Real Estate Funds Vie For Bldgs Under Development

July 14, 2005
Real Estate Funds Vie For Bldgs Under Development

TOKYO (Nikkei)--Privately placed real estate funds are stepping up their investment in properties under development as competition for promising real estate, especially in central Tokyo, intensifies.
In the trendy Harajuku district of Tokyo, construction of a 23-story commercial/office building began recently. The building, whose value when completed is estimated at 60 billion yen, is a premium property that would be a prime target for a large real estate investment trust (REIT).
But the building has been bought by DaVinci Advisors KK (4314), a major operator of privately placed real estate funds whose contributors are mostly institutions and companies. It may be the biggest-ever investment in an uncompleted property by a real estate fund.
DaVinci sank 50 billion yen in different properties under development in the first half of the current fiscal year through December, nearly double the amount last year.
But it is not the only operator of real estate funds that is increasing investment in uncompleted properties. Pacific Management Corp. also plans to put 110 billion yen in such real estate in the business term ending Nov. 30, 17 times the level in the previous year.
Behind the move lies an influx of money from pension plans and other domestic institutional investors into real estate funds, whose main contributors were overseas investors until recently.
DaVinci's new fund, whose investment list includes the Harajuku building, has seen half of its 100 billion yen in outside capital coming from domestic institutions, and 24 billion yen of that has been contributed by six pension plans.
Their aggressive investment has boosted the fund's total assets to 400 billion yen, compared with the 300 billion yen or so initially targeted, said sources close to the matter.
Japanese corporate pension plans manage a staggering 40 trillion yen in assets. Their active investment in real estate funds has led to a fierce race for properties among the funds, including REITs, thereby boosting real estate prices.
As a result, returns on existing buildings are falling, with even a select building in a prime Tokyo location yielding 4-5%, compared with about 6% two years ago.
A new building, which poses a higher investment risk, such as whether it can attract enough tenants, usually generates a better return. "Investment return on a new building is 1.0 to 1.5 percentage points higher than on an existing property," said Ryosuke Honma, president of Kennedy-Wilson Japan (4321), one of DaVinci's rivals.
DaVinci "wants to resell the Harajuku building for around 75 billion yen," said President Osamu Kaneko.
Real estate investment firms strive to limit their investment risk in uncompleted buildings. Kennedy-Wilson, which bought a shopping mall building in Shibuya, Tokyo, in April for 10 billion yen, has asked the builder many times to change the design of the structure so customers can be smoothly guided to visit each floor.
Still, investment in property under development is much riskier than that in a completed project for which performance can be more accurately gauged based on its past track record.
Most of the uncompleted buildings in which real estate fund operators are now investing will open in 2006 through 2007. At that time, however, there may be an office supply glut as baby boomers began to retire and a large number of buildings are completed simultaneously.
"The funds need to give investors a reasonable explanation about the extent to which uncompleted properties could lose their value in the worst case," said Junji Inoue, a senior consultant at STB Research Institute Co.

-- Translated from an article written by Tadayoshi Ichimaru, Nikkei staff writer.
(The Nikkei Financial Daily Thursday edition)