China property

BlackRock favours Japan and China

To John Saunders, the head of Asia-Pacific real estate at BlackRock, Japan and China are still interesting markets, one it bought into early and the other where it is hunting for targets

PUBLISHED : Tuesday, 06 October, 2015, 9:07pm
UPDATED : Friday, 09 October, 2015, 10:42am

John Saunders was a pioneer in the latest round of investment frenzy in Japan, taking advantage of its economic recovery. About a year before Shinzo Abe became prime minster and implemented Abenomics in 2012, Saunders and his team at MGPA, which was acquired by BlackRock in 2013, started investing in Japan when many of his peers hesitated.

Now BlackRock's head of Asia-Pacific real estate, Saunders says Japan is still an interesting market to invest in. The company is also interested in commercial properties in mainland China's major cities.

Can you share your company's strategy in Japan?

We were very early investing into Japan in its economic recovery. We were investing nine to 12 months before Abenomics. I remember I used to take Cathay Pacific [Airways] to Tokyo, the plane was pretty empty. I was not seeing anyone I recognised in the real estate sector. But now I see many people I recognise on the plane.

We were buying a huge yield of 9 per cent, funding them for a cost at less than 1.5 per cent. That was a huge spread. Nobody expected that was the election of Abe and the whole policy of Abenomics. Abenomics is about QE (quantitative easing). You see what happened to the yen. If you hedge with your equity, which we do, then actually a falling currency is very good for real estate. So clearly, we made a really good gain on most of our investments.

At the time, we believed rents would stop falling. When they do, people will compress the capitalisation rate (and assets values will rise). This was an initial premise. We did not expect Abenomics. That was a pleasant surprise.

Is Japan still interesting to invest?

Yes. The big question now is what is next. The interesting thing is whether we can see rental growth in Tokyo and in other cities. We have started to see some evidence of that. There is a floor in rents in Tokyo, and we have started to see rental growth.

Ironically, Japanese rents and capital values for many years were seen as terribly expensive. After 20 years of decline, it has been surpassed by a number of cities in the world and in Asia.

Three or four years ago when we had investments in China and we hedged our currency risks, people thought we were out of our mind

The Chinese government has devalued its currency. Is it good for foreign investors?

We tend to hedge our currency and equity exposures. When (the Chinese government) devalued, that makes it cheaper for us to invest in our base currency, which is generally US dollars.

I remember three or four years ago when we had investments in China and we hedged our currency risks, people thought we were out of our mind. I am glad we did hedging.

What is your investment strategy in China?

We are interested in all sectors, particularly in the office and retail in first-tier cities and selectively in second-tier cities. We have very successful investments in second-tier cities, particularly retail.

When was the company's last investment in China?

Our last investment would be about five years ago. We have been waiting. It is time to buy … certainly we are looking for interesting opportunities. I think prices still may have some movement. The interesting thing is the opportunities that will be throwing up. There are good opportunities if you hunt around.

The Chinese government has announced measures to encourage foreign investments. Does it help?

Yes, all that will help. If (the government) is providing an environment of a level playing field, we welcome that. It is definitely good and positive to the market. It is positive to the effect it has. It is also positive to the signal it has.

Do you think the Chinese government can manage the economic slowdown?

We are medium-term investors. In the medium term, we expect to see some recovery.

Can you tell us more about yourself?

I started my career with a chartered surveyor. I had a period of time working in real estate with Hongkong Land Holdings. Then I came up as a research analyst with CLSA for 10 years, which was a fantastic time. At CLSA, I was also involved in starting the CLSA fund. That's why I got involved with the fund business.

Unlike in the stock market, the tough one in the physical market is to go deal by deal. You got to go and find a real estate. You can do some of the best deals in the worst market or if you are not careful, you can do some of the worst deals in the best market.

Which is your best deal?

First of all, it is not a "me" thing. It is very much a team effort. We've got a team of 60 people in the region. The business we are most proud of should be our entry into Japan pre- Abenomics. There was a big question mark that it was a right or wrong thing to do. But we had a very strong conviction about the idea.

When were you sure you had made the right decision to enter Japan?

There are three answers. The first was when we finished refurbishing and started to lease out the building. We were getting the rent that we wanted. The second answer was, Abe was elected and announced his policies and his plans. We thought, "Wow. That is the whole currency issue".

We had 100 per cent confidence that was when we sold that property and we had our money back.