Slow growth is expected to continue in 2017 although there are still pockets of opportunities particularly in the hospitality and logistics segments and Tier 2 cities.
As 2016 draws to an end, it is now time to re-visit last year’s forecasts, compare them with current trends and numbers, as published by regional industry leaders, and attempt to hazard a guess as to what the coming year will bring to Japan’s real estate investment arena.
As expected, the passing year has seen price rises slowly grinding down to a halt nationally, with final 2015 numbers, released earlier this year, pointing to a slight overall drop of 0.4% in residential land prices, and a flatline in commercial land prices, according to a report by Mitsui Fudosan.
The main cities such as Tokyo, Osaka and Nagoya have registered slight price rises of 0.4-2%. Other hotspots such as Fukuoka city, the country’s western capital and gateway to Southeast Asia sees a similar trend. However, when averaged out with other areas which saw declines, the national average isn’t outstanding.
The lack of growth can be attributed to a very slight increase in rents in centres of large cities, between 1-2% on average. Although commercial vacancies have dropped; and the cost of living as reflected by the CPI (Consumer Price Index) and salaries have fallen (except for Tokyo), this isn’t likely a trend in the foreseeable future. Certainly, this trend is not enough to drive yield indexes higher as hoped for by investors.
Up until mid-2016, residential rents in the greater Tokyo area have been rising, mainly due to openings in new buildings, but have now started falling again, currently only 1.7% higher year on year as per Savills.
The Bank of Japan’s negative interest rates policy, which has proven to be successful with first time home buyers, has served to buoy the residential property market nationwide, according to Reuters. However, increased construction in Tokyo, Osaka and Nagoya has led to a slight oversupply. As a result, vacancies have risen amid increased uptake in residential property loans, as reported by Yusuke Ichikawa, senior economist at Mizuho research institute.
FOREIGN INFLOW CONTINUES
Price Waterhouse Coopers and ULI (Urban Land Institute), in their joint “Emerging Trends in Real Estate: Asia Pacific 2017” publication, point to compressed yields in 2016 as a regional phenomenon, not limited only to Japan. They predict that in 2017, investors’ appetite for yield will be higher, thus there will be a shift from safe havens like Australia and Japan to higher risk countries such as the Philippines, Vietnam and India.
However, institutional funds and other investors which have been active in government bonds and equity markets, etc, are still more than satisfied with the current yield levels in well-established economies such as Japan. For them, even these compressed yields offer a far higher return in comparison to their previous portfolio allocations.
There doesn’t seem to be too many risk-free alternatives globally. Considering the recent US election results and the UK/Euro split (“Brexit”), as well as the comparatively much smaller size of safe havens such as Australia and New-Zealand, which offer only a fraction of the assets for purchase, it is highly likely that foreign investment capital will continue to flow into the country in 2017.
TIER 1 VS TIER 2 CITIES
Transaction volumes have reportedly dropped in 2016, but not due to lack of confidence or weak market fundamentals. It is simply because existing owners of desired assets continue to hang on to their holdings mainly due to lack of investment alternatives elsewhere.
Japan continues to attract investor confidence despite lukewarm results from PM Abe’s re-inflation attempts. The negative rates policy, which is forcing domestic funds and other investors to branch outwards rather than “sit” on their cash reserves, will cause further capital inflow into the real estate market, at home and abroad.
This intense pressure on Tier 1 cities such as Tokyo and Osaka will most likely continue to direct funds into secondary markets such as Nagoya, Fukuoka and Sapporo, which have already been enjoying an immensely active investment market in the last two years. Although investors are initially reluctant to branch out to these secondary metropolitan centres due to their historical volatility and short spanned economic cycles, current market dynamics will most likely leave them with little to no other choice as per PWC/ULI.
Hotels and other hospitality venues continue to attract increasing numbers of international tourists in the lead-up to the 2020 Olympics. It is further strengthened by official policies to turn the country into a global investment destination again.
Another hugely successful sector has been logistics properties, although competition and prices are beginning to be too hot for comfort. There is now a sub-market forming in smaller, more central warehouses and other storage properties, in the central suburbs of large cities.
Senior assisted living may prove to be the next innovative investment strategy, although, as some PWC/ULI interviewees stated, attractive models for profitable investment have yet to be created in this sector
… in 2017, investors’ appetite for yield will be higher, thus there will be a shift from safe havens like Australia and Japan to higher risk countries such as the Philippines, Vietnam and India.
ZIV NAKAJIMA-MAGEN is Manager of Asia- Pacific, Nippon Tradings International (NTI), Tokyo.