Japan Post Holdings is in early-stage discussions with Royal London Asset Management over a deal that would involve the conglomerate making its long-awaited overseas real estate debut.
It is in talks to buy a stake in RLAM’s £2.8bn life fund, the Royal London UK Real Estate Fund.
No deal has yet been agreed with Japan Post, which is one of a number of institutions from the country that have been pitched to by Royal London, but the fund’s core, trophy assets and low leverage fit with typical requirements for Japanese investors.
Talks are still at an “educational” stage and any agreement is unlikely to be reached until the end of the year, as investors from Japan are famously slow in their decision making. A number of new investors are expected to come into the fund as the result of a roadshow currently being undertaken in Asia.
Cautious entrance
The former state-owned postal services company, which is the 33rd-largest in the world according to Fortune with almost £2tn of assets, has for years cautiously examined entering the market through its subsidiary Japan Post Bank, but it is now stepping up its diversification programme.
The prospective investment could be one of the first deals in what is expected to become a tidal wave of capital from the country in the next two years as Japanese institutions search for yield overseas in the face of historically low interest rates.
If Japan Post does ultimately invest in The Royal London UK Real Estate Fund it is expected to make a first investment of around £100m at a price reflecting a yield of less than 5%. Although the initial deployment is relatively small in the context of the company, it would have the opportunity to heavily step up its investment in the fund as RLAM pays out policy holders.
Last October Royal London announced the creation of the fund through the merger of its two existing life funds – the Cooperative Insurance Society Life Fund and the Royal London Long Term Fund. RLAM subsequently opened the fund to new institutional investors as the diminishing fund is expected to lose around £100m each year in run-offs.
“The ability to deploy significant sums of money immediately into a UK balanced fund of this quality is a highly attractive offering and pretty rare”
The investment in the fund could be used to pay back maturing policy-holders, invest in its development pipeline and make new acquisitions.
At the time Drew Watkins, senior fund manager at RLAM, told EG: “We are heading out to Japan in a few weeks to meet a number of investors who are very keen to consider this. The ability to deploy significant sums of money immediately into a UK balanced fund of this quality is a highly attractive offering and pretty rare.”
Japan Post is awash with cash with the government having undertaken a ¥1.3tn (£8.7nbn) share sell down of 22% of the company last September. As of 31 March last year Japan Post Bank had ¥14.6bn of investments in real estate funds, all of which are thought to be invested domestically.
In November JPH’s president, Masatsugu Nagato, said it would invest ¥200bn in overseas real estate funds as part of a broader ¥500bn investment programme into foreign funds in response to the country’s low interest rate environment.
Alternatives sought
It is looking to alternative asset classes including real estate, because of the relatively higher returns it provides compared with bond and equities, and particularly overseas real estate, which is typically far higher yielding than domestic property. Prime Tokyo office yields stood at 2.9% at the start of the year, according to Savills.
There was no Japanese direct investment into UK real estate last year, according to CBRE data, but this is expected to increase dramatically as its major institutions step up their hunt for yield. Most notably, the country’s £1tn Government Pension Investment Fund is expected to appoint advisers to spearhead its European property drive as soon as next month.
CBRE Capital Advisors is advising RLAM. Townsend Group and Tokio Marine are advising Japan Post.
The jewels in the crown of The Royal London UK Real Estate Fund
As of the time of its launch last October two-thirds of the fund’s £2.8bn of assets were in prime, core central London. However, across its 97 investments the fund still has a broad exposure to most major sectors, including industrial and retail parks, across the UK.
Key assets include:
■ 111-117 and 120-122 New Bond Street, W1
■ 103, 149-151 and 470-482 Oxford Street, W1
■ Kingsley House, Wimpole Street, W1
■ 9-12 Bow Street/57-59 Long Acre, WC2
■ 1-3 St Pauls Churchyard, EC4
■ Twentieth Century House, Soho Square, W1
■ Trafalgar Buildings, 1-6 Northumberland Avenue, SW1
■ Tunbridge Wells Shopping Park, Kent
■ Westway Shopping Centre, Greenford, north-west London
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