Japan’s historic interest rate hike unlikely to upend its position as top real estate investment haven

By Nur Hikmah Md Ali

/ EdgeProp Singapore |

April 25, 2024 5:06 PM SGT

Japan’s attraction as a top investment haven is unlikely to decline as long as interest rate hikes remain gradual significantly (Photo: Savills Japan)

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SINGAPORE (EDGEPROP) - Over the past decade, Japan has consistently been the top destination in Asia Pacific for foreign real estate investment. Between 2013 and 2023, an estimated US$16.2 billion ($22 billion) has been invested into Japan’s commercial real estate market, says Christine Li, head of Asia Pacific research at Knight Frank.

Last year, Singapore was the biggest cross-border investor in Japan’s real estate, says Li. As of September 2023, Singapore injected almost US$3 billion ($4.05 billion) into the Japanese real estate sector. Knight Frank attributes the allure of Japan to Singaporean investors to the weakness of the Japanese yen, low borrowing costs and growing demand in logistics and hospitality industries.

For the fifth consecutive year, Japan was ranked the most attractive investment destination in the region in CBRE’s 2024 Asia Pacific Investor Intentions Survey, published in February.

According to JLL’s 1Q2024 Capital Tracker report on April 23, Japan recorded an investment of US$11.5 billion, a 29% y-o-y increase across the quarter. While domestic buyers focused on core assets in Japan, foreign capital demonstrated interest in opportunistic investments.

Stuart Crow, JLL CEO of Asia Pacific capital markets, says overseas investors made sizeable acquisitions in the office, logistics and industrial sectors due to Japan’s loose financial conditions, positive yield spreads and weak currency.

The positive yield spreads are thanks to Japan’s negative short-term interest rate policy that has been in place since 2016. Japan is the only country globally to set negative short-term rates at -0.1% to address deflation. The low to negative interest rates allowed return on investment to exceed borrowing costs, resulting in high investor yields.

End of negative interest rate policy

However, Japan’s negative interest rate policy ended in March when the Bank of Japan announced that it would raise interest rates for the first time since 2007 to combat deflation. According to a statement by the bank’s board on March 19, the central bank’s new policy will set a rate between 0% and 0.1%.

Given the anticipated gradual rise in interest rates since last year, combined with its stability and liquidity, Henry Chin, CBRE’s head of research for Asia Pacific, predicts that the shift in monetary policy will have a limited impact on Japan’s real estate market. On the flip side, he adds that it provides clear guidance for investors to underwrite deals.

Andy Hurfurt, managing director of institutional investment consulting at Savills Japan, agrees. “The current market consensus is that the spread between current yields and debt cost should be sufficient to absorb any incremental increases likely in the foreseeable future.”

Many investors anticipate policy interest rates to remain within the market consensus range of 0.1% to 0.2%, says Hurtfurt. “ If interest rate hikes largely exceed this pace, it could lead to an overall increase in cap rates, potentially resulting in a sluggish investment market,” he cautions.

Investors prepared for interest rate hike

Chinatsu Hani, senior director at CBRE, says that speculation about the termination of the negative interest rate policy had begun towards the end of last year. She says foreign investors had already become more cautious in 2H2023. It is reflected in CBRE Research’s findings that foreign investment in Japanese real estate (based on transactions worth over JPY1 billion or $8.7 million) fell by approximately 80% y-o-y in both 3Q2023 and 4Q2023, resulting in an annual decline of 30% y-o-y.

The moderate interest rate hikes have led to a slight decline in the relative appeal of yield spreads. “Yet, Japan remains attractive as an investment destination due to its relatively high liquidity compared to other real estate markets in the Asia Pacific,” CBRE’s Chin adds.

The high liquidity is due to Japan’s large real estate market. Akinari Tokuyama, founder and chairman of Tokyo Stock Exchange-listed Japanese real estate investment firm CREAL, says: “The Japanese market is big and has a wide range of asset classes, from small to big types. Whether you have $200,000 or $1 billion, there are many opportunities for you to invest in, including hotels, multi-family residential assets and hospitals.” CREAL opened its Singapore office in December last year.

Will Japan retain its allure?

The Japanese property market continues to be attractive to domestic and foreign investors on a broad spectrum, ranging from J-REITs and domestic real estate developers through global life and pension funds to family offices and high-net-worth individuals, says Savills’ Hurfurt. “In 2023, cross-border transactions comprised approximately one-quarter of total transaction volumes, in line with the 25% to 30% range seen in each of the past five or so years.”

Hurfurt also notes that multifamily properties remain popular among core investors and those seeking a defensive and stable income. For value-added investors, the mid-size office segment is becoming increasingly favoured as it shows signs of recovery in post-pandemic rents.

Beyond low interest rates and lower financing costs, Japan’s appeal lies in factors such as transparency, depth and maturity of its real estate investment market, CBRE’s Chin adds.

For these reasons, even though there is a possibility that Japan may relinquish its position as the number one destination in terms of yield spread, Chin is confident that Japan’s attractiveness in terms of cash-on-cash returns — considering leverage and other factors — is unlikely to significantly decline, as long as interest rate hikes remain gradual.

Japan investment trends

Calvin Sin, director of CREAL Singapore, expects Japan’s tourism industry to recover rapidly this year, owing to the weak currency, with the yen at a record low against the US dollar. It has helped boost tourism demand and also investment in tourism assets.

CREAL’s Tokuyama-san says that one of the most anticipated developments is the upcoming US$8.1 billion Osaka integrated resort with its first casino. “We have seen many Singaporean investors showing interest in investing in Osaka because of the integrated resort,” he says.

Developed by US casino operator MGM Resorts International and Japanese partner Orix Corp, the giant resort complex is slated for completion in 2030. Built on the reclaimed island of Osaka Bay, it will include hotels, a conference centre, a shopping mall, a museum, a ferry terminal and a helicopter pad.

The Osaka integrated resort, which is slated to be completed in 2030, is already drawing foreign investors to the city, including Singaporean investors (Photo: MGM Resorts International and Orix)

Another trend is the increase in interest in data centre assets. “We are beginning to see the first few trades of stabilised data centre assets and we expect the number of opportunities in this segment to increase slowly,” says Hurfurt.

For instance, in March, Keppel signed an MOU with Mitsui Fudosan to explore data centre development and investment opportunities in Japan and Southeast Asia. Keppel also announced its framework agreement with Mitsui Fudosan for the proposed forward purchase of a data centre, which is currently under development in Western Tokyo. It marks Keppel’s first data centre project in Japan.

Hurfurt sees increased specialisation among overseas investors, with mounting interest in the high-end segment of real estate markets, such as luxury hotels and branded residences.

He also sees a growing investor appetite for start-up offices offering furnished accommodation and targeting high-growth industries. Residential subsectors such as shared housing or co-living and assisted living accommodation are other areas with increased investor interest.

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