Japan, Asia’s largest advanced economy, has been slow to catch up with the Covid recovery. The private sector is still in a quandary as the state of emergency is limiting recovery, and June research shows that commodity price cuts are impacting corporate profits.
One notable exception, however, is Japan’s real estate sector, which has emerged as one of the most resilient and most efficient real estate investment markets in the world.
According to JLL, Tokyo was the most actively traded city-level real estate investment market in the first quarter of this year after Boston, with $ 8 billion in transactions.
According to JLL, offshore buyers in 2020 poured 1.5 trillion yen ($ 13.5 billion) into the Japanese real estate market in 2020, accounting for about 30% of the market. This is the highest percentage since the 2007 record market.
These foreign investors, attracted by liquidity, safe haven status and reliable tenants who are part of the history of Japanese real estate, include asset owners such as Singapore’s GIC, France’s AXA and Norges Bank’s investment managers from Norway.
They are expected to spend at least another 1 trillion yen ($ 9 billion) in the Japanese market during this fiscal year starting in April, while still accounting for 30% of the total.
Despite pressures from inflation and interest rates, the market is ultimately expected to show transaction volumes of 3 to 4 trillion yen this year. Even the sectors most affected by the coronavirus, such as office space, are showing signs of recovery.
Strong domestic demand, a trend towards working from home and Japan’s unique multi-unit rental sector in Asia helped maintain relatively stable rental growth throughout the year through March 2021. This led to strong overseas demand last year, according to a DWS Investment study published in May.
Meanwhile, thanks to high demand for online shopping during the pandemic, Japan’s logistics sector was also very popular with overseas investors last year. It was the only sector to record overall rents growth with very low vacancy rates of less than 1% in Greater Tokyo, said Koichiro Obu, head of real estate research in Asia Pacific at DWS Investments Japan.
Koichiro Obu, DWS
“We continue to believe that logistics will be the leader in terms of profitability, which will be around 8% in the short and medium term,” Obu said. AsianInvestor… “Residential real estate is slightly lower, probably between 5% and 6%.”
He said fears about inflation and concerns about interest rates are unlikely to diminish the continued appetite for the Japanese property market.
“Usually real estate is considered an asset to hedge inflation – if inflation is 3%, then you can usually increase rents by 3% or even more,” he said.
Obu also noted that inflation, as well as interest rates in Japan, is likely to remain low for the foreseeable future.
Meanwhile, the big players in the Japanese real estate market have a long list, including seasoned investors such as GIC, AXA Investment Managers and Norges Bank Investment Managers, according to data provided by AsianInvestor by JLL.
GIC, Singapore’s Sovereign Wealth Fund, for example, attended in Japan for 30 years, who has invested in Japanese stocks and bonds since the 1980s, before later dabbling in real estate and private equity, and more recently in infrastructure.
Last week Japanese Real Estate GIC Team (RE) announced recruiting programs for interns and graduates. The RE team manages a multi-billion dollar portfolio of over 350 global investments, including Japan, according to a GIC report posted on LinkedIn last week.
AXA IM declined to comment on its investment in real estate in Japan.
Most of these institutional investors invest in Japanese real estate through direct investment to acquire property or partner with local firms to do so, while some may also invest through funds.
10 BUYERS DEAL
According to Koji Naito, director of capital markets research in Japan with JLL, although competition in the logistics sector is quite high in various cases, for example, an average of 10 buyers are fighting for one transaction.
Koji Naito, JLL
Overseas investors can offer rates about 5-10% higher than domestic investors when opportunities are presented in the form of portfolio deals involving seven to eight assets, Naito said. AsianInvestor…
As an example, Nikkei Asia May 31 reported that Goldman Sachs plans to increase its real estate investments in Japan to about 250 billion yen ($ 2.28 billion) annually from the current range of 100-150 billion yen, with a focus on logistics hubs, data centers and other facilities. … in growing demand.
M&G Real Estate is also active in the North Asian market, which has invested 27% of its $ 6 billion Asia-Pacific real estate fund in the Japanese market, said Richard van den Berg, fund manager at M&G Real Estate Asia. AsianInvestor… The fund is available only to institutional investors.
Japan is currently the second largest market for M&G Real Estate Asia after Australia. According to van den Berg, the two key sectors he looks at are logistics and the multi-family residential sector.
“As part of our main strategy, we have a goal to allocate about 30% to logistics. At the moment we have about 23%. This means that we have the opportunity to grow from 7% to 10%, ”he said.
When the fund’s growth to $ 600 million a year is taken into account, this gives it a total of $ 800 million in new investments in logistics, he added. “This is not all in Japan. But Japan will be one of the main recipients of our logistics acquisitions. “
Richard van den Berg,
M&G Real Estate
In the residential sector, M&G is considering increasing the share from the current 10% to about 15%, which means an opportunity for new housing acquisitions of around $ 200-300 million.
According to van den Berg, over the past year, his overall profitability in both sectors in Japan was above 8%, as demand exceeded supply and the number of vacancies was very low.
Looking ahead, with the continued contraction of capitalization in the logistics sector, yields are falling below 4%, while overall yields are expected to remain attractive between 7% and 8%, he said.
A capital rate squeeze occurs when the market increases the value of a property, even if there is no change in the net operating income of the property.
The residential sector would be different, with a higher yield of 4% to 5%. “Even in the area of logistics, in particular in more secondary locations, we could generate similarly attractive revenue streams in certain areas,” said van den Berg.
However, overall long yields will be lower at 6% to 7% as the current low cap rate is unlikely to be sustained, he noted.
He noted that income streams refer to streams of net income from assets for the investor, while total income also adds any increase in capital value.
Van den Berg said he is optimistic about the medium to long term growth prospects for the Japanese real estate market amid low interest rates, a recovery in consumption and the prospect of travel bubbles that make Japan one of their preferred markets for long-term mainstream strategies.
“(However) we remain cautious in the short term. A prolonged state of emergency in Japan, lower costs of inbound tourism and slower-than-expected vaccinations could affect the economic recovery, ”he added.