The 7th Questionnaire Survey on Real Estate Investment by Institutional Investors (Overview of survey results)
1. Introduction The Association for Real Estate Securitization has conducted its 7 th Questionnaire Survey on Real Estate Investment by Institutional Investors and compiled the results. This is an annual survey that has been conducted since fiscal 2001 as part of the association s survey/research activities for the purpose of grasping the realities and challenges in real estate investment in terms of asset management for pension funds and institutional investors such as life insurers, nonlife insurers and regional banks (referred to as pension funds and general institutional investors in this survey). This year, surveys were sent out to and collected from 609 pension funds and 189 general institutional investors, a total of 798 parties, from May 18 through June 15, 2007 and responses were received from 123 pension funds and 65 institutional investors, a total of 188 parties. It can be inferred from the results of this fiscal year s survey that real estate investment by institutional investors is gradually taking root against the backdrop of an expanding real estate securitization market. In particular, pension funds enthusiasm for real estate investment was high in this survey, implying that there is plenty of room for expansion in the future. Details of survey results and tabulation results are indicated in section 3. Main Content of Questionnaire Survey Results of this chapter. 1
2. Overview on Conducting the Questionnaire Survey This survey has been conducted annually since fiscal 2001 for the purpose of grasping the realities and challenges in physical real estate and real estate securitization product investments by pension funds and general institutional investors. The investment products subject to this survey are physical real estate, J-REIT, foreign REIT, * real estate private fund, etc. and bonds backed by real estate (*newly added on this survey). Question items were existence of investment, real estate of interest as investment target, important factors when considering investment, expected rate of return on investment (ROI), distinction of asset class, purpose of investment, investment period, mandate style (pension fund), etc. for each investment target. (1) Survey target (survey addressee) (A) Pension fund 609 organizations* extracted from among employees pension fund, fund-type or agreement-type defined-benefit pension plans, qualified retirement pension, public pension and mutual aid associations with total assets of 14 yen or more as of the end of March 2007 *Public pension and mutual aid associations were newly added as survey targets this fiscal year (B) General institutional investors Total of 189 companies from among life insurers, nonlife insurers, trust banks, regional banks, city banks, etc. (2) Survey period May 18, 2007---Mail out (Survey period: Post by June 1 (Friday)) June 5, 2007 ~ Requests for responses to organizations with past records of responding June 15, 2007---Response deadline (3) Survey Method Sending and collecting questionnaire sheets by mail Prepare and tabulate survey sheets separately for pension funds and general institutional investors (4) Survey Organization Association for Real Estate Securitization 2
(5) Major Survey Items Major survey items for pension funds are as follows: (1) Existence of investment in physical real estate and real estate securitization products and distinction of asset class (2) Policy asset allocation ratio and current asset allocation ratio (3) Purpose of investment by investment target (4) Types of real estate of interest as investment target (5) Items that seem important when considering investment (6) Investment period when making investment (7) Expected rate of return on investment (ROI) when making investment (8) Mandate style when making investment (9) Reason for not making investment (10) Adequacy of yield gap between J-REIT dividend yield and long-term interest rates (11) Configuration of REIT fund of funds that are of interest as investment target (12) Perspective on real estate when investing in bonds backed by real estate (13) Prerequisites for expanding investment (6) Investment Classification in Questionnaire Investment in physical real estate Investment in J-REIT Investment in physical real estate and real estate securitization product Investment in equity Investment in foreign REIT (real estate management) Investment in real estate securitization product Investment in real estate private fund, etc. Investment in debt Investment in bonds backed by real estate A. Investment in physical real estate: Direct investment in physical real estate or beneficial interest in real estate trust B. Investment in J-REIT: Investment in investment units of J-REIT, or purchase of securities investment trust that incorporates J-REIT into portfolio. Indirect investment in J-REIT via securities investment trust. C. Investment in foreign REIT: Investment in investment units of foreign REIT, or purchase of securities investment trust that incorporates foreign REIT into portfolio. Indirect investment in foreign REIT via securities investment trust. D. Investment in real estate private funds, etc.: Investment in real estate funds with private structure (such as Tokumei Kumiai anonymous association investment in limited company SPC) and investment in other equity-type real estate securitization products (such as investment in preferred equity securities issued by specific purpose company under the Act on Securitization of Assets). E. Investment in bonds backed by real estate: Investment in bond-type real estate securitization products backed by real estate or real estate loans including CMBS and RMBS. 3 * Real estate private fund and Other equity-type real estate securitization products in surveys up to the previous fiscal year were combined and referred to as real estate private fund, etc. in this fiscal year s survey.
