Friday, November 04, 2005

Got Glut?

Anyone in the business can tell you that yields for Japanese real estate has fallen significantly in the past two to three years. You used to be able to buy a prime office building in Tokyo for a 5% cap rate. REITs now purchase at around 4%, and some recent transactions have even gone below 3.5%. As I’ve covered previously in various posts, the big investors are diversifying their strategies - buying up non-stabilized properties and overlooked asset classes. They’re snapping up buildings in regional areas of Japan, and commissioning developments, which they buy pre-completion. Some of the capital is from international investors – from all the world’s richer countries, including the US, Australia, Germany, the Middle East, and Singapore - but most is from Japan.

The Wall Street Journal yesterday had an important article (archived here) explaining this phenomenon: there is now a worldwide glut of capital looking for investments, chasing not just Tokyo office buildings, but anything with a reliable return. The world’s pension funds, insurance companies and mutual funds have $46 trillion at their disposal, up almost a third since 2000. U.S. companies alone have $1.3 trillion in liquid assets. This capital, when compounded through leverage, pushes up the price in investment markets, in turn reducing overall return. This means that investors are demanding less compensation than usual for taking on the risk inherent in owning the assets. This in turn can lead to a feedback cycle of more money chasing fewer returns. Or as one person quoted in the article says, "It’s a global game of chicken."

Sounds like you better get some while it lasts!

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Image : The view from my office (the setting sun can sure be pretty).


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