Bubble-era missteps shape Tokio Marine's property strategy

Tokio Marine Holdings Inc., one of the nation’s oldest insurers, is joining its Chinese peers in investing in property overseas — but with a twist.

Unlike counterparts like China Life Insurance Co. and Anbang Insurance Group Co., which have been buying trophy properties in the United States and Europe, Tokio Marine is putting its money into funds that invest in real estate, said Shinji Kawano, head of Tokio Marine’s property asset management unit.

Tokio Marine, which traces its roots back 136 years to the Meiji Era, is eager to avoid the missteps of the 1980s, when Japanese investors buoyed by bubble-era valuations snapped up landmark buildings that later came back to haunt them. The nation’s insurance companies and pension funds are boosting purchases of overseas assets, such as real estate, as they chase higher returns and cut local bond holdings that yield close to zero.

“Japanese investors bought property directly and had quite a bit of trouble because of it,” Kawano said in an interview in Tokyo. “We had that experience ourselves, so it’s a bit like ‘lesson learned.’ That’s why we decided on investing in funds.”

Outbound property investments by Japanese investors surged 89 percent in 2014 from the previous year to $3.6 billion, according to Deutsche Bank AG. Chinese investment in overseas property rose 9.7 percent to $16.9 billion last year, according to Knight Frank LLP, as billionaire Wang Jianlin’s Dalian Wanda Group and others boosted investments from London to Sydney.

From the late 1980s, Japanese investors, led by developers, bought iconic properties in the U.S., such as New York’s Rockefeller Center and the Pebble Beach golf resort in California, as a domestic bubble left them flush with cash. Mitsubishi Estate Co. exited its 80 percent stake in the Rockefeller Center in 1995, six years after buying in, with a loss of about $2 billion as prices in the U.S. and at home nose-dived.

Tokio Marine has achieved returns in excess of 10 percent over the past two years by investing via real estate funds of funds, Kawano said. Investment adviser Townsend Group helps select the funds under a 2013 agreement between the two companies.

Tokio Marine Property Investment Management Inc. raises funds from domestic pension funds and institutions, and invests that along with some of its own money in real estate assets at home and abroad. The company is also currently raising funds for a domestic private real estate trust.

The Japanese insurer wants to increase overseas property assets by about ¥10 billion ($84 million) this year, and raise that amount to ¥100 billion “in several years,” Kawano said. He declined to say how much in offshore real estate assets Tokio Marine Property holds. It has invested in funds in the U.K., Europe, the U.S. and Australia.

By contrast, Chinese insurers have been snapping up some of the most famous properties in the world after being given more freedom to deploy their $1.6 trillion of assets. In a throwback to Japanese investments in the 1980s, New York’s Waldorf Astoria hotel, the Lloyd’s of London building and the headquarters of the U.K.’s top law firm are now all owned by Chinese investors.

“The Chinese aren’t going in blindly; they are generally picking up prime assets in key global cities,” said Nicholas Holt, Asia-Pacific head of research at Knight Frank in Singapore. “These big players they want to go direct, they want to control it.”

Chinese investors “still see value,” Holt said.

Japanese pension funds are tipped to lead the charge in terms of overseas real estate investment as they seek to boost returns to meet payouts in one of the fastest aging nations.

The Government Pension Investment Fund, which oversaw $1.15 trillion as of Dec. 31, making it the world’s largest pension fund investor, said last year that it will allocate as much as 5 percent of its portfolio to alternative investments including private equity and real estate.

With yield-generating investments at home drying up, funds from Japanese investors have no choice but to go abroad and outflows into overseas real estate may rise to as much as ¥15 trillion, the size of the nation’s private real estate trust market, Kawano said.

“Three or four years ago, there was very little Chinese capital coming out, but we’ve just seen it explode,” said Holt at Knight Frank. Now, “China is dwarfing Japan” in overseas property investment.