(7) Results of Questionnaire Collection (A) Collection results by addressee Questionnaire addressee Sent Collected Collection rate (last fiscal year) Pension fund (A) In principle, extracted from pension 609 123 20.2% (14.0%) funds with total assets of 14 (436) (61) yen or more as of March 2007 (A) Employees pension fund 268 53 19.8% (10.4%) Breakdown Defined-benefit pension 270 64 23.7% (18.5%) plans Qualified retirement 42 1 2.3% (3.1%) pension Public pension/mutual 29 4 13.8% aid associations, etc. Unknown/Anonymous 1 General institutional investor (B) 189 65 34.4% (26.5%) (204) (54) (B) Life insurer 38 9 23.7% (34.2%) Breakdown Nonlife insurer 22 7 31.8% (13.6%) City bank, etc. 10 6 60.0% (30.0%) Trust bank 23 9 39.1% (52.2%) Regional bank 96 34 35.4% (20.7%) Total (A)+(B) 798 188 23.6% (18.0%) (B) Collection results by scale of pension assets Total assets Over 20 Over 50 Over 100 under ~20 Over 500 Number of management yen yen~50 yen~100 yen~500 yen responses ( yen) yen yen yen Number of responses 29 45 16 27 2 119 from pension 24.4% 37.8% 13.4% 22.7% 1.7% 100.0% fund 以 上 4
3. Main Content of Questionnaire Survey Results (1)Investment in real estate securitization products has expanded and taken root (A) For pension funds, investment has expanded and diversified When looking at the situation regarding pension funds investment in physical real estate and real estate securitization products, 42% of the pension funds* that responded are investing in physical real estate or some type of real estate securitization product. It can be said that as a whole, investment in real estate securitization products is expanding. As for investment conditions by target, investment was centered on real estate private fund, etc. until last year. What is notable for this survey is that while investment in real estate private fund, etc. (22%) stayed at previous year s levels, the shares of those who have already invested in J-REIT () and foreign REIT (19%) have doubled in comparison to last year. Also, when classifying pensions total AUM into under 20 yen, 20 yen ~ Under 50 yen, 50 yen ~ Under 100 yen and 100 yen or more, and looking at investment conditions into major investment targets according to the scale of pension assets, one can understand that the larger the asset scale, the larger their investment record for real estate private fund, etc. On the other hand, pension funds with small asset scale have high investment records in REIT and foreign REIT. It can be said that investment in J-REIT and foreign REIT which allow for investment with small funds is progressing. As for pension funds, diversification of managed assets and expansion in investor demographics are discerned in accordance with the expansion of the real estate securitization product market and diversification of products. As for distinction of asset class, many pension funds are considering real estate as an asset class next to a substitute asset for bonds. [Refer to 1-(1), 1-(2), 1-(3) and 1-(4)) 5
[Figure: 1-(1)] Percentage of Respondents Investing in Physical Real Estate or Listed Real Estate Securitization Products 100% 80% 78% 86% 90% 87% 94% 60% 40% 24% 19% 37% 31% 42% 0% FY2003 FY2004 FY2005 FY2006 FY2007 Pension fund General institutional investor [Figure: 1-(2)] Investment by Investment Target (Pension Funds) Physical real estate 7% 1% 7% 84% 3% J-REIT 37% 40% Foreign REIT 19% 7% 36% 38% Investment in real estate private fund 22% 2% 14% 62% Bond backed by real estate 10% 3% 16% 71% 0% 40% 60% 80% 100% Alrey invested Interested in investment Considering investment No interest in investment 6
[Figure: 1-(3)] Investment by Pension Fund AUM Size 100% 80% 44% 35% 50% 37% 50% 42% 40% 18% 47% 31% 60% 40% 0% 37% 4% 15% 40% 31% 5% 21% 19% 33% 4% 26% 36% 4% 11% 37% 5% 16% 43% 7% 32% 88% 8% 4% 73% 7% 2% 17% 33% 24% 3% 41% ~20 Over 20 Over 50 Over 100 ~20 Over 20 Over 50 Over 100 ~20 Over 20 Over 50 Over 100 yen yen~50 yen~100 yen~ yen yen~50 yen~100 yen~ yen yen~50 yen~100 yen~ yen yen yen yen yen yen Investment in J-REIT Investment in foreign REIT Investment in real estate private fund Already invested Considering investment Interested in investment No interest in investment [Figure: 1-(4)] Distinction of Asset Class by Investment Target (Pension Funds) Physical real estate 13% 31% 19% 25% 13% J-REIT 10% 28% 19% 22% 22% Foreign REIT 16% 17% 22% 24% 21% Investment in real estate private fund 7% 34% 22% Bond backed by real estate 60% 16% 12% 16% 0% 40% 60% 80% 100% Substitute asset for stocks (within framework) Outside policy asset mix framework Not decided Substitute asset for bonds (within framework) Real estate as one asset class (B) For general institutional investors, investment in real estate securitization products has taken root With general institutional investors, the percentage of those investing in physical real estate or 7
real estate securitization products reaches 94%. More specifically, about 80% invest in J-REIT, about 50% in real estate private fund, and about 70% invest in bonds backed by real estate, showing that investment in real estate securitization products has taken root. [Refer to Chart 1-(5), 1-(6), 1-(7)] [Figure: 1-(5)] Investment by Investment Target (General Institutional Investors) Physical real estate 18% 5% 77% 2% J-REIT 79% 8% 11% 3% Foreign REIT 22% 19% 56% Investment in real estate private fund 48% 8% 3% 42% Bond backed by real estate 66% 2% 8% 25% 0% 40% 60% 80% 100% Alrey invested Interested in investment Considering investment No interest in investment [Figure: 1-(6)] General Institutional Investors Investment Situation by Attribute 100% 80% 75% 69% 69% 97% 73% 67% 67% 83% 60% 56% 50% 50% 40% 39% 30% 19% 17% 17% 17% 0% 0% 0% 0% Life and nonlife insurer Regional bank/secondtier regional bank City bank Trust bank Physical real estate Foreign REIT Bond backed by real estate J-REIT Investment in real estate private fund 8
[Figure: 1-(7)] Distinction of Asset Class by Investment Target (General Institutional Investors) Physical real estate 93% 7% J-REIT 36% 9% 24% 36% 4% Foreign REIT 24% 5% 14% 57% 5% Investment in real estate private fund 6% 45% 45% 3% Bond backed by real estate 71% 21% 11% 3% 0% 40% 60% 80% 100% Stocks Bonds Real estate Alternative Not decided (2) Asset allocation to Real estate is on upward trend As for the percentage of real estate in current (track record) asset allocation (Note: what is included in real estate depends on respondent s definition), it was 2.4% for pension funds (valid response: 106) and 9.8% for general institutional investors (valid response: 23). Asset allocation to real estate has increased compared to the previous year (pension fund; 1.2%, general institutional investor: 6.1%) for both parties. Also, in terms of policy (target) asset allocation for pension funds, the target allocation for real estate is 8.0%, but the fact that actual asset allocation has not reached the target also goes to show the status quo in which pension funds enthusiasm for real estate investment is high, but investment records have not caught up. [Refer to Chart 2-(1), 2-(2)] 9
[Figure: 2-(1)] Asset Allocation (Pension Funds) Policy (target) asset allocation 22.7% 14.5% 22.6% 8.0% 8.0% 8.0% 8.0% 8.0% Current asset allocation 29.3% 19.4% 23.6% 2.4% 2.7% 10.6% 7.1% 4.9% 0% 40% 60% 80% 100% Domestic stocks Foreign stocks Domestic bonds Foreign bonds Real estate Alternative Cash and short-term funds Life insurers general account [Figure: 2-(2)] Asset Allocation (General Institutional Investors) Current asset allocation 8.6% 15.5% 38.7% 21.6% 9.8% 2.4% 3.4% 0% 40% 60% 80% 100% Cash and short-term funds Stocks Bonds Loan Real estate Alternative Other ((3) Emphasis on Diversification of portfolio risk as purpose of investment As for the purpose of investment in respective investment targets for those respondents who are either investing, considering investing or interested in investing, many cited it was to diversify portfolio risk, to gain stable cash flow and improve rates of return. Pension funds in particular had a tendency to focus on diversify portfolio risk, while general institutional investors showed the tendency to focus on improve rate of return. Also, when asking those who cited improve rates of return as purpose of investment about what the focus is of the rate of return, they generally emphasized income gain over capital gain. [Refer to Chart 3-(1), 3-(2), 3-(3), 3-(4)] 10
[Figure: 3-(1)] Purpose of Investment by Investment Target (Pension Funds) 100% 80% 60% 40% 0% 93% 85% 78% 69% 71% 62% 62% 46% 44% 52% 35% 38% 41% 38% 31% 29% 27% 18% 21% 14% 7% 10% 0% 0% 3% 0% 0% 0% 0% 3% Physical real estate J-REIT Foreign REIT Investment in real estate private fund Bond backed by real estate Gain stable cash flow Diversify portfolio risk Real estate investment with liquidity Improve rate of return Inflation hedge Other [Figure: 3-(2)] Purpose of Investment by Investment Target (General Institutional Investors) 100% 80% 60% 40% 0% 87% 94% 79% 76% 76% 67% 61% 55% 59% 53% 52% 40% 44% 42% 35% 27% 14% 16% 7% 7% 6% 6% 0% 4% 3% 0% 0% 2% Physical real estate J-REIT Foreign REIT Investment in real estate private fund Bond backed by real estate Gain stable cash flow Diversify portfolio risk Real estate investment with liquidity Improve rate of return Inflation hedge Other 11
[Figure: 3-(3)] Focus Items in Terms of Improve Rate of Return (Pension Funds) Physical real estate 100% J-REIT 74% 26% Foreign REIT 78% 22% Investment in real estate private fund 64% 36% 0% 40% 60% 80% 100% Focus on income gain Focus on capital gain [Figure: 3-(4)] Focused Items in Terms of Improve Rate of Return (General Institutional Investors) Physical real estate 100% J-REIT 100% Foreign REIT 57% 43% Investment in real estate private fund 68% 32% 0% 40% 60% 80% 100% Focus on income gain Focus on capital gain (4) Items of importance when considering investment When looking at items of importance when considering investment, the top items for both pension funds and general institutional investors alike were stability in revenue and quality of real estate owned by fund like the previous year. But this fiscal year, the importance of track record and capability of management company has relatively increased for as items to be studied for J-REIT, foreign REIT and real estate private fund. Also particularly notable is the fact that pension funds raised correlation with other assets in terms of foreign REIT, which has been newly added 12
to the survey target starting this fiscal year. (Refer to Chart 4) [Figure: 4] Items Deemed Important in Considering Investment Pension fund General institutional investor 1st Stability in revenue 1st Stability in revenue Physical 2nd Return on investment 2nd Quality of acquired real estate real estate 3rd Quality of acquired real estate 3rd Return on investment 1st Stability in revenue 1st Quality of real estate owned by fund J-REIT 2nd Track record and capability of Track record and capability of 2nd management company management company 3rd Return on investment 3rd Stability in revenue 1st Stability in revenue 1st Future outlook of real estate market Foreign Track record and capability of Track record and capability of 2nd 2nd REIT management company management company 3rd Correlation to other assets 3rd Stability in revenue Investment Track record and capability of Track record and capability of 1st 1st in real management company management company estate 2nd Stability in revenue 2nd Quality of real estate owned by fund private Quality of real estate owned by 3rd fund fund 3rd Return on investment (5) Type of property diversifies As for the type of real estate that is of interest as an investment target, both pension funds and general institutional investors alike showed a high interest in office as in the previous fiscal year, but the interest in other uses are diversifying as well, as characterized by many responding, no preference in real estate type. Properties for J-REIT and real estate private fund is centered on offices, but the spreading of needs to rental housing, commercial facilities, mixed-use facilities, etc. can be detected. [Refer to Chart 5-(1), 5-(2)] 13
[Figure 5-(1)] Properties of Interest as Investment Targets (Pension Funds) 100% 80% 69% 66% 68% 60% 40% 0% 31% 31% 23% 23% 23% 23% 8% 47% 42% 42% 45% 38% 29% 33% 28% 22% 25% 15% 25% 18% 13% 14% 6% 10% 1% 0% 0% Physical real estate J-REIT Foreign REIT Investment in real estate private fund Office building Rental housing Commercial facilities Hotel Warehouse Mixed-use complex No preference in real estate type Other [Figure 5-(2)] Properties of Interest as Investment Target (General Institutional Investors) 100% 80% 60% 40% 0% 100% 86% 7% 7% 0% 0% 0% 0% 25% 63% 9% 39% 29% 14% 5% 60% 12% 36% 4% 0% 36% 32% 72% 42% 36% 25% 25% 14% 17% 0% 0% Physical real estate J-REIT Foreign REIT Investment in real estate private fund Office building Rental housing Commercial facilities Hotel Warehouse Mixed-use complex No preference in real estate type Other ((6) Investment period is mainly 3 years ~ Less than 5 years When looking at investment periods by investment targets, the mainstream for both pension funds and general institutional investors alike is 3 years ~ Less than 5 years, aside from the fact that general institutional investors investment in J-REIT and foreign REIT is short-term. For real estate private fund, etc. in particular, the number of pension funds that responded 5 years or more exceeded 3 years ~ Less than 5 years, indicating that they are assuming a longer term investment compared to general institutional investors because of the nature of their funds. [Refer to Chart 6-(1), 6-(2)] 14
