REAL ESTATE – Japanese pension funds may soon increase their allocations to real estate, says a spokesman for Japan’s Association for Real Estate Securitisation.

In North America and parts of Europe, it is not uncommon to see pension funds allocate around 5% of their assets to real estate investment. Their Japanese counterparts typically invest less than 1%.

According to Hiromichi Iwasa, a director of the Association for Real Estate Securitization and president of Mitsui Fudosan, says: “If the real estate securitisation market hits Y10trn, pension funds will begin to invest in the property market in earnest.”

The market size of J-REITs has expanded to Y3.4trn since the first initial public offering in 2001. Six of the 33 J-REITS were listed this year.

Iwasa was speaking at a conference in Tokyo hosted by the American Urban Land Institute. Mitsui Fudosan is one of Japan's leading developers and set up the country's first REIT.

Delegates were generally upbeat about prospects for Japan. With the average yield on investments around 2% higher than 10-year bonds, there are no signs of capital flows drying up. The prospect of a steady rise in interest rates is not deterring investors currently.

James Quille, chairman of Macquarie Global Property Advisors, believes Japanese property is still attractively priced. Toru Matsumura, lead researcher at NLI Research Institute, pointed out that properties in regional areas are yielding returns 1-2% higher than those in Tokyo.

Asset managers in Japan have focused on development-oriented real estate funds in anticipation of an end to deflation. Local REIT managers are also looking to international diversification once the Ministry of Land, Infrastructure and Transport lifts the current ban on overseas investment.