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German Investors’ Involvements in
Japanese Real Estate
and their Future Prospects
Yuko Tomizuka, LREA,MAI, MRICS, MBA WIB Real Estate Finance Japan K.K.37F Roppongi Hills MORI Tower, 6-10-1 Roppongi, Minato-ku,
Tokyo, Japan, [email protected]
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 2
WIB Japan& Author-Back Ground WIB Real Estate Finance JapanK.K.
WestLB AG, Duesseldorf, Germany
Westdeutsche ImmobilienBank AG, Mainz, Germany
WIB Real Estate Finance Japan K.K., Tokyo, Japan
Subsidiary, real estate financing& transaction
Subsidiary, focusing on Japan market
Yuko TomizukaResponsibility in WIB Japan: Property Valuation & ResearchAssessing collateral values, instructing& reviewing external
appraisals and consulting real estate financingAcademic relation to ERES: alumna of SDA Bocconi, MBA 30
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 3
Objectives
Back ground Slowed down real estate market in Japan especially after break
down of Lehman Brothers in 2008. German investors active acquisitions under bearish market. Current concerns: financial restructuring of assets. Japanese market overall still seems to be lead by domestic
investors. Deal participants tend to be limited to domestic investors or
non-German foreign investors due to lack of information and analytical assessment of German players’ future involvements.
Purpose of this paper Outline background of German investors’ activities Provide analysis of their future growth Increase the opportunities of German investors’ involvements Promote restructuring supported by German debt providers.
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 4
GERMAN INVESTORS’ACTIVITIES & THEIR
BACKGROUNDS German public open-ended funds (GOEFs) as well as special open-ended funds have been actively investing in Japanese real estate.
The investment amount & the number of German open-ended funds has been increasing
Investment to Japanese market has remain solid, even after the market clash in 2008.
German Open-Ended Funds also followed a diversification strategy from 2005 onwards.
Their investments’ drivers • Strong currency, • Transparency of social and legal
regulations• Low financing cost • Less political risk in the Asia Pacific
regions • Less competitors in the market
compared to the peak.• The main reasons of their appetites are
strong Euro, long-term stability of Japan’s business environment and the debt availability.
Assets and numbers of institutional open-ended real estate funds (German Spezialfonds)
Immobilien-Spezialfonds Special OEREF:BVI
0
5
10
15
20
25
30
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
May
201
0
Ass
et V
alue
in b
illion
Euro
020406080100120140160
Num
ber of F
unds
Assets Number of Funds
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 5
ANALYSIS OF FOREIGN EXCHANGE RATE
Since Euro was introduced, the currency has appreciated against JPY and reached a peak in 2007.
In 2007 and following 2008, many German investors who bought the properties in Japan benefited from the favourable exchange rate.
The transition of the value of 1 Euro in JPY
Bank of Japan
020406080
100120140160180200
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 6
SENSITIVITY ANALYSIS BASED ON THE THREE
SCENARIOS Under three basic market scenarios of future market change, it will be analyzed how different currency rate would create loss or gain for Euro zone investors.
The assumptions • Market scenario; analyzed future market trends are Recovery,
Stabilization, and Recession. • Investment targets; B location, B grade office buildings[1] in central
Tokyo.• Value change: applying the income approach, the future value change
transition is forecasted considering the past trends of rent and cap rate for the above investment targets.
• Timing of investment and exit point; purchasing in 2010 and selling the asset in 2014.
• Forecast exchange rate; simulations are made that 1 euro remains 125 yen, appreciated to 110 yen[2] and devaluated to 160 yen
• The value change in Euro is measured as an index when the value at purchasing is 1.
