What makes Japan’s real estate attractive for Aussie investors?

Oksana Patron

21 November 2022

Australian investors have been reminded that global real estate security is a huge and diversified universe, however some markets are looking better than others due to more favourable financial conditions at times when investing in public over private real estate makes more sense, according to LaSalle Investment Management.

Matt Sgrizzi, chief investment officer of LaSalle Investment Management, who runs the SGH LaSalle Concentrated Global Property Fund, said in an interview with Financial Newswire, that financial conditions ‘especially this year’ had been driving the markets and disproportionately impacting sectors, making the regions less affected, like Japan, looking more attractive.

“We think that there are greater investment opportunities in Japan today. The price and the prospective return from some of these companies in Japan are very attractive given the level of financial conditions in that market,” he noted.

“So, it’s just a good investment opportunity that has been underappreciated.”

Sgrizzi also said that among the companies he particularly liked in Japan were not necessarily REITs (real estate investment trusts), but real estate operating companies which are more diversified and have a number of different business lines.

“These companies have historically not been great at managing returns for shareholders, but they have been really improving in that regard over the past several years, and we see consistent improvement and especially in capital allocation and policies by these companies and that’s a key way that we can see these stocks outperforming is because of their continued improvement.”

Sgrizzi stressed that the point with regards to financial conditions was particularly important at times when the REITs returns were down, on average, around 25-30%, this year, depending on the day.

“Among the worst performers in REITs had been sectors with lower yields, with really great growth prospects, and some of the best performing sectors had been REITs with higher yields and not as good growth prospects. So, you have industrial and life sciences among the worst, and you have hotels and retail among the best and that’s because relative yield differentials are impacted differently by a type of financial conditions.”

“Financial conditions have been driving the markets this year especially, and the fact they have not impacted materially Japan is really important. That’s the key reason why we like Japan.”

Speaking on the industrial market, Sgrizzi said there were two ways to consider the growth in the sector and this included the strength of fundamentals as well as the price impact.

“We think for modern logistics is generally still very good [growth prospect] across most markets in the world, the yields for industrials are very very low and we were concerned about that within the context of financial condition tightening because very low yields in sectors have been disproportionately impacted by tighter financial conditions and that has already happened in the public markets to a large extent, with the industrial REITs globally being among the worst performers this year.

“So, I think there is fundamentals and there is a price that impacts those fundamentals. That was looking unattractive to us in the beginning of the year, but it’s repriced pretty significantly and we are getting more positive in industrial, more generally, and in the US.”

On the other hand, Japan’s industrial market looked more interesting, according to the CIO, despite a slower rent growth.

“I think Japan is an interesting industrial market. I think the fundamentals are also very good in Japan but there has been a little bit more supply of modern logistics, so the rent growth in Japan hasn’t been quite as exciting as in some US and European markets.

“But that does not mean that they are the bad investments. It just means that the growth hasn’t been quite as strong,” he added.

Sgrizzi also said that a second point he wanted to make to Australian investors during his trip to Sydney, Melbourne and Brisbane, was that tougher financial conditions have led to dramatic repricing in real estate securities globally, positioning public real estate very uniquely to what had happened in the private markets so far.

“We think that returns on offer from public real estate are much more attractive today than from private real estate and I think in terms of opportunities we think that especially investing in public over private is the key opportunity that we are telling investors.”

The SGH LaSalle Concentrated Global Property Fund, which had won Equity Global Real Estate category at the 2022 Financial Newswire–SQM Research Fund Manager of the Year, had the highest exposure North America (61.97%) and Asia Pacific (35.58%), including 28.42% to Japan. The fund had no exposure to Continental Europe and Australia, as of 30 September, 2022.

As far as sectors were concerned, it had the highest asset allocation to residential (24.30%), followed by diversified (19.75%) and retail (18.21%), specialty (12.87%), industrial (12.36%), self-storage (6.82%) and office (5.69%).