Understanding the Benefits, Risks and Considerations for Institutional Investors
Introduction
For many investors entering Japan’s commercial real estate market, purchasing through a brokerage firm is the most familiar acquisition strategy. Brokers provide access to investment opportunities, coordinate transactions and help buyers navigate a complex market.
However, brokerage firms are not the only route through which institutional-quality assets change hands.
Many commercial real estate transactions—particularly newly developed hotels, residential buildings and logistics facilities—are acquired directly from developers.
This approach is common among institutional investors seeking newly built assets, but it also introduces a different set of opportunities and risks.
Unlike stabilized properties, development-stage acquisitions require investors to evaluate projected rather than historical performance. Construction progress, leasing assumptions, operator selection and the developer’s execution capability all become central to the investment decision.
Buying directly from a developer is therefore not simply an alternative way to purchase real estate.
It represents a different investment strategy.
This article explains why institutional investors buy directly from developers, how these transactions differ from acquiring stabilized assets and what investors should consider before pursuing this approach.
Why Buy Directly from Developers?
The most obvious reason is simple.
Access to newly created investment opportunities.
Developers create assets that do not yet exist in the investment market.
By acquiring a project before or shortly after completion, investors gain exposure to assets that have not yet entered the secondary market.
For some investors, this is attractive because it allows them to secure modern, institutionally designed properties that meet current operational standards and sustainability requirements.
In Japan’s hotel sector, for example, many institutional investors seek newly developed assets because they offer contemporary layouts, efficient building systems and facilities designed for today’s travellers rather than yesterday’s market.
For investors with long investment horizons, purchasing early in an asset’s lifecycle may also reduce future capital expenditure requirements compared with acquiring older properties.
Higher Expected Returns Come With Higher Risk
A common misconception is that buying directly from developers automatically produces higher investment returns.
The reality is more nuanced.
Development-stage acquisitions generally involve additional risks that stabilized properties do not.
These risks may include:
- Construction delays
- Cost overruns
- Leasing risk
- Hotel ramp-up risk
- Financing risk
- Market changes before completion
- Regulatory or permitting issues
Because investors accept these additional uncertainties, they generally expect higher returns than would be required for an already stabilized asset.
Importantly, higher expected returns should not be interpreted as evidence that development acquisitions are superior investments.
Rather, they represent compensation for assuming greater execution risk.
As J.P. Morgan Asset Management notes in its research on private real estate, development projects require higher expected returns because investors bear construction, leasing and execution risks that are largely absent from stabilized assets. Success therefore depends not only on identifying attractive projects but also on managing development risk effectively.
For this reason, many institutional investors view development acquisitions as part of a value-add or opportunistic investment strategy rather than a core investment strategy.
Development-Stage Acquisitions Require a Different Approach
Development-stage acquisitions differ fundamentally from purchasing stabilized assets.
When acquiring an existing income-producing property, investors can evaluate historical occupancy, rental income, operating expenses and cash flow.
Development projects offer far less historical information.
Instead, investors assess projected performance based on factors such as:
- Market demand
- Location
- Product positioning
- Development specifications
- Construction progress
- Leasing assumptions
- Revenue projections
- Stabilisation strategy
Rather than analysing historical operating performance, investors evaluate whether the assumptions underlying the business plan are realistic and achievable.
For this reason, confidence in the developer’s execution capability becomes an essential component of the investment decision.
Buying From Developers Is Not About Avoiding Brokers
One important misconception should be addressed.
Buying directly from a developer does not mean brokers are unnecessary.
Many developers actively engage brokerage firms when marketing projects to institutional investors.
Likewise, many institutional investors maintain strong relationships with both brokers and developers.
These relationships are complementary rather than mutually exclusive.
The question is therefore not:
Should I buy through a broker or directly from a developer?
A more useful question is:
Which acquisition channel is most likely to provide the type of investment opportunity that fits my investment strategy?
Professional investors typically build access across multiple acquisition channels rather than relying exclusively on one.