german investors’ involvements in japanese real estate and their future prospects yuko tomizuka,...

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 2010

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



26. June 2010

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.



26. June 2010

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

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30

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May

201

0

Ass

et V

alue

in b

illion

Euro

020406080100120140160

Num

ber of F

unds

Assets Number of Funds



26. June 2010

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

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2005

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26. June 2010

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



26. June 2010

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)



26. June 2010

Property value change under different exchange rate,

Stabilization Scenario currency moves to 160 yen >>> loss the exchange rate moves to 110yen >>>small gain



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


Source: Produced by author based on Tokyo B grade office market data; “Real Estate White Book 2010” by CBRE



26. June 2010

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)



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




26. June 2010

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



26. June 2010

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



26. June 2010

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



26. June 2010

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



26. June 2010

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



26. June 2010

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



26. June 2010

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)



26. June 2010

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



26. June 2010

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.



26. June 2010

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.

german investors’ involvements in japanese real estate and their future prospects yuko tomizuka,...

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