Tosei, Hulic-Led Consortium Outbids Brookfield, LaSalle in $2.7B Tokyo Office Deal

A local consortium which won a September tender for a Tokyo office building with a JPY 400 billion ($2.7 billion) bid is said to have bested some of the world’s biggest investors in that contest.

A bid submitted by Tosei Asset Advisors was announced in September as winning a tender for the Japanese Ministry of Finance’s share in Otemachi Place, which consists primarily of the 32-storey eastern tower of the twin tower complex just east of the Imperial Palace.

Japan’s Orico Real Estate Co said on Monday that it is investing in the Tosei Asset Advisors fund which won the bid, with a report by news outlet Toyo Keizai indicating primary backing from local real estate giant Hulic and Mizuho Leasing.

A sale agreement for what would be the largest purchase of a single real estate asset in Japan’s history is expected to be signed this month, with the Tosei fund having outpaced bids backed by LaSalle Investment Management, Brookfield, Mirae Asset Global Investment and Korea’s National Pension Service (NPS).

Bidders Face Off

Tosei’s winning bid for the Tokyo office property exceeded pre-sale estimates by as much as JPY 100 billion after six groups submitted offers for the 2018-vintage building.

The target of the tender was the Japanese ministry’s eastern tower in the complex with 16 percent ownership in the shared retail and conference room spaces on the lower and underground floors included alongside the office portion.

Besides Tosei, LaSalle, Brookfield, Mirae and the NPS, other bidders included Mitsui Fudosan, Mitsubishi Estate, Sumitomo Corporation and Kenedix.

While LaSalle, which is said to have bid jointly with the NPS, was the only foreign name to lead a bid, a number of international players participated via local partners, according to media reports.

Mitsubishi Estate teamed up with Norway’s sovereign wealth fund for one bid, while Brookfield is said to have teamed with Sumitomo. Korea’s Mirae backed Kenedix’ bid and Mitsui Fudosan joined with Japan’s Government Pension Investment Fund and Japan Post Bank for its tender.

The office tower, which houses Sumitomo Corporation’s headquarters, is scheduled to be handed over to its new owners by the end of December.

Core Business Hub

Built with average floor plates of 2,920 square metres, Otemachi Place is located on the site of the former Communications Museum in the Otemachi commercial hub and connects directly to Otemachi Station on the Tokyo metro, which serves as a nexus for five subway lines.

In December last year, the Ministry of Finance made an announced its plan to dispose of its stake, and Mizuho Trust & Banking Co Ltd, which serves as trustee for the asset, launched the tender process.

The ministry said at the time that market conditions were favorable for the sale given a reduction in new office supply being completed in the five central wards of Tokyo in 2021 and 2022, with more buildings expected to begin leasing in 2023 with the completion of large-scale developments such as the Toranomon-Azabudai project.

Office space in the eastern tower was 90 percent let as of December, with Sumitomo Corporation taking up over 70 percent of all leasable area.

Echoes of Dentsu Deal

Citing multiple sources the Toyo Keizai report indicated that the investor lineup for the Tosei fund is similar to the team that set the existing record for Japan’s most expensive office deal with the JPY 300 billion purchase of the Dentsu Building last year.

In that 2021 transaction, Hulic contributed JPY 54.39 billion to a special purpose company created for the acquisition of the Dentsu building, giving it a 49 percent non-controlling equity interest. Mizuho Leasing invested about JPY 28.5 billion while other investors provided another JPY 28 billion. The rest of the JPY 300 billion purchase was funded by loans.

For the Otemachi Place transaction, Hulic is also expected to invest at a level that does not make it the controlling shareholder of the SPC, while the other investments and loans are expected to come mainly from companies under the Mizuho group.

Eyes East

Low interest rates and a cheaper yen have made Japanese real estate a focus of international investor interest this year.

Japan’s central bank has stood by its ultra-low interest rates with 10-year bond yields at around 0 percent even after the yen sank to a 32-year low against the dollar last month, providing international investors managing US dollar funds with discounted asset prices and low borrowing costs.

Besides low financing costs, higher liquidity compared to other countries in Asia Pacific and Japan’s status as a comparatively secure market amid growing geopolitical risks have also driven overseas investors’ interest in Japan, said Hiroshi Okubo, CBRE head of research for Japan, in a report.

In an interview in August, Isabella Lo, head of Japan investments of Hong Kong’s Gaw Capital, said that her firm plans to grow its investment in Japan to as much as $4 billion in the next two years to take advantage of the weakening yen.

In January, Gaw Capital announced that it had backed US investment firm Invesco’s $3 billion privatisation of the 18-property Invesco J-REIT, which stands as Japan’s largest office transaction of this year.

Earlier this year, M&G Real Estate took over the Minato Mirai Center Building in Yokohama for more than JPY 100 billion ($700 million) through an asset swap with Goldman Sachs, with Hulic having worked as a go-between in the transaction.