Avatar Capital Acquires Central Tokyo Luxury Residential Project at 30% Discount

Asia-based Avatar Capital Partners has closed on the purchase of a 70-unit luxury residential development in the Japanese capital, with the inaugural deal coming just three months after the founding of the multi-family focused real estate fund manager.

Located an 8-minute drive from the Imperial Palace in central Tokyo, the project was acquired at a 30 percent discount to the asset’s appraised value, Avatar Capital founding partner Angel Li told Mingtiandi. Financial details of the transaction were not disclosed.

“Cap rates have compressed since the Lehman crisis, but now is the first time I’ve seen inflation in Japan in the last three decades,” said Avatar Capital founding partner Ryuta Ueda. “We can expect some rental growth going forward, which will be key to hitting our expected returns.”

Avatar Capital is also understood to have reached a first close on a discretionary fund this month, with the investment manager having declined to comment on the fundraising.

Central Tokyo Focus

Occupying a site measuring more than 20,000 square feet, Avatar acquired the project from a local developer in an off-market transaction which was closed on a forward commitment basis on 12 June. The fund manager expects to lease up and stabilise the property over the next 12 to 15 months.

Founded in March by Macquarie Asset Management veterans Li and Ueda, Avatar Capital is targeting returns of at least 20 percent through opportunistic multi-family investments, with a 90 percent allocation to central Tokyo. The fund manager adopts a strategy of collaborating with smaller local developers to source deals.

“(Japan multi-family) is one of the hottest markets,” Li told Mingtiandi. “Our strategy is slightly differentiated – we work with local developers, many of which are relatively unknown and undercovered by the big investors, to create alpha.”

The fund manager now has another three to four deals in the pipeline, all of which are located in central Tokyo and involve both forward commitment purchases and development projects with local builders.

In addition to Avatar Capital’s real estate strategies, which also includes distressed and special situations, the fund manager is working with local partners to invest in renewable energy projects including battery and energy storage facilities and biomass initiatives.

Prior to founding Avatar Capital, Li served as head of Asia real estate and a member of the investment committee for Sydney-based Macquarie’s global real estate fund, while Ueda held the role of head of Japan real estate. The partners had earlier originated and managed real estate investments across Asia Pacific and Japan at CLSA Real Estate.

Japan Multi-Family In Vogue

With $6.3 billion in transactions last year, according to MSCI Real Assets, Japan’s residential sector ranked as Asia Pacific’s top market for multi-family investors on the back of continued population growth in major cities like Tokyo and Osaka and abundant liquidity.

The re-emergence of inflation in Japan has also increased the country’s appeal for multi-family investors, who are now able to factor rising rents into asset models as wages and other economic factors continue to climb.

Japan’s core consumer price index climbed 3.2 percent in 2023, marking the highest rise since 1991, while average wages increased 3.2 percent last year, exceeding 3 percent for the first time since 1994, according to official statistics.

“Stable rents for multi-family properties are expected to shift towards a significant upward trend due to wage increases,” consultancy JLL said in an April commentary. “In the investment market, multi-family property investment yields have decreased since 2010…however, rental increases driven by wage growth are expected to positively impact the multi-family sector.”

While Japan’s rental residential sector is still dominated by domestic players, global investors have been playing a larger role this year as the sector’s attractive fundamentals, coupled with low financing costs, boost institutional interest in the country’s multi-family assets.

In April, Tokyo-based Alyssa Partners and Hong Kong private equity firm Gaw Capital Partners acquired a portfolio of 29 Tokyo apartment buildings from a major Japanese conglomerate, with the purchase of 835 homes representing the country’s largest trade of rental residential assets so far this year. Gaw Capital invested in the deal on behalf of separate accounts for the Qatar Investment Authority and other investors, while Alyssa Partners took a minority stake in the deal.

In February, a Tokyo-listed REIT sponsored by KKR made its 12th acquisition of rental residential assets in Japan with a JPY 9.5 billion deal for a set of four apartment buildings in the capital city.

That deal came the same month rental residential platform Weave Living, announced the establishment of a $500 million fund to invest in acquiring apartments in Japan and expanding operations in the country.

Earlier this year, the property division of UK asset manager M&G bought the 298-unit Frontier Shinjuku Tower residential complex in Tokyo’s Shinjuku area from LaSalle Investment Management for JPY 30 billion.