Japanese multifamily residential properties have come onto the radar for overseas investors searching for attractive investments within Asia-Pacific commercial real estate.

The latest example came on January 20 when Tokyo Multifamily Partnership (TMP) announced the acquisition of seven multifamily assets in Tokyo. TMP is a club vehicle gathering capital from US Teachers Insurance and Annuity Association (TIAA), Dutch pension fund bpfBOUW and local operating partner Kenedix as well as a third, undisclosed global institutional investor, understood to be a large, global institution.

Both TIAA’s real estate manager, Nuveen Real Estate, and bpfBOUW’s real estate arm Bouwinvest believe that Japan is the epicentre of further Asia-Pacific expansion into multifamily. This is a part of a more general uptick in overseas interest in Japan’s commercial real estate market, including student housing.

Tjarko Edzes

Tjarko Edzes, director for Asia-Pacific investments at Bouwinvest, pointed out that the residential-for-rent market is fairly established and well-suited for institutional investors in Japan.

As a potential next step, Edzes has a keen eye on markets such as China and Australia. There, an increasing number of people require rental accommodation to be able to live in the urban locations they favour.

“Although these cities already have large groups of people who rent from private landlords, we think that the quality of the rental product can be improved through the involvement of professional management and institutional investors, comparable to what is happening in the residential markets in Europe and the US. For that to emerge, it is quite important that government policies provide enough stimulus,” Edzes told AsianInvestor.

Nuveen globally manages a portfolio of multifamily investments worth more than $20 billion on behalf of TIAA and third-party capital. The TMP vehicle, however, is so far its only multifamily investment in the Asia-Pacific region, according to Shu Wantanabe, director of capital transactions in Asia at Nuveen Real Estate.

Shu Wantanabe

“In Japan, Osaka, Nagoya and Fukuoka [also] look attractive, as well as Tier 1 cities in China, such as Beijing, Shanghai and Shenzhen, due to the demand for urban living, good commutability and an accommodating regulatory environment,” Wantanabe told AsianInvestor.

He points to Southeast Asia, excluding Singapore, as markets that are too premature even to consider for multifamily investments.

The seven central Tokyo multifamily properties are an addition to TMP’s existing portfolio established in May 2018. The investment takes the strategy’s GAV (gross asset value) to $642 million and a total portfolio of 1,535 units across 22 assets.

MIDDLE-CLASS DRIVING DEMANDS

The TMP acquisition is the latest of several overseas investments within recent months to target Japan’s multifamily sector. Among these investors are Allianz Real Estate and M&G Real Estate

Jonathan Hsu

Together with logistics assets, Jonathan Hsu, director and head of research in Asia, sees Japan multifamily properties as one of the most attractive across the Asia-Pacific region. That is due to the current stage of the economic cycle, where real estate yields (the annual income from the investment, expressed as a percentage of the investment's total cost or estimated current value) are compressed by high demand and prices.

When investments into Japanese multifamily started in around 2017, yields stood above 5%, Hsu said. Now they are around 3.5% in Tokyo, but still a relatively attractive spread compared to office assets around Asia-Pacific; 2.6% in Tokyo and 2.66% in Hong Kong, respectively, according to real estate broker JLL.

“Multifamily is a defensive investment with a sticky occupant profile that is increasing in Japan. The younger generation has an urban focus rather than settling down in the suburbs. At the same time, the older generation pivots back to live in the cities,” Hsu said.

Wantanabe explained that TMP’s latest acquisition reflects those preferences, catering middle to upper middle-market tenants. The lifestyle preferences of the upper-middle working class are changing in Japan.

“This includes seeking better commuting links – the TMP targets [those] within 30 minutes as opposed to 1 to 1.5 hours, which was common in the 1980s and 1990s – and the increase in Dink (dual income, no kids) families. The urban living market is led by these families and millennials,” Wantanabe said.

As international investors show increasing interest for multifamily assets in Japan, M&G Real Estate’s own Asia core fund is seeing more competing bidders in the market, Hsu elaborated.

He concurred that Japan is still the most attractive multifamily market in Asia-Pacific. One of the reasons is the scale and sophistication. Investors can find a local operating partner, as well as a development partner if the strategy is build-to-core rather than by existing assets.

“Around Asia-Pacific outside Japan, homeownership is still the preferred and dominant residential model. Multifamily in South Korea lacks the required infrastructure to support overseas investments.

"In China, the government is starting to support multifamily housing for low-income families, but the market is still premature for international investors,” Hsu said.