Japan’s Prime Minister Shinzo Abe announced a 28 trillion yen (US$276 billion) stimulus package following last month’s sweeping election victory for his Liberal Democratic Party. While Abenomics has its critics, the prime minister’s three-arrows approach – fiscal stimulus, monetary easing and structural reforms – to revive Japan’s economy has benefited its real estate sector, which is increasingly being perceived as a safe haven during recent market volatility.
Japan’s real estate has been at the heart of the boom and bust of the country’s economic cycles of the 80s and 90s. However, since the arrival of Abe in 2012, property prices have been recovering. Despite a rapidly aging population and weak economic growth, real estate in Tokyo has attracted the attention of international capital at a quicker pace than faster-growing markets such as Shanghai and Mumbai. The main impetus is Abenomics, which has provided real estate investors with an abundance of cheap capital.
The first two arrows of his signature policy have caused the inevitable asset price inflation. Property deal volumes have soared from US$19 billion in 2011 to more than US$34 billion in 2015. The proportion of foreign buyers has risen from 4 percent to 22 percent over the same period. Prime office yields have eased from 4.5 percent in 2012 to around 3 percent today, reflecting rising capital values rather than falling rents.
In our view, this new stimulus package, like those of the past, will have a positive impact on the economy with an increase in capital flow, at least in the short term. Coupled with the Bank of Japan’s aggressive monetary policy, businesses may be encouraged to increase their spending on capital investment thanks to more investment opportunities, which has been sluggish. Increased capital spending will have a positive effect on occupier demand, and we are expecting the vacancy rate for commercial properties to remain at low levels in the near term, which will support modest rental growth.
The prime minister’s latest spending plans will see about a third of government investment targeting infrastructure development, including port expansions and accelerating the Maglev train project. A further third of the investment amount will be spent on helping small and midsize companies expand. These developments will undoubtedly boost the real estate market in the longer term.
The attractiveness of the Japanese real estate market is underscored by the availability of a relatively large amount of institutional grade stock, coupled with steady demand from both domestic and foreign investors.
Both of these trends are well entrenched and are set to continue over the longer term.
Confidence in the sector is further bolstered by the fact that Japan’s real estate market’s transparency is improving. According to our Global Real Estate Transparency Index 2016 report, Japan jumped seven places, helped by more extensive tracking of property transactions, to rank 19th globally.
Among the real estate sub-sectors, performance in Japan’s hotel and hospitality industry has been notably strong. A relatively weak yen in 2015 has helped fuel the tourism sector, with visitor arrivals reaching record highs.
The country reported US$2.2 billion worth of hotel transactions in the first half of this year, up 83 percent from 2015 and accounting for half of the deal volume in the Asia-Pacific region. The US$604.7 million sale of the Grand Pacific Le Daiba Tokyo marked the largest hotel transaction within the region in 2016 to date.
Following the Bank of Japan’s negative interest rate move earlier this year, investment volumes in the office sector have been subdued because improved refinancing terms have deterred owners from putting their assets on the market. Direct commercial real estate investment was down 12 percent in the first half. Nevertheless, transactions between 2013 and 2015 in Tokyo were more than double the volumes seen in the preceding three-year period. Despite recent domestic and global economic headwinds, interest in Japan’s real estate sector continues to swell.
Investors continue to be attracted by low borrowing costs, an outlook of high returns and more recently, seeing Japanese property as a safe harbor from global economic volatility. There has also been a noticeable increase in foreign interest post-Brexit.
While Japan, like many mature economies, is pursuing monetary policies to try to reignite economic activity, the gamble is whether such measures will spark real economic growth before the stimulus runs out.
In commercial real estate, an indication of economic growth is when sustained tenant demand leads to higher rental growth before interest rates and property yields increase. Based on our latest data, Japan’s office rentals have climbed almost 4 percent in the three months to June, compared with same period a year ago, registering growth for the 17th consecutive quarter. Meanwhile, capital values, which rose 9.4 percent, were up for the 15th successive quarter. This data would seem to signal that the fundamentals of the office market remain healthy.
There might be reasons to doubt the success of the long-term impact of Abenomics, however, for the immediate future, the prime minister’s brand of economics looks set to benefit the real estate market.