Real estate likely played a role in the hefty price US private equity firm KKR paid for Japanese systems developer Fuji Soft after an unusual bidding war with Bain Capital.
The two investment companies spent half a year one-upping each other’s offers for Fuji Soft before KKR’s victory in February. KKR is believed to have pushed as hard partly because of the office towers owned by Fuji Soft.
Before this deal, KKR-owned Japanese group Logisteed had announced in February 2024 that it would sell 33 logistics centres to Industrial & Infrastructure Fund Investment, a listed Japanese real estate investment trust (REIT) under KKR’s umbrella.
Market watchers had thought that Fuji Soft office buildings would likely be sold to Japan Metropolitan Fund Investment (JMF), another KKR-linked REIT investing in commercial and office properties.
As expected, JMF said in August it would buy 14 properties from the Fuji Soft group for a total of 68.6 billion yen ($465 million), making it the largest deal this year in Japan’s publicly listed REIT market. They include the Shiodome Building in Minato ward.
Fuji Soft remains a tenant at the properties under a sale-and-leaseback arrangement. The sale proceeds could help fund new investments for the software group.
There have been deep-rooted concerns about Japanese REITs being used as vehicles for their sponsors—the investment companies behind them—to sell properties they own at high prices.
REITs themselves are essentially just containers for real estate, which is actually managed by the REITs’ operators. Those are in turn controlled by the sponsors, which hold considerable sway.
JMF’s sponsor is KKR, and it would not have been surprising if investors had viewed KKR as using JMF in this way to sell the Fuji Soft properties.
Yet JMF’s share price has remained solid since the announcement. It closed up 1% on Thursday in Tokyo, and was down just 1% from its close on Aug. 27, before the announcement — on par with the Tokyo Stock Exchange’s REIT index.
JMF set strict conditions on the deal to avoid losing value for its investors.
Among these is a provision to adjust rents in line with broader market rates, based on reports from an independent third party. While rent revisions based on consumer price index movements have become increasingly common, this is believed to be the first deal by a Japanese REIT that links rents to the office market.
JMF is covering the cost of the acquisitions through asset replacement along with borrowing, avoiding a public offering that would have diluted the stakes of existing investors.
The properties themselves are seen as good picks. JMF’s implied cap rate — the relationship between a REIT’s share price and returns on underlying assets, equivalent to cost of capital — stood at 4.1% in late August. The average yield on the 14 Fuji Soft properties tops this, at 4.7%.
“It feels like rather than being passive toward its sponsor, the operating company made an effort to work actively on REIT holders’ behalf,” said Yosuke Ohata, a senior analyst at Mizuho Securities.
The recent pivot by Japanese companies away from holding unnecessary assets like real estate provides chances for REITs to snap up good properties.
“As sales of unused real estate rise, the focus is on how REITs use that opportunity,” said Kohei Omura, a research analyst at Nomura Securities.
Conflicts of interest between J-REITs and their sponsors are a perpetual concern. Roughly 90% of J-REITs trade below their net asset value — equivalent to a price-to-book ratio of less than 1 for stocks.
“Managers need to maintain strict discipline,” Ohata said.
This article first appeared in Nikkei Asia
