Japan real estate – hot or not, in or out?!

July 8, 2015 / By  

For the last 12 months I’ve listened to the same focus coming from the region’s real estate investors – “we’re now looking at Japan.”  Why Japan and what’s changed?  If logic prevails, Japan on paper doesn’t look that promising  – a rapidly ageing population only bodes well for the aged care market!  So what’s blowing away the stagnation and malaise?

From where I stand, essentially there are two major factors at play from a real estate perspective:-

  • Abenomics – the first of the three arrows, monetary easing, is having a positive effect on the real estate markets – Tokyo office rents are up 15% since the end of 2012 and capital values even more significantly at 41%. With the lowest cost of debt in the world,  it’s little surprise that transaction volumes have increased sharply, with Japan accounting for 34% of transactions in Asia Pacific at $43.4 billion in 2014 (up from 25% in 2012).
  • Globally with monetary easing, to put it bluntly, there is so much cash sloshing around in the markets at the moment, it needs somewhere to go and as the largest, most liquid market in the region, it makes total sense a lot of this cash has ended up in Japan.

Overseas investment in Japan is up over the last four years (see below).  Indeed, inbound investment accounted for 30% of overall investment in 1Q15, up from 4% in 2011 – somewhat of a significant jump!

Transaction Volumes by Overseas Investors


Source: JLL

Investment strategies by overseas investors are many and varied.  Some are underwriting deals on a two year horizon, but willing to get out in less than 6 months if the numbers work, others are looking at the usual 3-5 years.  As yields in the core market have tightened, we’re now seeing investors move up the risk curve and look at “value add” and other strategies.  One thing that is noticeable however is that any planned reigning in of monetary easing will be a major consideration for overseas investors – I’m hearing a lot of “it’s all about timing!”

Whatever your thoughts on Abenomics and whether you think it will work or not doesn’t actually matter!  The bottom line is, if you’re an international real estate investor looking at the short to medium term, all that needs concern you is that the money whirling around is creating opportunities to invest and make decent returns.  Albeit, the quick wins and low hanging fruit have probably gone already.  Spreads are still favourable (280 bps v’s 150bps at the peak of 2007), capital value growth is due to outstrip most global real estate markets in the near term and significantly Tokyo capital values are still way off their previous peaks.

For these reasons alone, Japan is somewhere I’d be looking to put my money…well, at least for the time being or until the pumps stop priming!

Look out for a further update on Japan outbound investment in the coming days from my colleague Yoshi.

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