China’s Property Struggles Shift Investor Focus to Japan

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China’s Property Struggles Shift Investor Focus to Japan

China has been one of the world’s fastest-growing economies for decades, attracting investors eager to profit from its rise as an economic superpower. Recently, concerns about overbuilding and poor lending practices in the property market have given investors pause. The bankruptcies of several high-profile real estate companies have further deterred property investments. A recent fundraising success by an Asia-focused fund shows that capital is flowing elsewhere, with investors looking to other sectors and opportunities across the region.

The alternative asset manager PAG just announced it has raised $4 billion for an Asia-focused real estate fund. While relatively small in the broader world of asset management, the fund's investment strategy is notable. More than 70% of the capital will be used to acquire Japanese real estate. The PAG team sees opportunity in Japan’s recent economic struggles, aiming to acquire mostly distressed assets through off-market deals.

Part of the focus on Japan stems from the struggles of China’s property sector. With foreign interest in China dwindling, finding buyers for future sales is becoming increasingly difficult. “When liquidity is down in China, there is almost no price that you can sell an asset,” said PAG’s President and Co-Founder Jon-Paul Toppino. “There is a clearing price in Japan, so we’ve always been able to dispose of assets in our portfolio there.”

PAG has long been one of the most sophisticated investors in Asia, with a diverse portfolio that includes investment banks, theme parks, and airlines. Founded in 2002, the firm impressed early investors with nearly 40 percent returns in its first years. In 2006, it made history by executing the first-ever leveraged buyout of a mainland Chinese company, Goodbaby. Today, PAG owns 7,400 properties across Asia, valued at approximately $43 billion.

If a firm with PAG’s track record of making money in China is pulling back from the country’s property sector, other investors are likely doing the same. So far, China has managed to keep its real estate problems from destabilizing the financial system, but winning back investors will require proving that there’s still a viable market. Like Japan, China may need to offer steep discounts to attract those willing to get in early.

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