Goldman to Expand REIT to 300 Billion Yen as Market Bottoms

Goldman Sachs Group Inc. plans to expand its new private real estate investment trust to as much as 300 billion yen ($3.7 billion) to buy Japanese properties as the Wall Street bank foresees a turnaround in prices.

The bank’s asset management unit will begin the REIT in August with as much as 30 billion yen including equity and plans to increase the size to about 300 billion yen in five years, said Taro Squires, head of real estate investment management at Goldman Sachs Asset Management Co. in Tokyo.

Goldman Sachs joins Mitsubishi Estate Co., Mitsui Fudosan Co. and Nomura Real Estate Holdings Inc. that have set up private REITs in the past 12 months as four years of price declines, amid more than a decade of deflation, seem to be slowing. Office property prices in Tokyo, down about 40 percent from a 2007 peak, are little changed this year, according to Los Angeles-based property broker CBRE Group Inc.

“We are close to the bottom of the real estate cycle,” said Squires in an interview. “I expect the market to bottom out within the next six to 12 months.”

The REIT, which targets a 4 percent to 5 percent dividend yield, will have a leverage of 50 percent, enabling it to buy as much as 30 billion yen of real estate at the start, Squires said. The company has a target to expand the REIT initially to 100 billion yen in two years, he said.

Office buildings will account for more than 60 percent of the trust, while residential and retail will represent the rest, he said, adding that a majority of assets will be in Tokyo.

Different Cycle

The Tokyo Stock Exchange REIT Index rose the most in more than two months, gaining 1.4 percent. That compares to the 0.1 percent drop in the benchmark Topix index.

“Japan is in a different cycle compared with other markets in Asia-Pacific,” said Christopher Lee, Hong Kong-based managing director of corporate ratings for the region at Standard & Poor’s. “The other markets are coming off from a cyclical top so they are well under way for correction. Japan has been in correction for some time now, so it’s on its way for a recovery.”

Goldman Sachs, the first non-Japanese company to start a private REIT, is looking to raise money from financial institutions and corporate pensions in Japan, Squires said.

Stable Returns

Two decades of slumping stocks, one of the world’s lowest bond yields and an aging population are prompting the nation’s pensions to expand investments into alternative assets, including real estate and hedge funds. The 10-year Japanese government bond yield is 0.8 percent, the second lowest after Switzerland. The Nikkei 225 Stock Average is less than a quarter of its 1989 peak.

Private REITs own buildings and pay investors dividends from rental income. They are not traded on exchanges so don’t have daily price fluctuations that listed REITs have. That matches the need of pension funds seeking stable income.

“What we are trying to target is to provide investors that were in publicly listed REITs with more stability, to give investors that were originally in private real estate funds with more clarity,” said Squires. “For JGB investors, it still provides them with yen-denominated return albeit at a higher level.”

Investment Yield

The capitalization rate for office buildings that cost more than $10 million in Japan has declined to 5.57 percent in the first three months of this year after an average of 5.74 percent in the past 12 months, according to Real Capital Analytics Inc., a New York-based research and consulting company. A drop in the rate, a measure of investment yield for properties, signals an increase in prices.

Japan’s $3.36 trillion in pension money is the world’s second-largest retirement pool after the U.S., according to Towers Watson & Co. Japan was the only market among 12 that had a drop in pension assets because of the poor returns on local stocks and bonds, according to the report.

Japanese pensions have 31 percent of investments in equities and 59 percent in bonds, with only 6 percent in alternative assets, according to Towers Watson. That compares with 25 percent in such assets in the U.S. and 23 percent in Australia, it said.

J-REITs account for 8.3 trillion yen of Japan’s 23.2 trillion real estate investment market, while private equity real estate funds represent the rest, according to STB Research Institute Co. The size of Japan’s private REIT market is less than $2 billion, said Squires.

“Private REIT is really the one product that has been missing in the market,” he said. “It’s still a very young industry. We expect the market to grow.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE