Two recent acquisitions show that overseas investors are increasing their appetite for Japanese multi-family housing.

On October 4 German Allianz Real Estate, acting on behalf of several Allianz companies, signed a sale and purchase agreement to acquire a portfolio of multi-family residential assets in Japan from Blackstone managed funds. That was followed on October 8 when British M&G Real Estate, the property arm of the Prudential-owned asset manager, also acquired a residential portfolio.

Nicholas Wilson

And there are relatively good reasons to invest into Japan’s multi-family market, according to Nicholas Wilson, director of capital markets research in Asia-Pacific at global real estate broker JLL.

“Multi-family cap rates (the ratio of net operating income (NOI) to property asset value) in a number of global cities are in-line or below the equivalent office cap rates, however that’s not the case in Japan – Tokyo still offers around a 50 to 80 basis points premium for multi-family,” Wilson told AsianInvestor.

The Allianz Real Estate-Blackstone transaction is expected to complete in the fourth quarter of 2019 with a value of €1.1 billion ($1.23 billion). The portfolio comprises 82 assets, totalling 4,600 units and will mark Allianz Real Estate's first direct investment into Japan’s real estate market, following investments via logistics funds and co-mingled funds.

Rushabh Desai

“Japan is the world’s third-largest multi-family market. Urbanisation trends are putting pressure on rents, especially in the four major cities,” said Rushabh Desai, Asia-Pacific chief executive of Allianz Real Estate. “There is limited net supply which drives high and stabilised occupancy levels. Japanese multi-family is a very good product for investors looking for stabilised cash yield.”

Wilson pointed out that Japan is the only country in the Asia-Pacific region with a well-established multi-family sector, so overseas investors are not necessarily targeting multi-family due to a lack of options in other sectors. Often, overseas investors' first direct acquisition is actually multi-family – as in the case of Allianz.

The ability for investors to leverage multi-family with low-cost finance also makes the cash on cash yields among the best income returning asset classes in core Asia-Pacific markets, Wilson added.

HOMEFIELD ADVANTAGE

The multi-family residential market, however, remains dominated by local investors. According to data collated by Real Capital Analytics, 2018 showed overseas acquisitions worth $537.7 million against $2.27 billion made by domestic buyers.

Data back to 2015 shows that domestic transaction volumes generally dwarf overseas by between 3:1 and 4:1. The only exception was 2017 when Chinese insurer Anbang made a portfolio acquisition of about ¥260 billion ($2.4 billion), then Japan’s biggest property deal since the global financial crisis. Anbang, now government-administered, has reportedly put the portfolio up for sale as a part of an effort to bring down its debt levels.

With this potential sale and the Allianz Real Estate acquisition in mind, 2019 could become another year where overseas investors dominate the domestic players. But there is still a long way to go to make this the norm, JLL's Wilson said:

“Similar to other asset classes, it [multi-family] is tightly held and a lot of assets are transferred into REITs (local real estate investment trusts) that the developers sponsor."

UK-based M&G Real Estate started to invest in Japanese multi-family in 2014. Since then it has made four multi-family portfolio purchases. The latest, in October, was a $57 million residential portfolio of three assets, with two properties located in Kobe and one property located in Nagoya.

Richard van den Berg

The acquisitions were made on behalf of M&G’s core Asia property strategy for institutional investors. The strategy is managed by Richard van den Berg who has seen the Japanese multi-family market change over the last five years in terms of competition. The main reason, he cites, is to deliver stable and resilient income, supported by positive city-level demographic trends.

“Over the past five years, we’ve seen a rise in competition and with it, enhanced capital market liquidity, which provides entry and exit opportunities for local developers, REITs and wealthy high net worth individuals,” said van den Berg.

SPREADING THE EXPOSURE

The trend is still to invest within the major cities like Tokyo and surrounding prefectures, Osaka and Fukuoka. Despite Japan's generally declining population, these cities still have population growth driven by urbanisation.

“Other major cities also have population growth in the central areas so there are pockets of demand in a number of sub-markets across the country,” Wilson added. “A lot of old stock gets demolished and redeveloped to bring it up to the seismic codes so often there’s not a net increase in supply, rather it’s just redevelopment.”

For these reasons M&G upgraded its residential portfolio exposure from sub-regional cities or secondary locations into markets like Kobe and Nagoya, van den Berg explained. In addition to positive demographic trends, these cities are supported by convenient amenities and good public transport connections to the local metro or train and bus lines, within the surrounding micro-location.

“Tokyo and Osaka are expected to form the majority component of overall multi-family exposure, and cities such as Nagoya and Kobe remain minor exposures, while we take a selective approach towards asset level, micro-location and bottom-up fundamentals,” van den Berg said.

In the portfolio that Allianz Real Estate is slated to acquire, 78 out of the 82 assets are located in Japan’s four major cities Tokyo, Osaka, Nagoya and Fukuoka.

“Despite all the headwinds, Japan's economy continues to demonstrate resiliency,” Desai said. “Japan is one of the largest and most institutionalised real estate markets in the world. It offers one of the highest yield spreads, which is attractive both for core as well as opportunistic investors.”