Notwithstanding Covid-19, Japan is still seen as a safe haven for investors due to a combination of a mature and liquid investment market, stable returns and a currency that is a haven in itself.
We have seen fears of the pandemic affecting the commercial sector globally, in particular the hotel and hospitality sector. Counter-intuitively, however, the pandemic has also accentuated the appeal of Japan’s property market, shown in its outperformance against its regional peers. What makes Japan’s commercial property market so resilient and stable?
Tokyo’s central business district
Investors still believe in the safe haven of Tokyo’s central business districts. Taking comfort in this market’s stability and predictability keeps them coming back for more.
The combination of a mature and liquid investment market with stable returns, and a currency that is a haven in itself, is a magnet for investors targeting secure, income-producing assets in high occupancy locations.
While office vacancy rates in central Tokyo’s prime business districts have increased with lease cancellations and companies downsizing their workspace, other businesses have been expanding their office space, to allow for social distancing.
Investors do expect the teleworking trend to have an impact on the future demand. However, even though Japanese commercial property transactions fell 22 percent from 2019 in the second quarter of 2020, with Tokyo’s central business districts accounting for only 36 percent of real estate deals in Japan in the first half of this year (down from 47 per cent in the first half of 2018), according to data from Jones Lang LaSalle – foreign investors are not deterred.
Regional logistics trend
Investors recognize Japan’s regional cities – Osaka, Nagoya and Fukuoka – as prime locations for the increasing global warehouse demand, with rents being lower than in Tokyo and other similar regional international commerce hubs. This demand is a result of the virus-induced surge in investment in the e-commerce-driven, online-shopping logistics sector.
According to data from CBRE, logistics rent in the Greater Osaka region in the first half of this year grew by 3 percent. It is the second-fastest rate among the main markets in Asia, and is forecast to increase at a slightly faster pace for the year as a whole. The caveat, however, is that prices of warehouses and similar facilities are sharply increasing.
Some investors have sold their logistics portfolios at a 33 percent premium over their acquisition cost of 2016. Therefore, and considering the resulting drop in yields, this market is fast becoming out of reach for smaller budget investors.
Distressed real estate assets
With travel almost at a halt all around the globe, hotels, retail properties, mortgage-backed securities and other assets have come under stress due to unpaid rent or mortgages as a result of the pandemic.
In Japan, those distressed assets are available at bargain prices, some might say a once-in-a generation opportunity, appealing to both private & institutional investors.
Blackstone Group Inc., Brookfield Asset Management and Starwood Capital Group are no strangers to this strategy, having raised capital from pensions, sovereign-wealth funds and other big institutions in recent years. Next year Blackstone will also start taking investments from wealthy locals, to raise billions of dollars over the next few years, with the aim to diversify funding in Japan. This would be the first time a major investment fund offers products to commercial investors here.
It is clear that despite the continuing uncertainty and economic malaise, the current environment presents the sort of circumstances that risk-tolerant property investors say can make a career. And, while investors are in it for a profit, it is their investments in part, that keep the Japanese property market stabilized.