Japanese institutions began to invest in real estate again in 2002, first in their home market and now internationally. Some Japanese institutions are already investing in U.S. REITs and global real estate funds managed by U.S. investment managers that have operations in Japan.
Japanese investors are attracted to the U.S. because it has a large, transparent real estate market, Mr. Murakami said.
The lower real estate returns predicted in the U.S. in the next two years are still well above Japanese domestic investments, Mr. Grinis said. "The Japanese version of the federal funds rate equivalent is barely above zero. Here it is 5.25%," he said.
According to a 2005 survey of members of the Association of Foreign Investors in Real Estate, a Washington-based trade group, 74% of foreign investors said the U.S. provided the most stable and secure real estate investments, up from 60.7% the year before.
"Most people's frame of reference is the 1980s, when Japanese investors were exclusively buying a significant number of high-profile properties (in the U.S.), Mr. Grinis said, noting the Japanese got burned on some of those early investments. "Today, they are careful and cautious real estate investors."
Japanese investors are already buying office buildings, entering joint ventures with U.S. real estate operators and investment firms and investing in U.S. REITs.
Mitsui Fudosan is purchasing U.S. properties to create a pool of assets, and then will raise money from Japanese investors based on the specific pool, explained Graham Baum, chief operations officer of Mitsui Fudosan America. This is the opposite of the "blind pool" approach used by U.S. real estate managers, who raise funds first and then buy the properties. Mitsui officials expect they will have acquired the bulk of properties in 12 to 14 months and will be ready to go to investors by 2008.
New City North America Inc., San Francisco, set up shop in May to co-invest in U.S. real estate deals with Japanese institutional investors, said George von Liphart, president. New City is a new U.S. subsidiary of New City Corp., Tokyo, a real estate investment firm and merchant bank that develops mostly residential but also some retail and industrial properties.
Mr. von Liphart expects Japanese investors to begin investing in U.S. office buildings in prime city locations. According to Jones Lang LaSalle, Japanese investors began investing in office buildings last year.
A group of real estate investment advisers that weren't around in the 1980s — including Secured Capital Japan Co. Ltd., Tokyo, partly owned by principals of Eastdil Secured, a U.S. subsidiary of Wells Fargo & Co, San Francisco — have joined known names like Mitsui and have raised funds with U.S. and Japanese institutional investor commitments. U.S. investment activity is expected to increase rapidly when the newer Japanese real estate managers start investing in the U.S., Mr. von Liphart said.
A few U.S. money managers — those with established Japanese real estate funds — also stand to benefit from the new investor interest.
Heitman LLC, Morgan Stanley Asset Management, Lehman Brothers Asset Management, Aetos Capital LLC and Lone Star Funds are examples of fund managers that started by creating real estate funds that invested in Japan for U.S. institutional investors. Now, the firms' latest Japan funds have a mix of U.S. and Japanese institutional investors. A 2003 change in Japanese regulations made it easier for Japanese pension funds to invest with U.S.-based investment managers, Mr. Grinis explained. Now, Mr. Grinis expects Japanese institutions to invest in U.S. real estate funds with these same managers.
These days, there are few opportunities to buy real estate in Japan that will produce sufficient returns, said Joe Azelby, managing director and global head of New York-based JPMorgan Asset Management's real estate business. JPMorgan is sponsoring a global real estate fund that invests in Asia.
"I see Japanese investors looking at the U.S. as well as Europe and outside their country," Mr. Azelby said. "They are more interested than in the past."
A number of private pension funds in Japan are now investing in large real estate opportunity funds that invest in the U.S., Mr. Azelby said. Soon these Japanese investors are expected to begin investing in U.S. real estate funds managed by the U.S firms with whom they have relationships, Mr. Grinis said.
As Japanese investors become comfortable, the will again enter the U.S. real estate market, he said.