[1] Analyzing the location and quality of the assets purchased by German funds in the past[2] Forecasts made by Federal Reserve, West LB, and Commerzbank AG
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 7
Property value change under different exchange rate, Recovery
Scenario The exchange rate keeps 125 yen or is appreciated to 110 yen>>> considerable gain
Japanese Yen (JPY) devaluated to 160 yen against euro>>>small gain
Produced by author based on Tokyo B grade office market data; “Real Estate White
Book 2010” by CBRE
100
120
140
160
2009 2010 2011 2012 2013 2014
Pro
per
ty V
alue
Chan
ge
Index
(20
05 =
100
)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Prop
erty Valu
e in E
uro
Property Value Change (2005 = 100)Property Value in Euro (1 EUR = 110 JPY)Property Value in Euro (1 EUR = 125 JPY)Property Value in Euro (1 EUR = 160 JPY)
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 8
Property value change under different exchange rate,
Stabilization Scenario currency moves to 160 yen >>> loss the exchange rate moves to 110yen >>>small gain
Produced by author based on Tokyo B grade office market data; “Real Estate White
Book 2010” by CBRE
Graph 4: Property value change under different exchange rate, Stabilization Scenario
90
100
110
120
2009 2010 2011 2012 2013 2014
Pro
per
ty V
alue
Chan
ge
Index
(20
05 =
100
)
0,00,10,20,30,40,50,60,70,80,91,0
Prop
erty Valu
e in E
uro
Property Value Change (2005 = 100)Property Value in Euro (1 EUR = 125 JPY)Property Value in Euro (1 EUR = 110 JPY)Property Value in Euro (1 EUR = 160 JPY)
Source: Produced by author based on Tokyo B grade office market data; “Real Estate White Book 2010” by CBRE
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 9
Property value change under different exchange rate, Recession
Scenario The investor would suffer loss from the value change, especially large loss if the euro started being evaluated again to the level of 2007 (160 yen)
Produced by author based on Tokyo B grade office market data; “Real Estate White
Book 2010” by CBRE
0
20
40
60
80
100
120
2009 2010 2011 2012 2013 2014
Pro
per
ty V
alue
Chan
ge
Index
(20
05 =
100
)
0.00.10.20.30.40.50.60.70.80.9
Prop
erty Valu
e in E
uro
Property Value Change (2005 = 100)Property Value in Euro (1 EUR = 125 JPY)Property Value in Euro (1 EUR = 110 JPY)Property Value in Euro (1 EUR = 160 JPY)
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 10
SUMMARY OF THE SENSITIVITY ANALYSIS
The property appreciation plus strong yen may bring the large gain to investor while value decrease in both property and local currency may cause unexpected loss.
Assuming the acquisition of 2011, the investor may obtain positive gain or moderate return unless the market goes further into recession.
Now the market is closing to the bottom and JPY has started to appreciate against euro, the currency exchange may motivate German investors to expand their portfolios in Japan
EX Ratio/Market Trend Recovery Stablization Recession Recovery Stablization Recession
Euro = 110 yen GAIN GAIN SMALL GAIN GAIN NEUTRAL LOSSEuro = 125 yen SMALL GAIN NEUTRAL SMALL LOSS GAIN NEUTRAL LOSSEuro = 160 yen LOSS LOSS LARGE LOSS GAIN NEUTRAL LOSS
Purchase in 2010 Purchase in 2011
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 11
ANALYSIS OF MARKET STABILIZATION German open-ended property fund (GOEFs) improves the portfolio
performance over long-term investment term. The benchmark portfolio is assumed to consist of one third equities, one
third bonds, and one third money-market investments. Increasing the allocation to property (equity; GOEFs) and decreasing the allocation of other assets results in decrease of the risk of the portfolio.
To manage the risk of portfolio efficiently, it is necessary to increase allocation to GOEFs.
GOEF’s performance should be discussed in long term time horizon. The stability of the market over the asset holding period has also been
considered to be an important investment criterion for those property funds.