[Figure: 6-(1)] Investment Period of Investments (Pension Funds) Physical real estate 8% 31% 23% 38% J-REIT 16% 32% 16% 36% Foreign REIT 9% 35% 36% Investment in real estate private fund 7% 37% 39% 17% Bond backed by real estate 10% 34% 24% 31% 0% 40% 60% 80% 100% Less than one year One year ~ Less than 3 years 3 years ~ Less than 5 years 5 years or more Not decided [Figure: 6-(2)] Investment Period of Investments (General Institutional Investors) Physical real estate 47% 53% J-REIT 14% 16% 13% 57% Foreign REIT 24% 12% 4% 60% Investment in real estate private fund 3% 14% 49% 9% 26% Bond backed by real estate 7% 50% 13% 30% 0% 40% 60% 80% 100% Less than one year One year ~ Less than 3 years 3 years ~ Less than 5 years 5 years or more Not decided (7) Expected rate of return on investment is on a downward trend The average of expected rate of return on investment by investment target generally indicated a downward trend compared to the previous fiscal year, excluding pension funds expected rate of return on investment for physical real estate. In addition, the level of expected rate of return on investment for foreign REIT, added to survey target from this fiscal 15
year, was higher than the level for J-REIT. General institutional investors are expecting lower rates of return on investment than those expected by pension funds for all investment targets excluding investment in real estate private funds. As for the yield gap between J-REIT dividend yield and long-term interest rates, the majority replied adequate. (Refer to Chart 7) [Figure: 7] Secular Comparison of Expected Rate of Return on Investment (ROI) by Investment Target Pension fund General institutional investor FY2004 FY2005 FY2006 FY2007 FY2004 FY2005 FY2006 FY2007 Physical real estate 5.3% 6.0% 5.0% 8.2% 6.9% 6.4% 6.0% 5.6% J-REIT 4.9% 5.0% 6.1% 5.9% 4.6% 4.7% 5.8% 5.6% Foreign REIT - - - 6.9% - - - 6.3% REIT fund of funds - 5.8% 6.4% 6.5% - 5.4% 7.0% 5.8% Investment in real estate 7.7% 7.6% 7.6% 7.4% 9.7% 8.9% 9.6% 9.2% private fund Bond backed by real estate 5.3% 5.3% 4.4% 4.2% 1.7% 3.3% 3.8% 2.1% *In surveys for FY 2003, FY 2004 and FY 2007, respondents were asked for the absolute value of expected rate of return on investment. In surveys for FY 2005 and FY2006, respondents were asked for the range of expected rate of return on investment. *Figures for FY2003, FY 2004 and FY 2007 are averages of valid responses. Figures for FY 2005 and FY 2006 were reached by multiplying the average of each range by the number of responses and dividing it by the number of funds (companies) that gave valid responses. (8) High needs for establishment of market infrastructure Amid expanding real estate investment, the major issues in investment pointed out by pension funds were real estate investment index serving as a benchmark, improvement of credibility in real estate appraisal and standardization of real estate investment-related information. On the other hand, 70% or more of general institutional investors pointed out improvement of information disclosure on individual real estate. Other common responses were improvement of credibility in real estate appraisal, fostering of knowledgeable staff in charge of management, expansion of market scale and standardization of real estate investment-related information. Furthermore, needs for legal structure allowing discretionary investment was the least common response from both pension funds and general institutional investors. 16
