Japan is unique in an Asia Pacific sense in that it has a very deep, liquid and intuitional multifamily real estate market. Japan has more traded multifamily real estate than the rest of the Asia Pacific region combined with over USD 55 billion in transaction volumes over the past 10 years. This amount is larger than every other market in the Asia Pacific region combined over the same timeframe.
Tokyo is also the most actively traded multi-family city in the world outside the US. In fact multifamily real estate in Japan is the third most-traded asset class, with volumes higher than those in the industrial and hotel sectors. In recent years, the case for investing into the multi-family sector in Japan has strengthened.
Strong population growth in central Tokyo, high job security and early signs of wage growth have helped to improve occupancy rates to 97 percent. The low volatility nature of the asset class meant that even as market conditions tightened, the sector has seen only modest rental growth over the past few years relative to other sectors. By the same token, as fundamentals weakens, any price falls are limited. Following a number of years of above-trend rent and value growth in most other asset classes, investors are seeing the multi-family sector as a high yield, low volatility, low risk sector with superior downside protection characteristics. Its stability is particularly appealing for investors seeking predictable returns, and there has been a noticeable growth in the level of interest, given the pricing and cap rate trends seen in more traditional asset classes.
Despite the lower risk nature of the multi-family asset class, cap rates for core Tokyo product remain at over a 100 bps (basis points) premium to typical A grade retail assets while office assets are at approximately 4 percent in central Tokyo. The cost of debt for the sector has also continued to compress. The average long-term interest rate for listed REITs in the sector is now below 1 percent, with cash-on-cash yields often hitting 10 percent.
A widening price spread between the multi-family and private residential markets has given rise to an interesting investment opportunity. Land prices are starting to show strong growth and pricing in the private condominium market has accelerated significantly over the past few years, leading to a price differential between the multi-family and the private condominium markets. This is providing potential for reconversions as well as other value-add plays on existing multi-family assets or older strata condominium buildings.
For more information on Tokyo’s multifamily sector, please visit our website.
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