Japan’s GPIF predicts lower return and prioritizes income

Hideto Yamada, the head of real estate at Japan’s Government Pension Investment Fund, warned delegates at the PERE’s Global Investor Forum in Tokyo that returns from investments will trend down in the coming years.

“We have to be ready that our return from previous investments will not be as good as previous years and that we need to be more selective again,” said Yamada, in response to a question on a potential recession.

Yamada said the investor would continue to build its real estate portfolio but would focus on investments generating consistent cashflow as its response to the current economic slowdown.

“The fundamentals of an economy connected to our future cashflows projection is vitally important for us,” he explained.

The fund has committed ¥1.2 trillion to private real estate in total as of March 31, up from ¥1.13 trillion at the same time last year, according to its latest annual report. The market value of its real estate portfolio also grew from ¥545 billion to ¥773 billion over the same period. Real estate delivered a 12.99 percent since-inception internal rate of return in yen terms for GPIF as of March 31.

In order to secure a stable cashflows, the investor will focus on identifying secular trends and sectors with strong growth trajectories and move away from placing an emphasis on the geography of an investment. “It used to make a big difference in the selection of the markets or regions only. But now it is about looking at the global trends across the board,” Yamada said.

He pointed out industrial and residential have been the “more encouraging” sectors over the past few years due to the structural changes in the economy. Indeed, logistics has overtaken offices to become the investor’s largest sectoral exposure in real estate.

The market value of its logistics assets increased from 34 percent in 2021 to 42 percent of GPIF’s total real estate portfolio in 2022. The share of its residential properties also increased from 16 percent to 19 percent over the same period. Yamada said the retail and office sectors would be accessed with “the right” managers which could still find growth opportunities.

Going forward, GPIF will continue to expand its investment horizon in addition to commingled funds. It would also seek to form investment platforms and joint ventures with managers for specific properties. In February 2021, the pension appointed CBRE Global Investment Partners to manage its first co-investment and joint venture mandate. It was the second global real estate investment mandate issued by GPIF, which also selected CBRE to manage a commingled fund mandate in 2018.

“We need to do this as we keep balance in our portfolio. For offices perhaps, it is very difficult to identify which office funds have all the good properties that can withstand future changes. So, we need to identify specific office assets or specific newly built offices with ESG elements. This would be the expansion we are looking for in terms of finding new investment partners,” said Yamada.