Average Minimum Returns (AMR) for Various Holding Periods
Open-ended Property Funds as an Essential Building Block in a Successful Asset Allocation Oct 2008;BVI
1 2 3 4 5 6 7 8 9 10
0% GOEFs -12.98% -13.48% -10.24% -10.41% -9.06% -7.97% -5.99% 0.08% 4.36% 5.71%5% GOEFs -12.04% -12.27% -8.99% -8.84% -7.50% -6.33% -4.27% 1.75% 6.01% 7.50%10% GOEFs -11.10% -11.08% -7.75% -7.29% -5.97% -4.72% -2.57% 3.39% 7.63% 9.27%15% GOEFs -10.18% -9.90% -6.53% -5.76% -4.46% -3.14% -0.91% 5.00% 9.23% 11.00%20% GOEFs -9.26% -8.73% -5.32% -4.26% -2.97% -1.58% 0.73% 6.59% 10.80% 12.70%25% GOEFs -8.35% -7.58% -4.12% -2.78% -1.51% -0.04% 2.34% 8.15% 12.35% 14.37%
Investmetn yearsallocation to GOEFs
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 12
GDP GROWTH & ITS FORECAST
Among many factors, looking at its consistency and comparability, the GDP growth will be analyzed as the comprehensive stability indicator.
Due to slow-downed exports growth and uncertainties of the government economic policies, the average GDP growth for the next decade is 1.2% p.a.
Investment in IT especially in sustainable technologies, in telecoms or in medical-social security system might drive early economic recovery.
However, overall growth of Japanese economy looks moderate.
Actual GDP growth and its forecast
Source: Medium Term Japan Economic Forecast 36th; Japan Centre of Economic Research (JCER); GDP Official Calculation 2008 confirmed; Cabinet of Office, Government of Japan
-4%
-2%
0%
2%
4%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 13
JAPAN’S POSITION IN ASIA
Comparing other Asian countries, despite China, Japan’s position as the investment destination with solid economic output is expected to persist over medium term.
Considering comprehensively the political stability, market transparency, efficiency of real estate management processes (holding, leasing, and disposing), Japan will remain an attractive market for German investors as long as the country stays on positive growth path.
GDP, current prices in US dollar by countries
World Economic Outlook Database 2010;
IMF
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
2008
2009
2010
2011
2012
2013
2014
2015
United States
China
Japan
United Kingdom
India
Australia
Korea
Taiwan Province of China
Thailand
Malaysia
Hong Kong SAR
Singapore
Vietnam
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 14
ANALYSIS OF DEBT AVAILABILITY
In Japan, the mainstream of real estate financing is a non-recourse loan, which is provided to the borrower SPC specifically relying on the ability of an individual asset to generate cash flow.
In Japan major non-recourse loan providers are financial institutions of large financial groups whose funding sources are savings and funds from the central bank.
In Germany, dominating banks in commercial property finance are Pfandbriefe-issuing banks who have been successful in raising funding scheme through the Pfandbriefe.
Pfandbriefe is a type of bond issued by German mortgage banks that is collateralized by long-term assets used
Gross Sales Pfandbrief
Deutsche Bundesbank, vdp
020406080
100120140160180200220
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Mortgage Pfandbrief Public Pfandbrief
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 15
PFANDBRIEFE OVERVIEW In safety on legal basis, quality assured
by underlying-mortgages, simplicity (no subordination), transparency, cover pool liquidity, standardization, and continued quality control .
For Mortgage Pfandbriefe (used for the funding of property loans and which must be secured by real estate), similar to non-recourse loans in Japan, detailed due diligence and thorough analysis on property value have to be conducted.
Specifically, the assessment of the property value as conservative basis is comprehensively regulated under the The Pfandbriefe Act
Great Britain, France and Poland are important foreign markets
USA is dominating in cross-boarder lending other than EU member countries, whereas Japan so far accounts less than 2%.
