A private equity affiliate of Singaporean developer Tong Eng Group has joined a growing wave of international investors chasing opportunities in Japanese rental apartments with a $50 million purchase of a Tokyo portfolio.
On 18 December TE Capital Partners, acting on behalf of its TE Japan Income Partners I fund, closed on the buy of a set of three multi-family assets in central Tokyo, the company’s managing director Emilia Teo told Mingtiandi, seeing the acquisition as a way to gain dependable returns as the COVID-19 pandemic undermines confidence in some other asset classes.
“We like this asset class as it’s very stable and resilient,” Teo said, pointing out that rental income from properties in the Japanese capital has held steady in the face of the coronavirus pandemic. She added that, “There is a trend for younger working professionals in Japan to migrate to Tokyo.”
TE Capital announced the closing of its transaction just days after UK fund manager Nuveen announced that one of its existing joint ventures had agreed to purchase a separate Tokyo apartment portfolio for $226 million. In addition to TE Capital and Nuveen, Institutional investors AXA and Blackstone have also made announced major acquisitions of multifamily assets in the Japanese capital this month, helping to make apartments in the city among Asia Pacific’s most popular investments of 2020.
Betting on Renters
“Demographic and lifestyle shifts, such as inward city migration and urbanisation will continue to support demand for multifamily residential apartments within proximity and accessibility to key transport connections and nodes,” TE Capital managing director Terence Teo said in a statement, “This portfolio is in line with our strategy to target assets in Tokyo and within key cities and deliver attractive returns with a defensible level of risk to our investors.”
The portfolio includes a pair of assets completed this year in Tokyo’s Minato and Setagaya wards, as well as a stabilised property in Minato ward, with the three buildings yielding a total of around 100 homes. TE Capital purchased the properties off the market from a local developer at a passing yield of 4 percent on a net operating income basis, according to the company.
All three assets are within eight minutes walk of a train station with occupancy having risen to 95 percent from the 80 percent level recorded at the time that TE agreed to purchase the properties in November.
The Tokyo transaction is TE Capital’s second purchase in Japan and its first in the residential sector, where it says it has additional deals in the pipeline.
“We expect this to be the first of many acquisitions in Japan,” Teo said of the apartment acquisition. “We want to grow our Japan multifamily assets to something sizable.” The company indicated that it would continue to look for future opportunities to purchase apartments in Tokyo, with the region around the capital, as well as Osaka and Nagoya also under consideration for acquisitions.
Building a Regional Presence
Sealing the Tokyo deal meant the TE Capital team had to brave travel restrictions to make the trip from Singapore to Tokyo in order to conduct site inspections and final negotiations for the purchase.
“This deal came to us off-market in late October and had to be closed by the end of the year, and we made the decision to make the trip to Japan” said TE Capital Partners director Stanley Shen, who described writing out detailed travel itineraries and meeting agendas in order to receive approval to make the trip via a since-suspended “green lane” set up to allow restricted travel between Singapore and Japan. “Now that the green lane is closed we are one of the few to have made the trip,” he added.
Shen noted that in 2019 the company had acquired an interest in a retail asset in Tokyo’s Ginza commercial district which they resold at a 1.7 times equity multiple earlier this year.
With TE Japan Income Partners I having raised cash from the family office of Tong Eng Group managing director Teo Tong Lim and other prominent regional family offices, TE Capital says it now wants to establish a series of income-focused funds. In July of this year TE had teamed up with Singapore-listed developer Roxy-Pacific Holdings to buy KTS House, a 20-storey office building in Melbourne, for A$145 million (then $101 million).
“Other than multifamily assets in Japan, we are still looking at buying offices in Singapore, Australia, Hong Kong and other key APAC markets,” Shen said. He indicated that the company’s current focus in the commercial market would be on value-add investment opportunities.
Tokyo Apartments Gain Favour
While of a smaller scale, TE Capital’s Tokyo buy bears a resemblance to a purchase announced earlier this month of a 428-home portfolio by Tokyo Multifamily Partnership, a venture managed by Nuveen and Kenedix with backing from Dutch pension fund manager Bouwinvest.
That purchase of recently completed assets in central Tokyo brought the partnership’s total portfolio to 35 properties and 1,940 homes with a gross asset value of $810 million.
Also during December, US fund management giant Blackstone said that it had invested JPY 110 billion ($ 1 billion) to purchase a portfolio of commercial and residential properties, primarily in Tokyo and Osaka, from a vendor said to be PAG.
The real estate division of France’s AXA Investment Management has made multiple investments in Japanese apartments this year, including announcing in early December that it had purchased a Tokyo apartment portfolio for JPY 70 billion.