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European property latest lure for Japan funds, Tokio Marine says

Tokyo (Bloomberg, April 10 ) - Japanese institutional investors' appetite for European real estate funds is rising as attractive yields and lower hedging costs lure them away from a potentially peaking U.S. market, according to Tokio Marine Asset Management Co.

The $57 billion money manager saw inflows to its overseas real estate equity funds soar "multi-fold" to around 200 billion yen ($1.9 billion) at the end of March from a year ago, as demand from Japanese pensions and other institutions surged, said Shinji Kawano, head of its overseas property investment department. Total assets under management were little changed over the same period, he said.

"Japanese investors want to take risks on real estate but not on currency," Kawano said in an interview in Tokyo last week. "The appeal of the U.S. is decreasing while Europe is gaining more and more attention now, given its big market size and attraction in light of lower hedge costs. There is also a wariness about the U.S. property market peaking out." Client inquiries, which were focused on the U.S. three years ago, are now neck-and-neck for Europe, Kawano said. Assets in overseas real estate equity funds suddenly spiked in 2017 after years of marginal growth, he added.

For investors from Japan seeking higher returns from overseas assets, the rise in benchmark U.S. borrowing costs has made it more expensive to hedge dollar-denominated investments back into yen. Conversely, still subdued euro-zone interest rates have kept hedging costs for the common currency low, increasing demand for European assets.

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"I think this trend will continue for some time as many people don't expect interest rates in Europe to rise so easily," said Kawano. "In addition, further increases in U.S. interest rates threaten to undermine yields on American real estate."