A general introduction to real estate M&A and private equity in Japan

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Overview of the market

From the late 1990s, the Japanese market saw an increase in real estate investment, adopting more modern investment methodologies and techniques, including non-recourse loans, commercial mortgage-backed securities, residential mortgage-backed securities and the use of other securitisation and structured finance vehicles, and market participants included not only Japanese real estate companies and financial institutions, but also Wall Street-style foreign investment banks and other investment firms. Non-recourse investment in real estate and other Wall Street-oriented model investments and loans rapidly increased until the market became sluggish in the latter half of 2007 and declined sharply in 2008 because of the global financial crisis. Some years of stagnation in the economy followed, but beginning with the December 2012 re-election of Shinzo Abe as prime minister, the Japanese real estate investment environment significantly improved under a series of economic measures adopted by the former Abe administration, popularly referred to as Abenomics. The awarding of the 2020 Olympic Games to Tokyo in 2013 also contributed to the overall increase in real estate investment in Japan. The depreciation of the yen additionally encouraged increased investment of foreign capital in Japanese real estate. More recently, while the covid-19 pandemic has had an impact on many Japanese business sectors as it has had globally, the Japanese real estate investment market has held up well, with no significant decline in transaction volume compared with other countries.

In terms of market players, major public real estate companies domiciled in Japan, such as Mitsubishi Estate Co Ltd, Mitsui Fudosan Co Ltd and Nomura Real Estate Holdings Inc, tend to hold significant assets and possess strengths in the development, management and operation of real estate; many have subsidiaries that are asset management companies (AMCs) of Japanese real estate investment trusts (J-REITs). Apart from these companies, there is another class of public real estate company in Japan, which is characteristic in the Japanese market: they belong to non-government owned railway company groups, such as the Tokyu Group, Hankyu Hanshin Toho Group and Kintetsu Group – historically, the development of railways and surrounding areas has created synergies between the real estate business and the railway business, especially when the Japanese economy experienced high economic growth after World War II. However, a number of these companies, faced with a decline in operating revenues because of covid-19, are seeking to sell their real estate in order to secure funds for future growth. For example, in October 2021, the Kintetsu Group sold eight hotels owned by its subsidiaries to an investment fund managed by Blackstone Inc, a US asset management firm (Blackstone). Additionally at the end of March 2023, Seibu Holdings completed the sale of 26 hotel and leisure assets to GIC, a Singaporean sovereign wealth fund; five assets were excluded from the original sale arrangement and have been retained by Seibu Holdings.

In March 2023, Odakyu Electric Railway Co Ltd (Odakyu) sold its share of the Odakyu Dai-ichi Life Building to a domestic corporation funded by The Dai-ichi Life Insurance Co Ltd and another company; Odakyu also sold the Odakyu Century Building to Central Park Specific Purpose Company.² In addition, all shares of Hotel Odakyu Corporation, which operates the Hyatt Regency Tokyo, were transferred to Palette Holdings 1 Pte Ltd, which is owned by vehicles managed or advised by KKR& Co Inc and its joint venture partners. Through these transactions Odakyu has transferred the Hyatt Regency Tokyo.³

Another key driver in Japan's real estate investment market is J-REITs. The J-REIT market was established in September 2001, when two J-REITs publicly listed their investment units on the Tokyo Stock Exchange (TSE) for the first time. Since then, REITs have become popular in Japan among investors as a moderate-risk product with stable returns. As of the end of April 2023, Japan is the second-largest listed REIT market in the world, after the United States; and as of the end of April 2023, 60 publicly listed REITs are operating, with a total market capitalisation of approximately ¥15.4 trillion, having total assets under management of approximately ¥22.1 trillion. This exceeds the total market capitalisation of the 64 public real estate companies listed on the Prime Market Section of the TSE (approximately ¥13 trillion) as of the end of March 2023.

