Last week Japanese real estate firm K.K. DaVinci Advisors, which runs Japan’s largest private real estate investment fund, purchased the office portion of the Pacific Century Place Marunouchi building in Tokyo for $1.7 billion (€1.3 billion) from Richard Li, a Hong Kong-based communications tycoon.
Coming fast on the heels of another Tokyo office deal, the purchase of 39,102 square meters of office space in the centrally located, 39-story building may be a sign that Japanese real estate is no longer a distressed investment. According to real estate firm Richard Ellis, class-A Tokyo office vacancies have dropped for the past three years and, earlier this year, stood at 6 percent.
The DaVinci acquisition was reportedly encouraged by the improving fundamentals in Japanese real estate. The ¥200 billion paid for the building represents the largest single-asset transaction in Asia, according to Merrill Lynch, which advised the seller.
Hong Kong telecom and internet magnate Li also sold his controlling stake in Hong Kong’s largest telephone company, PCCW, last July. He will retain ownership of the Four Seasons Hotel Tokyo, which is located in the Marunouchi building.
DaVinci has more than ¥1 trillion in property assets and said it plans to continue acquiring assets in Tokyo.
The sale of the Pacific Century building comes shortly after the announcement by US investment bank Morgan Stanley that it was acquiring an office building in central Tokyo. In an interview with Private Equity Online’s sister publication, Private Equity Real Estate, the head of the bank’s property business in Japan said the improving market was a driver behind the transaction.
“We’re no longer in a distressed situation,” said Fred Schmidt, managing director and head of Morgan Stanley Real Estate, Japan. “It’s come off the bottom. It’s more of a recovery market.”
He says the class-A office building was initially leased at below-market rents and Morgan Stanley hopes to raise rents over the next five years and increase cash flow.
Morgan Stanley paid $523 million for the building, known as Akasaka Garden City, which is near the popular entertainment and shopping district of Aoyama, as well as Route 246—a road running from the Imperial Palace, through the Akasaka, Aoyama and Shibuya districts, to the Tokyo suburbs. It is also close to three subway stations.
Schmidt noted that Japan has been a distressed market for the past 8 years—during which it has been fraught with bank failures and consolidation—but that fundamentals in the country are now improving, as evidenced by increasing rents, occupancy and land prices.
He added that rental growth has increased 20 to 40 percent in certain submarkets. In Tokyo, only 7 percent of the office stock is class-A offices—less than half that found in comparable markets like New York or London.
Because of the situation, Schmidt said the firm could pursue the rental growth strategy in Japan, noting that many Japanese corporations still have real estate assets on their balance sheets.
DaVinci was founded in 1998 by Osamu Kaneko, who remains the company’s president, while Morgan Stanley’s real estate division has been active in Japan since 1998 and employs more than 200 people.