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As Chinese Investors Pull Back From U.S. CRE, Japan Is Waiting In The Wings

The impact of heightened capital controls on Chinese outbound investment is being keenly felt across the United States commercial real estate landscape. Fear not, say many industry players: There are overseas capital sources not far from China primed to fill the void.

The Empire State Building, with One World Trade Center in the background

Experts point to places like Canada, Singapore, South Korea and the Middle East as strong candidates to pick up the slack left behind by the Chinese buyers. But many are looking at Japan as investors there begin to ramp up offshore investments.

“[Japan] is a spectacular capital source,” Savills Studley Vice Chairman and co-head of the Capital Markets Group Woody Heller said. "They have reactivated their interest in the [United] States."

Overall, Chinese investment dropped by more than 50% in 2017, declining from $16.2B in 2016 to $7.3B last year, according to a recent report from Cushman & Wakefield. The momentum in New York City’s investment sales market went with it, although there is some indication that sector is now picking up steam once more.

Investors from Japan are notoriously gun-shy of overseas real estate. In the 1980s and 1990s, amid a booming domestic economy, the Japanese invested billions in trophy assets. When Japan's stock market crashed, they disappeared from the American commercial real estate scene for decades.

They were badly burned, but they are now starting to return. Japanese investors are generally now very “methodical” and take time to engage, Heller said.

“They’ve been investing in certain fund vehicles instead of individual assets” — until recently, Heller said.

Savills Studley Vice Chairman Woody Heller in 2013

Increasingly, Japanese real estate and general trading companies are forming real estate funds with the view of targeting overseas investment, according to a CBRE report on Japanese outbound investment in the first half of 2017.

The funds serve as investment vehicles for both institutional investors and pension funds, and will lead to significant capital flowing to outbound real estate investment, the report found. Last week, The $2.8 trillion Japan Post Holdings pension fund was reportedly close to buying a stake in a foreign real estate fund, its first overseas real estate investment.

In total, CBRE pegged outbound real estate investment from Japan to be at $1.3B in the first half of 2017, a 23% year-over-year jump. Almost all of that investment was in the Americas, with 88% going to office buildings.

CBRE researchers estimated that Japanese real estate investment via indirect investment will hit $15.3B over the next few years.

“The first wave of investment from Japan is really going to be in funds,” SL Green Realty co-Chief Investment Officer Isaac Zion said at a Real Estate Board of New York panel last month. “And then, starting in 2019 and 2020, it will be into commercial real estate.”

During the 1980s and 1990s, Japanese investors went on a real estate shopping spree, scooping trophy properties across the United States.

Mitsubishi Estate famously took a controlling stake in Rockefeller Center in 1989 and 1990. The company dropped around $1.4B for its 80% interest, and then spent $500M on improvements and covering cash shortages, according to the New York Times.

In 1995, it walked away from the asset and reportedly lost $600M.

“[Mitsubishi] went in at the top and ended up dumping that asset, they lost money,” said CBRE Senior Director Junichiro Muto, who is based in Tokyo.

Since then, the Japanese have become extremely cautious of real estate investment, Muto said. Over the past three decades, the Japanese have been fixed-income investors.

“The Japanese have now started to come out [into international real estate]; they don’t have that big of an exposure. They will be looking for quality assets,” he said.

Muto thinks sometimes the Japanese risk getting left behind because they take so much time with checks and balances. Still, he said, there are significant benefits to working with Japanese investors and developers.

“They are sticky, but once they get used to you, they’re there” he said. “The Japanese are more about relationships and they’re in there for the long term. For good and bad weather.”

He noted that bigger Japanese developers have strong relationships with Japanese banks and are able to bring cheap financing in a tight lending environment.

“They are in a very low rate environment in their home country, there’s not a lot of opportunity for increased yield,” CBRE Chairman of New York City Capital Markets Bill Shanahan said. "The United States is a primary opportunity. Our major gateway markets are liquid and the assets are sizable, so they can make larger investments.”

685 Third Ave. in Midtown Manhattan

Shanahan represented TH Real Estate in its deal to sell the 31-story building at 685 Third Ave. to Japanese real estate firm Unizo Holding Co. for $467.5M. The firm reportedly paid all cash for the acquisition, which is the sixth purchase it has made in the city.

In Washington, D.C., Unizo went on a shopping spree, buying $1.2B worth of properties in 15 months in 2016 and 2017. The firm operates in D.C. without local partners, Bisnow learned, and is silent about its real estate dealings.

“There’s no drama, which is nice,” Shanahan said of dealing with Japanese buyers. “A lot of investment has been happening right in front of people’s noses at Hudson Yards.”

Mitsui Fudosan, the American arm of Tokyo-headquartered Mitsui Group, has a 90% stake in 55 Hudson Yards, paying $257.8M in 2015. Last year, the company announced it would also take a 90% stake in the $3.6B office tower at 50 Hudson Yards, its largest offshore investment in a single building.

Shanahan also noted Tokyu Land Corp.’s partnership with L&L and GreenOak Real Estate for the office tower at 425 Park Ave.

“China has slowed down for certain,” he said, adding "there is a lot of capital that is willing to take its place.”