Closs Border Commercial Property Loans, except EU member states,
Total Lendingas at end-2009(Share in %)
vdp statistic
Canada
Iceland
Japan
Norway
Switzerland
USA
Other states
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 16
DIFFICULTIES OF PFANDBRIEFE IMPLIMENTATION TO
JAPAN Local legal structure, for this scheme to be efficient, the preferential right of creditors of German Pfandbriefe should be secured in the event of insolvency of Pfandbriefe bank.
In real estate financing in Japan, TMK structure with TMK bonds issued with the General Security has generally been preferred scheme
However, legal status of the General Security being only a statutory preferential right has always been questionable in the discussion of the eligibility of this TMK for the covered pool of Pfandbrief.
General Security can not be perfected under Japanese law; it will subordinate against any registered collateral over Trust Beneficiary Interest. (TBI)
Therefore General Security per se can not establish the secured position required under the Pfandbriefe scheme.
Payment Specified Assets Asset-related
SecuritiesSpecial Purpose funding
Owner of underlying assets Real Estate
Specific corporate bonds Financial Institutions
Transfer Assets Specific notes Bond purchase
Entrustment PaymentAsset management, Trustee Beneficiary Interests Preferred Equity Investor
Manage&Disposal Security IssuranceSpecific convertible
corporate bonds
TMK(Tokutei Mokuteki Kaisha)
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 17
SOLUTIONS FOR PFANDBRIEFE IMPLIMENTATION TO
JAPAN GK-TK,in which lenders make loans with TBI pledge or Mortgage in stead of TMK bonds, lender’s right is perfected and both mortgage and TBI pledge are considered equivalent to mortgage in Germany.
This will also apply for TMK loan portion with a mortgage or TBI pledge under a hybrid structure where TMK loan is made in combination with TMK bonds.
In recent market practice in Japan, the some progress has been made to develop a structure eligible to Pfandbrief.
WestImmo AG made a loan to a German real estate fund for purchasing an real estate located in Japan and this loan was qualified for Pfandbriefe.
Mitsubishi UFJ Trust & Banking Co., Ltd also issued a press release in January 2010 stating that they have arranged the trust contract for the creditor of Pfandbriefe as trust beneficiary for another Pfandbriefe bank for a loan originated in the past.
Specified Assets Debt & EquityNon-recourse loan funding
Trust Bank Non-recourse loan Financial Institutions
Management&Disposal
Transfer of beneficiary interest in trust (TBI) TK investment TK investment
Originator TKInvestor
Equity
GK(Godo Kaisha)
Beneficiary Interests in trust
Payment for beneficiary interests
Beneficiary Interest in trust
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 18
DISCUSSION ON FUTURE PROSPECTS
Currency; under recovery and stabilization scenario, the German investors may be able to gain from the property investment in Japan unless exchange rate rise up to 160 yen.
>>>plausible, future economic outlooks; the real estate market in Japan is now at the bottom then will be bottoming out, evidenced through transactions and investment appetites, it is unlikely for the exchange rate to be pushed up to the level of 2007.
>>> currency may not hamper further investments of German investors to the property in Japan.
Stability; Japan’s economic recovery is a tardy progress although it gives long-term stability.
>>>if the China’s economic growth slowed down and keeps constant annual growth higher than that of Japan, the former might be more preferred destination.
>>> Under such circumstances, the investment shift may happen for seeking more stable and solid return.
Debt availability; the positive environments to expand Pfanbriefe financing in Japan.
>>>now that the basic platforms have been developed and successfully implemented, the major concern is solved, although remaining problems like insuring earthquake risks have to be considered.
WIB Real Estate Finance Japan K.K.
Roppongi Hills Mori Tower 37th Floor,6-10-1, Roppongi, Minato-Ku, Tokyo 106-6137
26. June 2010Page 19
FINAL CONSIDERATIONS The stability of Japan’s
economy might not be secured over long term compared with alternative markets.
however the currency exchange rate and debt availability may support for German investors to expand their exposure in Japan.
Consequently, so long as these three drivers change positively and moderately, further investment demand from German investors can be expected.