Savills IM wins two mandates to invest $600m in Japan

Savills Investment Management has won two mandates worth a combined $600m (€567m) to invest in Japanese real estate.

“One of the mandates came from an existing investor, the other is a new institution,” chief executive Justin O’Connor told IPE Real Estate.

“Mandates have been a trend in the last three to four years – and we are benefitting from that.”

O’Connor, who is visiting the firm’s Asian and Australian offices, said there is growing interest in Japan, as shown in a recent ULI-PWC survey on emerging trends in real estate.

“Japan has been major recipient of inbound capital,” said O’Connor. “It is the second-largest market in the world after the US (and) it has an enormous amount of stock. If you have the ability to execute on the ground then it is a great market.”

Savills IM’s first Japan fund, known as Greater Tokyo Office Fund, raised $82m in the first round, and has received commitments of $150m in subsequent closes.

The fund remains open, and O’Connor expects to soon reach the target of $200m.

The fund could begin selling assets this year and Savills IM is planning to follow it up with a second vehicle. 

Savills IM manages assets in Japan valued at more than US$1bn. ln 2013,it acquired Merchant Capital in Japan, giving it a presence in the country, and in 2015 it bought SEB Asset Management, which began investing in Japanese real estate 10 years ago.

“We source 99% of our transactions in Japan off-market,” O’Connor said, stressing that Japan is a market “where you need local people on the ground, who speak the language”.

“We like offices and residential, where there is a strong and deep rental market,” he said. “Depending on where you buy, you can get cash on cash yields of between 4% and 6.5%.

“The cost of debt is cheap. So if you buy central Tokyo, you may be able to get a 4-4.5% yield, and if you buy on the outskirts of Tokyo, the yield may be around 6-6.5%. If you are borrowing at an all-in cost of 1%, that is fantastic.”

By comparison, he said, debt is relatively expensive in Australia. “It doesn’t make sense buying assets at 4% yield when the cost of debt is 3%.”

Like Australia, Japan is seen as a core market offering stable income returns to investors, based on both rental incomes and capital appreciation.

O’Connor sees opportunity in Japan’s logistics sector due to changing retail trends. “We are seeing different types of demand for logistics from e-tailers, ranging from mega-distribution centres to last-mile logistics to service consumers.”

He intends to emulate Savills IM’s activities in Japan and Europe in the wider Asia-Pacific region.

Having opened an office in Australia last year, the firm is now increasing its capacity through recruitment. It plans to open an office in Shanghai in the first half of this year, and will then look at Seoul.

O’Connor said Savills IM is on track to launch a pan-Asia core plus fund which will seek to raise between $300m and $500m to acquire assets with a gross value of around $1bn.