MAY 2014 | perenews.com
FOR THE WORLD’S PRIVATE REAL ESTATE MARKETSTHE JAPAN REPORT 2014
A special supplement to PERE magazine

SPONSOR INTERVIEW | DIAMOND REALTYForerunners of Nippon
A new strategy to invest abroad is Diamond Realty’s latest effort to innovateahead of others
The DREAM team: early movers

Diamond Realty Management (DREAM), the realestate investment management arm of Japanese conglomerate Mitsubishi Corporation, is not one of thefirst names that spring to mind when thinking about private
real estate investment in Japan. And yet, since its foundingin 2004, the firm has grown its asset base to approximately$4 billion, making it one of the more established firms in theJapanese market.
DREAM manages an open-ended private REIT, private equity
real estate funds and mezzanine finance real estate funds, thelatest of which is expected to be launched this quarter. Whether
the firm is able to keep to its growth trajectory, however, hasmuch to do with how it navigates one the hardest private realestate investment markets in Japan in years. Indeed, with fierce
competition for core real estate and free-lending banks withwhich to contend, DREAM’s business faces challenges aplenty.
President and chief executive Takashi Tsuji acknowledges asmuch. “Everyone is crowding to the same assets,” he says. Headmits that leverage is starting to return to pre-crisis levels of
about 75 percent on a loan-to-value basis and, in such a liquidmarket, it would be reasonable to suppose there would be little
place for a mezzanine finance-focused strategy.

Knack for moving first

For those reasons, executives at DREAM today are spendingtime looking at a new niche strategy currently neglected by its
rivals in a bid to adapt to these challenging conditions.
2PERE | THE JAPAN REPORT 2014

Finding a niche in a market as clearly defined as private realestate sounds like an oxymoron. However, manager William
Hsu says that is precisely what his firm has done in its past, andhe has faith that history will repeat itself. In fact, he notes thatDREAM has been an “early mover” in a number of specialized
strategies that have become popular since.
The prime example of this strategy is logistics real estate,
which Hsu says was a favorite of DREAM before large, international companies like Global Logistic Properties and Goodman
Group legitimized the asset class for institutional investors.
DREAM has acquired $1.5 billion of industrial real estate since
it first uncovered the opportunity a decade ago, and today it has
four funds dedicated solely to the property type.
Another example is data centers, which still is a nascentsector region-wide, with only a handful of firms like Singaporelisted Keppel Land operating vehicles dedicated to the propertytype. DREAM closed its first data center fund in 2011 withJPY9.5 billion (€67 million; $92 million) in capital commitments. Today, the firm is preparing to launch a second fund forthe same strategy.
It is not only property types where DREAM executives
feel they have been first movers. The firm also lays claim
to being among the pioneers in Japan’s embryonic private
REIT universe. In October 2012, DREAM launched a private
REIT in Japan to cater to institutional investors with longterm investment horizons, such as pension plans. To date,
the DREAM Private REIT has $1 billion in assets and about

$650 million of equity. DREAM anticipates it will grow theREIT to $2.5 billion in assets in the next three years, according
to director Masanobu Fujita.
DREAM’s leadership add that they have been first to react tomarket cycles as well. In support of that claim, they say the firm
was the first to return to offering mezzanine finance to private
real estate borrowers following the global financial crisis. In
that space, DREAM filled a hole left by international lenders,which had departed from the marketplace in the wake of collapsing valuations.
Fujita remembers how it was the domestic managers thatfirst saw that opportunity. DREAM raised its first mezzanine
finance fund in 2011, collecting JPY10.2 billion of equity. Todate, it has closed on $700 million of mezzanine loans.
“We have two strengths [as a mezzanine finance lender],”
Tsuji says. “One, we can evaluate the underlying asset because
we are an asset manager; and two, we can handle the asset incase a takeover is necessary.”
DREAM’s connections to Mitsubishi also give it the capacity to tackle hefty deals in the Japanese market, Tsuji adds. The
largest one to date was $200 million.

