KKR to keep buying Japan real estate even after BOJ raises rates

KKR & CO plans to keep buying real estate assets in Japan even if the central bank raises interest rates for the first time since 2007.

Japan is now the alternative asset manager’s main focus for property in Asia, and KKR has the capacity to spend anywhere from Us$20mil to more than Us$1bil on individual deals, says Ralph Rosenberg, the US firm’s global head of real estate.

The nation’s property sector has been attractive because the Bank of Japan (BOJ) has kept rates at rock bottom, allowing the return on investment to exceed borrowing costs.

Rosenberg expects monetary conditions to remain accommodative even after the BOJ scraps its negative-rate policy.

“As long as that spread remains quite positive and wide, I think you’re going to see a lot of appetite for investing in the Japanese real estate market,” Rosenberg said in an interview in Tokyo. “The market here is pretty exciting.”

Japan has maintained negative rates for eight years to fend off deflation, in contrast with other developed nations that have tightened policy to cool prices.

That might change as soon as next week, as wage growth finally picks up in addition to inflation. Investors have been focused on how the move will impact everything from financing costs to the flow of money.

Rosenberg says KKR can borrow at around the mid-1% level in Japan, and he doesn’t see that increasing much if the BOJ raises rates at its meeting ending Tuesday.

The firm is able to buy high-quality multi-family apartments, logistics and hospitality assets in Japan at returns of 4%-5% without consideration of debt, he adds.

There hasn’t been much real estate speculation in Japan, according to Rosenberg, and he expects the market to remain attractive as long as inflation is kept in check and property prices don’t rise too quickly.

That’s even as some other foreign real estate investors pull money from Japan – a move that he says might have been triggered by stress elsewhere.

“My suspicion is that it’s not because they have lost confidence in the fundamentals,” Rosenberg says. “It’s probably to crystallise liquidity here to either defend assets in other markets or redeploy capital.”

The re-emergence of price growth in Japan means investors can now see property in the country as an inflation hedge, rather than a substitute for fixed income, Rosenberg says.

“There’s economic growth that’s consistent with real estate fundamental growth,” he says. “It’s quite constructive for the real estate investment environment.”

Another catalyst for the Japan market has been the trend for local companies to sell off parts of their business, including property holdings, as they are under pressure to improve value, Rosenberg says. KKR is able to work on those types of deals with its private-equity arm in Japan.

New York-based KKR last year purchased the Hyatt Regency Tokyo hotel with Hong Kong investment firm Gaw Capital.

In 2022, it bought a Japanese real estate asset manager from UBS Group AG and Mitsubishi Corp in a deal valued at 230 billion yen.

KKR has about Us$69bil of assets under management in real estate across equity and debt investments globally, with about Us$16bil of that in Asia Pacific. It started investing in real estate in the region in 2011.

“There’s economic growth that’s consistent with real estate fundamental growth.”

Ralph Rosenberg