Investors from Japan are primed to play a key funding role for global infrastructure and real estate, according to analysis from AMP Capital.
With assets under management approaching JPY500 trillion (approximately USD4.4 trillion), the Japanese institutional investment environment is undergoing a transformation and represents a substantial source of capital for investment into real assets across the globe.
Toshiaki Yamashita, AMP Capital managing director, Japan, says: “The unique characteristics of the market in Japan have impacted investor sentiment and behaviour as few other economies have experienced as long a period of low growth and low yield. Japanese investors, both retail and institutional, are broadly seen as conservative, with more than 50 per cent of financial assets in deposits and approximately 5 per cent in investment trusts. This allocation may change, however, as government policies encourage investors to shift from deposits to investments, investors begin seeking higher-yielding assets after a prolonged period of low growth, and an easing of institutional investors’ aversion to risk.”
Japan’s institutional investment market, comprising corporate pensions, public pensions and financial institutions, are near universally arranged as defined benefit schemes, which further underscores the need for the consistent income streams that may be offered by real assets investment.
Infrastructure debt is expected to be one of the beneficiaries of a growing thirst for alternatives with the asset class rising to prominence in a relatively short period of time. It represented just 6 per cent of infrastructure funds that completed fundraising in 2009 compared with almost a quarter of funds in 2015.
Andrew Jones, AMP Capital global head of infrastructure debt, says: “The largest proportion of investors with a preference for unlisted infrastructure debt is based in Asia and we see a significant growth opportunity in this market. In Japan, banks and investment banks make up the largest proportion of investors as they tend to have the resources and expertise to invest in the market as well as a more positive sentiment since the financial crisis. Strong deal flow opportunities coupled with limited competition from alternative junior lenders provide the potential to generate the attractive risk-adjusted returns focused on cash yield these investors are looking for.”
On the listed side, Japanese retail investors have been early adopters of listed infrastructure. Interest is beginning to broaden to the institutional market due to the challenges in accessing direct infrastructure allocations, the size of the listed market and a desire for liquidity.
Japanese investors have also demonstrated an appetite for global listed real estate and this is expected to grow. Of particular focus for Japanese investors is likely to be the US REIT market as they seek income yield.
James Maydew, AMP Capital head of global listed real estate, says: “Japan has been the second biggest market for asset exchange-traded fund flow in listed real estate in 2016 behind the US, and given the Bank of Japan has increased its allocation to Japanese REITs from 5 per cent to 10 per cent during 2016, we don’t expect this trend to change any time soon. Even as cash rates start rising, the demand for listed real estate and its characteristics of diversification, stable cash flows and income yield will continue to be sought by Japanese and global investors.”
Yamashita says Japanese institutional investors show a clear preference for assets that are lower risk and can consistently generate a low to mid-single-digit yield.
“Having experienced decades of low growth and limited domestic opportunities, these investors are hungry for investment alternatives. It’s a natural step for Japanese institutions to begin deploying capital to global infrastructure projects, which is a positive development for liquidity and will continue to support the globalisation and maturation of this market,” says Yamashita.
During the past five years, Japanese investors have committed more than AUD1 billion to AMP Capital-managed alternative funds.