Traditionally focused on central Tokyo, overseas investors looking at Japanese real estate are increasingly looking towards regional cities such as Osaka, Nagoya, Sapporo and Fukuoka, in the search for yield.
Over the past couple of years, Japanese real estate has lured foreign investment, with the office and hotel sectors receiving the lion’s share.
“With growing political uncertainty around the world, overseas capital has increasingly seen Japan as a ‘safe haven’,” says Akihiko Mizuno, Head of JLL’s Capital Market business in Japan. “Japan poses little geopolitical risk, while our low interest rates enable investors to capture a certain level of return even when the investment yields are low.”
Japan is expected to overcome the current period of prolonged deflation and, while investors are unlikely to see the heady returns of the ‘bubble’ era, they will still see solid returns, he explains.
Transparency issues do, however, remain with Japan falling well behind other markets of similar maturity. The country was ranked 19th in JLL’s 2016 Global Real Estate Transparency Index, an improvement on previous years but still with some way to go. The widespread use of Japanese language for rental data and contracts presents another barrier to entry in the market. It’s unlikely that Japan can compete with global cities such as New York and London, until information used for investment decision making is made public in English.
Shift to regional
As demand outstrips supply in Tokyo’s CBD, overseas investors are turning their attention to regional cities such as Osaka, Nagoya, Sapporo, and Fukuoka where market recovery and supply offers decent investment yields and capital gains.
“Osaka is one of the leading economic centers in Japan following Tokyo, and demand for real estate is growing rapidly boosted by a flourishing economy,” explains Yuko Akiyama from JLL’s Capital Markets team in Kansai.
According to the Osaka Convention and Tourism Bureau, a record 9.41 million foreign tourists visited Osaka in 2016, a 31 percent jump on the previous year.
“The Dotonbori/Shinsaibashi area is popular with overseas tourists even on weekdays and many of our clients can see the potential value,” says Akiyama.
While the Japanese government is pouring money into the country’s regional hubs, many investors are still faced with problems around access, creating a demand for trusted local partnerships.
Management is key to value
Increasing the value by improving profitability will be key to enticing overseas investors into active real estate investment in Japan says Tatsuya Jibiki from JLL’s Properties and Facilities Management, Asset Services Group. “Property values differ significantly in regional cities, depending on the quality of management operations,” he says.
“Our clients are promoting best practice in cities around the country.”
Jibiki cites the complex commercial facility “Norbesa”, a landmark property in Susukino area with its rooftop Ferris wheel in central Sapporo, as an example.
“The tenant mix didn’t match market demand so there was a high vacancy rate,” he says. “By introducing more tenants that cater to overseas tourists, such as restaurants and anime/game related distributors, the property has become a tourist hot spot for domestic and overseas visitors.”
Introduction of properties is merely the first step. Investors make their decision on acquisition based on understanding of prospective value enhancement through property/asset management strategies implemented after the acquisition.