[Refer to Chart 8-(1), 8-(2)] *denotes item newly added in this fiscal year s survey [Figure: 8-(1)] Prerequisites for Real Estate Investment (Pension Funds) Real estate investment index serving as benchmark Improvement of credibility in real estate appraisal* Standardization of real estate investmentrelated information* Expansion of market scale Improvement of information disclosure on individual real estate Clarification of fiduciary duty in asset management Management company reliable for discretionary investment Fostering of knowledgeable staff in charge of management Consultants offering investment advice* Clarification of accounting standards regarding investment* Legal structure allowing discretionary investment 54.2% 53.4% 47.5% 42.4% 39.0% 32.2% 27.1% 26.3% 25.4% 20.3% 14.4% Other 3.4% 0% 40% 60% 80% 17
[Figure: 8-(2)] Prerequisites for Real Estate Investment (General Institutional Investors) Improvement of information disclosure on individual real estate Improvement of credibility in real estate appraisal* Fostering of knowledgeable staff in charge of management Expansion of market scale Standardization of real estate investmentrelated information* Real estate investment index serving as benchmark Clarification of accounting standards regarding investment* Clarification of fiduciary duty in asset management Management company reliable for discretionary investment Consultants offering investment advice* Legal structure allowing discretionary investment Other 23.8% 12.7% 9.5% 4.8% 3.2% 3.2% 71.4% 65.1% 55.6% 49.2% 46.0% 38.1% 0% 40% 60% 80% When respondents not interested in investment were asked the reason for not investing, the mainstream responses were do not understand product attributes and scarce information on individual case, another indicator of the necessity of information disclosure on individual real estate. Also, given that there are relatively few responses citing the absence of a benchmark as a reason for not investing, needs for a real estate index that serves as a benchmark can be considered to be of the respondents who are already investing, or are interested in investing. [Refer to Chart 8-(3)] 18
[Figure: 8-(3)] Reason for Not Investing in Physical Real Estate/Real Estate Securitization Products Pension fund General institutional investor Low liquidity 1st 1st Low liquidity Physical No understanding of physical real estate 2nd real estate attributes 2nd Scarce information on individual case No understanding of physical real estate 3rd Scarce information on individual case 3rd attributes 1st Do not understand product attribute 1st Expected ROI does not match 2nd Scarce information on individual funds Lack of management track record / Few J-REIT 2nd brands and small scale / High volatility of 3rd Few brands/small scale investment unit prices 1st Do not understand product attribute 1st Scarce information on individual funds Foreign 2nd Scarce information on individual funds 2nd Do not understand product attribute REIT 3rd No benchmark 3rd Lack of management track record Investment 1st Do not understand product attribute 1st Scarce information on individual funds in real estate private fund 2nd 3rd Scarce information on individual funds No benchmark 2nd 3rd Do not understand product attribute Lack of management track record / No benchmark / Market conditions not favorable Bond backed by 1st Do not understand product attribute 1st Scarce information on individual case 2nd Scarce information on individual case 2nd Expected ROI does not match real estate 3rd No benchmark 3rd Do not understand product attribute No benchmark (9) Future outlook of the market (indicator) is plus (on an upward trend) According to indicators that suggest the future outlook of the financial and capital markets as well as the real estate market in the coming year, long-term interest rates, stock prices, land prices and office rent are all on the plus side, making for an overall forecast of an upward trend. (Chart 9) 19
[Figure: 9] Secular Comparison of Future Outlook on Financial/Capital Market and Real Estate Market (in coming year) Pension fund General institutional investor FY2006 FY2007 FY2006 FY2007 Long-term interest rates 83 57 83 73 Stock prices 42 68 50 75 Land prices 50 58 76 84 Office rent 48 53 80 92 *Indicator: Value obtained when subtracting the ratio (%) of respondents that said downtrend from the ratio of respondents that said uptrend 0 is the equilibrium. Plus indicates forecast of an uptrend and minus indicates that of a downtrend. The closer the value is to 100, the stronger the trend. 20