Why instos are eyeing Japanese multi-family properties

Despite Covid’s impact reverberating through the local economy, multi-family properties in Japan have seen growing interest, but competition is driving down entry yields.
Why instos are eyeing Japanese multi-family properties

The double whammy of a global health crisis and a rapidly ageing population has not dampened institutional investors’ interest in Japanese real estate, and particularly multi-family residential assets. 

Several international institutional investors have conducted acquisitions in the property sub-sector, including Allianz’s joint real estate vehicle, which it had established with The National Pension Service of Korea on June 29. The $2.3 billion fund snapped up $160 million worth of these properties on Monday (August 17).

This followed another acquisition announced on July 1 by French insurer’s investment management arm, AXA IM – Real Assets, which bought a residential complex in Nagoya for $186 million.

Rushabh Desai
Rushabh Desai, Allianz RE

“In the midst of the pandemic, we noticed that in buildings that are well occupied, the tenants have delayed or deferred their decisions to change apartments,” Rushabh Desai, the chief executive for Asia Pacific for the property investment arm of Allianz, told AsianInvestor. He added that the occupancy rate of assets in the firm’s portfolio has been between 90% and 95%.

Prime residential properties in central Tokyo could also offer investors investment yields of between 3.25% and 3.5%, above local government bond yields and the 3% yields that local office assets produce, he said, which contributed to the rising enthusiasm amid the “lower-for-longer” bond-yield environment.

Overall, the local commercial real estate market was the only one in Asia to see a positive gain in the first half of this year. According to data from JLL, transaction volumes reached $24 billion, up 7% from the first half of last year.

The growing allure of these assets came despite Japan posting worse-than-expected economic data, and a general downbeat outlook regarding the local government’s ability to ease its monetary policy meaningfully.

Due to the coronavirus outbreak, Japan’s real GDP dropped 7.8% from the previous quarter, registering a weaker than consensus dip. HSBC, for example, expected it to slide 6.7% in the second quarter of this year. The economy contracted 0.6% in the first quarter.


The appeal of Japan's property marke is very confined. Experts have told AsianInvestor that their positive views towards the country's real estate assets and especially multi-family properties, is limited to assets in the big four cities: Tokyo, Osaka, Nagoya and Fukuoka.

Both Robert Johnson, the Asia Pacific real estate portfolio manager at JP Morgan Asset Management, and Desai said that they would be selective with respect to the location, with Desai expecting to have at least 50% to 60% of the fund’s Japanese residential portfolio in Tokyo’s metropolis areas.

Robert Johnson
Robert Johnson,
JP Morgan AM

Desai added that urbanisation in cities like Tokyo would continue to maintain the demand for rental housing.

“I think city selection is really critical because if you look at some of the demographics in Japan, ultimately the population will be shrinking and ageing, but then you are seeing a variability on a city-by-city basis,” said Johnson.

Still, the ageing population will likely post challenges to future demand. While the population of the Greater Tokyo area, currently 37.39 million, has held steady for the last decade, it is expected to fall to 36.57 million in 2030, according to Statista.

Having said that, Japan’s prime minister Shinzo Abe has planned to attract foreign talent to work in the country. When asked what this will mean to the demand for local multi-family properties, Johnson said it would be a “cherry on the cake,” but the firm is more focused on the domestic economy.


Owing to Japanese multi-family assets’ yield advantage, the demand for these properties has grown more intense.

“If you look at the Asia Pacific region, Japan is the only market where residential rental assets are an institutional product with deep liquidity and secular demand from investors,” said Desai.

“There isn't a stabilised portfolio that we can just go and buy... so you will have to take some sort of development or leasing risk to be able to play in residential rental assets in non-Japanese markets,” he added.

The intensifying competition, which Desai said is a major risk, will ultimately drive down entry yields, and will tarnish these assets’ relative appeal “because the arbitrage story wouldn’t hold up that well.”

But he said that, as local developers and vendors get comfortable transacting with a particular institution, they are willing to interact on an “off-market” basis with reasonable market pricing.

“The last two transactions we did in Japan have been off-market, so we have been able to remove competition or reduce it using our relationships and execution credibility,” said Desai.

The firm established a new office in Tokyo in May, which currently houses two investment executives.

Story updated to clarify the level of yield that Tokyo prime residential properties can offer.

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