– will likely be launched sometime in the second quarter thisyear, and DREAM hopes to corral about $150 million for itfrom investors. The firm declined to comment on its fundraising plans, but it generally launches a fund after it alreadyhas closed the vast majority of its deals using capital from
Mitsubishi’s balance sheet. Once the fund is constructed, theloans are transferred over.
“What’s important is how to adapt to the change of market
conditions,” Tsuji sums up. “We don’t want to compete withothers [for the big deals], which means we have to gain a firstmover advantage and differentiate ourselves.”
So far, DREAM’s trailblazing has paid off. The firm declined
to comment on returns, but PERE understands most of thefunds it raised since the crisis have been posting net returns ofmore than 10 percent – and some vehicles are tracking the 30percent range.

Outside its home turf

DREAM shares one last strategy where again it hopes to be outof the starting blocks before others catch on: exporting Japaneseinstitutional capital to international, private real estate markets.
Japanese institutions are notorious for moving at a glacial
pace when it comes to investing in new asset classes or secOne more step out
tors. Japan’s Government Pension
Nonetheless, Tsuji iterates theInvestment Fund (GPIF), for examimportance of accepting when the“What’s important is how tople, has batted around investing infirst mover advantage is over. He
alternative assets for years, but it
points out that there are increasing
adapt to the change of market
only just made its first ever concrete
numbers of mezzanine finance lendconditions. We don’t want toallocation to alternative assets iners these days, making the market
compete with others [for the bigFebruary.
increasingly liquid. To illustrate, hedeals], which means we have
As other Japanese pensions seek
notes that good assets are now findto gain a first-mover advantage
to diversify their investment base,ing competitive senior lending terms
and differentiate ourselves.”
Tsuji believes they will be “forced toup to 60 percent on a loan-to-value
allocate to real estate” and alreadybasis, as compared to a maximum of
have started domestically with
50 percent three years ago.
As such, DREAM has re-thought the strategy for its incom- investments in listed J-REITs, private REITs and closed-ended
ing mezzanine finance fund, with a view to finding that funds. Going abroad, however, currently is outside their comniche once more. Today, the firm is willing to extend loans to fort zone, and that is where DREAM as a domestic manager
developments, previously an area no one considered given the hopes to bridge another gap.
“What investors really lack [in overseas real estate] is a sense
inherent risk.
While there is finance in abundance for Japan’s standing of trust,” Hsu explains. “And a co-investment with Mitsubishi
assets, with lenders and investors alike feeling comfortable gives them that sense of trust.” With a well-respected brandabout committing to established assets, the same cannot be said name domestically, the hope is that Japanese institutions
for development. That, by DREAM’s reckoning, represents an should feel comfortable allowing DREAM to select assets ormanagers abroad.
opportunity for the firm.
DREAM already has assumed an advisory role within Japan“We’re always focusing on the gap between demand andsupply,” says Tsuji. “Right now, the greatest gap we see is in the since 2004, assisting international investors seeking to breakinto the Japanese property market. Tsuji hopes that experiencedevelopment stage projects.”
However, in a sign of the times, DREAM will be committing will serve as a precursor to taking them abroad.
Tsuji describes the island nation as “relationship-driven”
capital to a strategy that brings with it greater risk than before,
even though it should produce similar core to value-added style and, to that end, DREAM has brokered a few introductions
returns. Tsuji points to DREAM’s Mitsubishi relationship as a in the past. “In the same way, we hope to challenge Japanese
mitigating factor, allowing it to evaluate projects with the same investors to go outbound and invest overseas, even if they areefficiency that it has evaluated assets in the past. In addition – cautious,” he says.
By Tsuji’s reckoning, DREAM has fostered a reputation for
and where appropriate – DREAM also will be able to securesenior debt from major Japanese banks for the developments, being a first mover in Japan. It is hoping it has done enough toencourage Japanese capital to take its first steps abroad with
thanks to its connection with its parent.
The incoming mezzanine finance fund – the firm’s third the firm.
THE JAPAN REPORT 2014 | PERE3