Interest in Japanese real estate grows despite rate rise prospects
Institutional investors and wealthy individuals from Asia Pacific (APAC) continue to favour Japan’s real estate market, despite headwinds for the sector presented by possible interest rate rises, as new data reveals sharp falls in flows in the fourth quarter of 2023.
Kanu Gupta, an investor and serial entrepreneur, is chair of the recently launched Singapore branch of TIGER 21, a network of ultra high net worth individuals (UHNWIs) collectively accounting for $150 billion of assets across 106 groups in 46 markets worldwide.
He said Japan’s real estate market distilled much of what was most attractive to his members about the region.
Tiger 21
“Significant investment interest exists for Japan given how well the markets have performed recently and there is particularly strong interest in its real estate markets due to high quality yields,” Gupta told AsianInvestor.
“Overall, investors are becoming more bullish on Asia given the consumption nature of these markets, which insulate them on a relative basis from global issues and geopolitical concerns,” he added.
Joe Kwan, managing partner of Raffles Family office in Singapore, named Japan as one of several pillars to the family’s real estate allocations in 2024, along with Korea, Singapore and Australia.
Raffles Family Office
“Our current focus remains locked on to the core Asia-Pacific markets as risk adjusted returns look very attractive for 2024,” Kwan told AsianInvestor.
“Japan and Korea continue to show strong potential within their residential rental sectors as the younger generation continue to shy away from home ownership. This drives the long leasehold segment; the best operators in this space will be rewarded," he said.
“In Japan, multi-family and logistics and cold storage sectors have been areas of interest for investors,” said Mary Power, principal consultant and head of property research at JANA Investment Advisors in Melbourne, Australia.
JANA
Power noted the uncertainty facing investors in Australia, a key alternative in the region to Japan, with little activity in Premium and Grade A office assets, making it hard for investors to establish accurate price estimates.
“In response to 13 interest rises in Australia, the real estate market has re-set capitalisation rates and discount rates to account for a higher cost of capital," Power told AsianInvestor.
"An absence of transactional activity, especially in the office sector, has meant that valuers have had little guidance as to current market value and hence market participants are waiting until valuation and key performance drivers have stabilised. In the absence of price discovery, buyers and sellers have been reluctant to transact,” she said.
RISING RATE THREAT
But the prospect of increasing interest rates in Japan may already be giving some investors pause for thought.
In Q4 2023, allocations to Japanese real estate fell 44% year-on-year, to $7.6 billion, according to the latest Asia Pacific Capital Trends report from MSCI Real Assets, published in late February.
This drop which far exceeded the 14% average fall across APAC, as well as the 13% fall in China, the region’s favoured real estate market for investors, and a 6% fall in South Korea, which lies in third place.
In recent years, the decision by Japan’s central bank to hold interest rates at -0.1%, where they have sat since early 2016, at a time when many of the country’s leading economies experienced rate rises, has attracted investors to many Japanese asset classes, including real estate.
However, growing confidence that deflation is under control has many analysts predicting an increase by the central bank rate this year, its first since 2007.
Kwan warned of the dangers that such a move would pose.
“Japan has been the darling for capital over the past couple of years, we are of the view valuation gains may have run its course and the weight of near-term monetary policy may suggest some headwinds,” he said.
ROBUST FLOWS
The Q4 figures mark a sharp turnaround in allocations to Japanese real estate by global real estate which were robust across 2023, helped by a record year for industrial allocations.
Japan topped the list of APAC countries for cross border investment flows, with $9.3 billion, ahead of greater China with $6.4 billion and Australia with $5.8 billion, according to MSCI.
In total, flows to the sector reached $36.9 billion, down 16% on a year earlier, compared to a 28% fall in flows to APAC as a whole.
Meanwhile, flows into China, saw an annual fall of 19%, to $37.5 billion; and those to South Korea fell 47% to $18.8 billion.