Despite domestic and global economic headwinds, interest in Japan’s real estate sector continues to swell. New investors have been attracted by its low borrowing cost, high return outlook and more recently, as a safe harbour from global economic volatility.
Direct commercial real estate sales between 2013-2015 in Tokyo were more than double volumes seen in the preceding three-year period. The city remains global investors’ favourite investment destination among Asian cities followed by Shanghai, according to JLL’s latest Investment Intensity report.
“Favourable funding terms, strong overall international investment position, large current account surplus and deep and liquid financial markets have made Japan a very established and safe investment destination. Further to this, the return outlooks are among the best in the region, with above trend rental growth expected in most asset classes over the next few years” says Nicholas Wilson, Capital Markets at JLL Japan.
Japan’s negative interest rates
Foreign investors made up 22 percent of property acquisitions by volume last year – the highest share since 2007, according to an update for Japan Real Estate Investment. Tokyo was – for the third year running – ranked the number one market of choice in the Asia-Pacific for investors in the Emerging Trends in Real Estate Asia Pacific 2016 by the Urban Land Institute and PwC; Osaka ranked fourth.
“We expect Japanese Real Estate Investment Trusts and private funds to continue to aggressively deploy fresh capital over the course of the year,” says Wilson. “New foreign investors are continuing to make their way into the market and we have seen a surge in Chinese developers and investors looking to undertake large acquisitions across the country.”
In January, the Bank of Japan surprised global markets by adopting a negative interest rate on excess reserves.
“This is largely positive for the real estate sector as some of the built up reserves will likely find its way into both real estate debt and equity channels, in the chase for positive returns. Already we’re seeing assertiveness from the banks looking to expand their balance sheets by seeking to originate new loans as well as by offering extensions and top ups on existing positions” says Wilson.
Based on JLL’s City Momentum Index, Tokyo is ranked 14 globally. The city’s momentum is growing as the 2020 Summer Olympics provides a catalyst for urban renewal. Major projects such as the redevelopment of Shibuya Station District and the planned Tokiwabashi District Redevelopment Project, adjacent to Tokyo Station, will boost the city’s standing as a global technology and financial centre.
Tokyo’s high-tech sector is already a major contributor to buoyant demand for new commercial space. The city has more than 40 Fortune 500 Global companies, compared with London’s 18 and New York’s 17. Only Beijing has more with 52 companies.
In addition, “tourism dollars will drive growth in the retail sector and e-commerce is opening up investment opportunities in logistics,” says Neil Hitchen, Head of Markets Japan.
The number of visitors to Japan in 2015 rose a staggering 47 percent over the same period in 2014 mainly due to the influx of Chinese tourists, who have now overtaken South Korean as the largest source of foreign visitors.
The huge increase in Chinese tourists is a big boon for retailers as they typically spend more than double the average tourist on shopping sprees, splurging more than ¥180,000 (US$1,580) per visit.
“Tourism has been a strong driver of growth within the retail market, pushing up retail leasing activity as retailers look for new space to expand to meet customer demand.” says Hitchen.
While retail sales expand, the booming e-commerce sector continues to drive demand for state-of-the-art logistics facilities. Japan is the the fourth-biggest market for e-commerce sales behind China, the US and the UK and the market is predicted to nearly double in size by 2020.
“E-commerce companies and those in other related sectors are looking for more modern and efficient facilities, and requesting for specifics like higher ceiling heights to cater for larger SKUs (stock-keeping units) for small parcel deliveries,” explains Hitchen.
Despite Japan’s aging population, the country’s real estate market growth is picking up momentum. “Supported by Japan’s status as a ‘safe haven’, a factor that is unlikely to change in the foreseeable future, its real estate market is likely to continue a long stable growth path,” says Hitchen.
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Head of Markets, JLL Japan