Hong Kong-based fund manager Gaw Capital Partners on Friday announced that, together with US investment management firm Invesco, it has completed the $3 billion privatisation of Invesco Office J-REIT.
The deal, which was led by Invesco Asia Fund IV, represents the first successful privatisation of a Japanese-listed REIT ever, with funds managed by Gaw having partnered with Invesco to finance the transaction, which was first reported by PERE.
“We feel strongly that Japan will be one of the winners coming out of COVID,” said Calvin Chou, head of Invesco Real Estate Asia. “With less than 5 percent office vacancy citywide despite the pandemic, and a culture that values teamwork, Tokyo has the best supply demand dynamics of any major office market globally.”
The trust managed by a unit of Invesco comprises 18 fully stabilised Grade A and B office assets in Japan, including 12 in Tokyo, three in Yokohama and one each in Nagoya, Fukuoka and Osaka.
Hostile Takeover Thwarted
With Invesco Office J-REIT having seen its unit price drop by more than half in March 2020 as the pandemic threatened global office markets, and with the share price still down by around 25 percent of its pre-COVID peak at the beginning of April 2021, the management of the listed trust and its 3.2 million square feet (296,648 square metres) of office space received notice on the 2nd of that month that the REIT was the target of a takeover attempt by US-based Starwood Capital Group.
Invesco saw that offer as undervalued and quickly moved to counter.
“Call us old-fashioned, but we still believe in offices, particularly the office markets in Tokyo and other major Japanese cities,” Invesco’s Chou said. “While COVID is impacting near-term demand, we forecast a strong Return to Office (RTO) upon market stabilisation.”
The Texas-based firm, which closed on a total of $1.25 billion in commitments for its Invesco Asia Fund IV value-add strategy last year, managed $3.8 billion in assets in Japan as of March 2021 and considers itself local to the market where it has invested in 153 buildings since 1999.
Starwood’s initial offer of JPY 20,000 per unit represented a roughly 13 percent premium to the REIT’s unit price at the time, and a 7 percent premium to its book value, but was still far below its February 2020 peak of JPY 24,470 per unit.
Chou pointed to Japanese hubs having the lowest vacancy rates among global gateway cities, strong cash-on-cash yields and a high level of market liquidity as underpinning the firm’s belief in the long-term value of the listed vehicle.
With Invesco owning just around 3 percent of the trust and with the remaining units under relatively fragmented ownership, primarily composed of Japanese index funds with few sizable institutional holders, Starwood stood a real chance of achieving the 66 percent tender acceptance rate needed to move forward with the privatisation.
On 15 April 2021, Invesco released a statement announcing reservations concerning Starwood’s offer, before coming out with a statement opposing the deal on 6 May on the grounds that it did not allow unitholders sufficient time to consider the offer and that it provided limited options for minority unitholders that did not agree to the buyout offer. On that same day, the REIT manager said it was enlisting its parent firm to mount its own counterbid for the REIT’s units.
Despite Starwood ultimately raising its offer to JPY 22,500 per unit, and lowering the acceptance threshold to 55 percent, that bid ultimately failed to win approval after Invesco, which had upped its own stake in the REIT to 7 percent in May, ultimately bested that offer, with that initiative winning acceptance from investors at JPY 22,750 per unit on 28 July.
Invesco Office J-REIT was delisted from the Tokyo exchange in November, with final closing on the privatisation taking place this month, with Invesco, which had enlarged its Invesco Asia Fund IV fund partially in response to the takeover opportunity, now having committed 70 percent of the capital from that vehicle.
Following the privatisation, Invesco and Gaw are expected to privatise some of the assets, while also looking for opportunities to improve returns through value-add measures that will boost rents.
With the remaining capital from the value-add fund, Invesco is focused on further opportunities in Japan, as well as pursuing logistics development in Korea, particularly in the Greater Seoul area.
“Overall, we favour Japan and Korea as our top target investment markets in the region,” Invesco’s Chou said. “We believe that the eventual lifting of COVID restrictions will aid growth in these markets and precipitate a strong recovery to pre-COVID levels.”
Saluting a Landmark
Kenneth Gaw, president and managing principal of the family run investment firm, hailed the completion of what he dubbed a “landmark transaction” alongside Invesco.
“We are extremely pleased to work with partners who have deep knowledge and operating experience in the Japan market and we look forward to collaborating on this investment,” he said.
Gaw Capital, which had $32.6 billion in assets under management as of the third quarter of 2021, entered Japan in 2014 through its investment in Hyatt Regency Osaka, which it sold in 2016 for $153 million in the second-largest hotel deal in the city that year.
Other properties in Japan under Gaw’s portfolio include the Aoyama Building in Tokyo, the H Beauty & Youth Flagship Store in Tokyo, the Renaissance Okinawa Resort and Coco Garden Resort in Okinawa, the Minatomirai Center Building in Yokohama, the Toyobo Building in Osaka and the Matsushita IMP Building in Osaka.
The fund manager also has a residential portfolio comprising assets in Tokyo, Osaka, Kyoto, Sapporo, Nagoya and Yokohama.