The Goldman Sachs Group Inc. (GS) is planning to venture into Japan’s property market through its asset management wing. According to Bloomberg, the U.S. investment bank strategizes to expand private real estate investment trust (REIT) in the Japanese soil to 300 billion yen ($3.7 billion) over the next five years.
Goldman aims to initiate the private REIT in August with 30 billion yen ($0.4 billion) and expand it further over the long term. It also plans to increase its investment fund to 100 billion yen ($1.2 billion) over the next two years. The REIT targets to begin investing primarily in office buildings in Tokyo with the anticipation of an upward movement in the Japanese property market.
Further, according to the source, Goldman’s investment is expected to be extended to residential and retail properties. Precisely, office buildings are anticipated to account for 60% of the trust, while the remaining will account for residential and retail properties. Moreover, the main second-tier Japanese cities might also come under the purview of investments in the later years.
Private REITs, which possess buildings, pay dividends to the investors from the rental income. These trusts do not trade on exchanges, and therefore they sound similar to pension funds that yield stable income for investors.
Due to low yielding bonds and falling stocks, pensions in Japan are focusing on diversifying their investments to increase returns in the country instead of investing in assets such as bonds and equities. Therefore, Goldman intends to target pension funds and domestic institutional investors for REIT with an aim to earn 5% return on an annual basis.
Earlier this year, other firms such as Mitsubishi Estate Co., Mitsui Fudosan Co. and Nomura Real Estate Holdings Inc. — subsidiary of Nomura Holdings Inc. (NMR) — also came forward to increase their investments in private REIT. They intend to increase the size of the trust to tap the Japanese market.
The aforesaid firms were attracted by the Japanese pensions having total assets of $3.47 trillion and recording a compound annual growth rate of 0.2% over the past 10 years.
Goldman expects a turnaround in the Japanese real estate market; hence, it has decided to make such a huge investment. At the current level, investing in Japanese properties would yield higher returns over the long period once the Japanese economy stabilizes and government’s policies come into effect extensively.
Goldman currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a ‘Neutral’ recommendation on the stock.
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