GlobeSt.com: What in the Japanese market says that this is the time to strike up such a JV?

Mintz: We've tried to create a vehicle to house assets that are substantially larger than we normally would purchase on our own. We also wanted to create something that was programmatic, with a partner in place. Previously we had solicited partnerships on a one-by-one basis, but given the size and growth of our portfolio, we needed something more stable, more certain.
In terms of Shinsei, under Japanese law they can't own more than 50% of a real estate vehicle, so they needed a partner to pursue the kinds of transactions they want. So we each had various reasons why it made sense.

GlobeSt.com: What do you mean by programmatic?

Mintz: That there are established structures and fees and economic interests, so each time we create a deal we don't have to come up with a new relationship. We spent six months getting comfortable with each other. So they trust and understand the kinds of underwriting we do. That's critical in a partnership like this.

GlobeSt.com: You said the JV would help you gain access to larger properties. What's the threshold?

Mintz: The venture is aimed at office and retail properties solely in Japan, and we're targeting assets valued at $100 million-plus. It's very easy to get to that $100 million since in Tokyo, on a price-per-square-foot basis, you're looking at $1,000 a foot. It's a very different market than anywhere in the US.

GlobeSt.com: You said Shinsei can't own more than 50%. So by definition all acquisitions will be 50/50?

Mintz: It's actually set up so that GE will own 67% of the equity.

GlobeSt.com: Is it an exclusive arrangement?

Mintz: We've agreed for a period of time not to enter into another programmatic joint venture like this in Japan.

GlobeSt.com: Given GE's firepower, couldn't you have done all this without a JV partner?

Mintz: Sure. Our business in Japan is about $2.5 billion and globally it's $30 billion. But we believe in diversification of risk across many asset classes and geographies. We could change the cap, but it goes against one of our principal diversification theories. A venture like this not only enables us to participate in larger assets but it also allows us to maintain an appropriate asset-level exposure.

GlobeSt.com: The Japanese investment market has been compared to the US market of the '80s and '90s. Do you agree?

Mintz: This venture is in no way a reaction to what we think are market conditions, and it would have happened in any market. Korea's in a very different evolutionary stage, and we entered into that venture one month before Japan. Japan has got about 675 million sf of office space, but most companies when they downsize want to remain in Tokyo. It's very different than in the US, where companies will pick up and move. As a result, for the past 10 years--despite deflation and a challenging economy—-Tokyo's vacancy rate hasn't been above 9.5%.
Also, land values are a significant component of building value, generally speaking between 65% and 75% of a typical asset. And that's after 12 years of declining land values.
Last but not least, you still have a tremendous spread between the cost of funds in Japan and the kinds of yields you can achieve. So while the nominal cap rate in a place like Tokyo in most asset classes is at 5%, five-year funds at a normal loan-to-value are at 1%, so you have a 400 basis-point arbitrage. Around the world the only places where that exists are India, Korea and Japan.

GlobeSt.com: You surprised me. I was expecting more of a statement of upside potential.

Mintz: We don't see that. We understand a lot of our peers and competitors see that, and it's driving market pricing. Some people see property values at 50% of what they were 10 years ago and figure it has to come back. But I don't see a tremendous recovery.

GlobeSt.com: So where will the JV be in a year?

Mintz: We can have something on the order of $400 million to $500 million in assets—-probably six—-with a 5% NOI yield and third-party financing up to 75%, probably up to 100 basis points over. The average asset size would probably be around $85 million or $90 million.

Instant Insights /

Philip Mintz of GEReal Estate/Asia

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