate market is still very liquid as transactions continue to take place. “We have seen transactions happen well throughout the two and a half years of the pandemic. In fact, pricing has become even more attractive. Of course, the pandemic had some impact on some assets, but living and storage facilities are some of the clear winners and we have seen more liquidity and attractive pricing in the student housing sector because of it.”
A report by CBRE released Feb 22 states that global commercial real estate investment had strong growth in Q42021 with record volumes in the US and Europe, along with strong volume in Asia Pacific despite the pandemic and rising inflation. Global investment volume increased 54% y-o-y in 4Q to a record US$498 billion while full year 2021 global volume increased by 55% from 2020.
He adds: “We think that the liquidity for the assets that we are investing in should remain robust moving forward.”
Photo: Albert Chua/ The Edge Singapore