When established, J-REITs are generally structured on the assumption that they will be listed in the future. However, since the creation of Japan's first private REIT in 2010, the market for this instrument has expanded to meet the needs of investors looking for long-term, stable investments. Private real estate funds that do not take the form of J-REITs are also active in Japan.

In addition, investors' interest in investing in Japanese infrastructure projects has been growing, as infrastructure also is considered to be a stable asset class that is less susceptible to economic trends as well to provide diversification from an asset management perspective. In response to this increased interest, the TSE established an infrastructure fund market on 30 April 2015 on which funds that invest in infrastructure assets, including renewable energy facilities, power grids and transport and transmission networks, are listed. As of the end of April 2023, five publicly listed infrastructure funds are operating, with a total market capitalisation of approximately ¥140 billion.

Recent market activity

Some of the most significant recent real estate transactions are described below.

In April 2020, Japan Rental Housing Investment Corporation, having Daiwa Securities Group Inc as sponsor, implemented an absorption-type merger, with Japan Healthcare Investment Corporation as the absorbed corporation. This transaction sought to expand the asset size, obtain stability of proceeds and disperse the risk of the combined entities in a complementary way.

Thereafter, in March 2021, Japan Retail Fund Investment Corporation (JRF) and MCUBS MidCity Investment Corporation (MMI), both having Mitsubishi Corp-UBS Realty Inc as sponsor, implemented an absorption-type merger, with JRF as the surviving corporation and MMI as the absorbed corporation.

More recently, in March 2023, Mori Trust Sogo Reit Inc (MTR) and Mori Trust Hotel Reit Inc (MTH), both having Mori Trust Co Ltd as sponsor, merged in an absorption-type merger with MTR as the surviving corporation and MTH as the absorbed corporation.

In November 2020, Sumitomo Mitsui Finance & Leasing Co Ltd (SMFL) announced that a fund, investing through one of its subsidiaries, acquired 70 per cent of the shares of Kenedix Inc (Kenedix)⁴ through a share tender offer (or takeover bid (TOB)) for about ¥120 billion. The remaining shares of Kenedix will continue to be held by ARA Asset Management Limited (ARA),⁵ which was the largest shareholder of Kenedix before the tender offer deal. This is because, as a result of discussions between SMFL and ARA, it was determined that maintaining a strategic capital relationship between Kenedix and ARA would further enhance the effect of Kenedix's going private through the TOB and would contribute to the enhancement of Kenedix Group's corporate value over the medium to long term.

In March 2022, KKR announced that one of its subsidiaries acquired all of the shares of Mitsubishi Corp-UBS Realty Inc, which is the AMC of Japan Metropolitan Fund Investment Corporation and Industrial & Infrastructure Fund Investment Corporation (in addition to being the sponsor of JRF and MMI, as noted above). This entity had been formed and owned by Mitsubishi Corporation and UBS Asset Management.

In addition, in November 2022, SBI Financial Services Co Ltd acquired all shares (67 per cent of the total shares in issue) of Sojitz REIT Advisors KK, the AMC of Nippon REIT Investment Corporation, owned by Sojitz Corporation. As a result, SBI Financial Services Co Ltd became the main sponsor of Nippon REIT Investment Corporation, and the trade name of the AMC has been changed to SBI REIT Advisors Co Ltd.⁶

In April 2023, Yasuda Real Estate Co Ltd (Yasuda Real Estate), Taisei Corporation (Taisei), and Meiji Yasuda Life Insurance Company (Meiji Yasuda) transferred to Tokyo Tatemono Co Ltd (Tokyo Tatemono) all of their shares (Yasuda Real Estate: 10 per cent of the total shares in issue; Taisei: 10 per cent; Meiji Yasuda: 5 per cent) in Tokyo Realty Investment Management Inc (TRIM), the asset management company of Japan Prime Realty Investment Corporation (JPR). As a result, Tokyo Tatemono now owns all of JPR's outstanding shares, making JPR a wholly owned subsidiary.⁷