Japan Property Investors Venturing Outside Tokyo

Japan Property

6 Nov, 2014 –


When it costs nearly $2 billion to buy just part of a building in a prime Tokyo location, it is no wonder some investors in Japanese property are looking farther afield.

Singapore sovereignwealth fund GIC Pte. Ltd. said Tuesday it bought 24 floors of Pacific Century Place Marunouchi, a building next to Tokyo Station, in a bid to grab a slice of Japan’s hot property market. A person with knowledge of the deal said the cost was $1.7 billion.

Total real-estate investment in Japan rose to ¥3.5 trillion ($33 billion) from the start of the year through September, the highest level since 2007 and a 13% increase from the same period last year, according to data from Urban Research Institute Corp., a real-estate think tank operated by Mizuho Trust & Banking Co.

Both commercial and residential properties are being snapped up by foreign investors finding that value in Japan has been unlocked by a cheap yen and Prime Minister Shinzo Abe’s pro-growth policies. Chinese buyers, in particular, are playing a growing role.

The problem for many investors is a lack of top-class properties for sale in central Tokyo, as illustrated by the high price Pacific Century Place fetched. The deal, which covers floors eight through 31, amounts to about $44,000 per square meter (roughly $4,100 per square foot). The purchase doesn’t include other parts of the building, such as the Four Seasons Hotel.

The Urban Research Institute data show more investors are looking outside of central Tokyo, and sometimes also beyond Osaka and Nagoya, the nation’s No. 2 and No. 3 business centers. The volume of deals outside of the three metropolitan areas reached ¥432 billion in the first nine months of this year, up 81% from the same period a year earlier, while volume in the 18 wards of Tokyo outside the city center rose 84%. Investment in the central five wards increased 24%.

Expected yields on office buildings in the Otemachi section of central Tokyo—annual net operating income as a percentage of a building’s purchase price—fell to 4.1% in July, the lowest since July 2008, according to real-estate brokerage CBRE Group Inc. That compared with yields on Osaka buildings at 5.9%.

Kunihiko Okumura, head of acquisitions in Japan for LaSalle Investment Management, said he almost threw out a brochure he received for a shopping center in the middle of rice fields in the countryside. But when he examined it more closely, he saw the property, more than 32 kilometers northwest of Nagoya, was attracting a steady stream of shoppers because it offered a lineup of fast-fashion brands like H&M and Zara.

Mr. Okumura’s company, a subsidiary of Chicago-based Jones Lang LaSalle Inc., ended up buying the 1.3 million-square-foot mall in May. Mr. Okumura declined to disclose the price, but the real-estate brokerage Savills reported it as ¥21 billion.

In August, a Japan-based unit of Shanghai conglomerate Fosun Group, along with another investor, purchased a 25-story office building in southern Tokyo’s Shinagawa area for more than ¥10 billion. They bought the property even as a major tenant was leaving.

Mikihisa Hirai, chairman of the Fosun unit in Japan, said a relative shortage of office space would likely help with leasing in the next couple of years. He said that Shinagawa, though somewhat distant from the central Tokyo areas that draw the highest rents, would likely benefit from planned redevelopment.

“We were able to seize a very advantageous entry point,” he said.

The Bank of Japan has eased monetary policy aggressively since April 2013, making local banks more willing to lend, and the cost of borrowing has fallen. Domestic investors are also chasing properties because of rock-bottom yields on government bonds and other safer investments. The total return from property investments in Japan— rents plus price gains—rose to 6.0% in 2013, according to Investment Property Databank Ltd.

The risk, of course, is that the gains won’t continue. Japan’s economy is struggling to recover from an April sales-tax increase that hurt consumer spending. Over the longer term, an aging and shrinking population is expected to hit areas outside of Tokyo particularly hard.

“You have to examine individual properties closely. And because you examine them individually, you can find plenty of investment opportunities in regional cities,” said Shinji Kawano, head of global investment at Tokio Marine Property Investment Management, part of Tokio Marine Holdings Inc., an insurer. The firm started a ¥40 billion fund at the beginning of October targeting office and retail properties in major Japanese cities.

In the years before the global financial crisis in 2008, Japanese real estate experienced what some call a “minibubble.” It was nothing like the history-making bubble in the late 1980s, whose collapse pushed the nation into a long economic slowdown, but it was still based on assumptions of rapid rent growth that turned out to be unrealistic.

Junichiro Muto, senior director in Tokyo for CBRE, said the situation today is “totally different” from that of 2007 because rents are just starting to rise. “Because the buyers [now] are long-term investors who aren’t using much leverage, they wouldn’t dump them even if prices fell,” Mr. Muto said.

Mapletree Investments Pte. Ltd., a real-estate unit of Singapore’s Temasek Holdings Pte. Ltd., had raised more than $500 million for a Japan office fund as of June. It is targeting office buildings just outside of Tokyo’s main business districts and in cities like Osaka and Nagoya. Yields for those areas are higher than those in Tokyo’s central business district, said Terence Heng, chief executive for Japan at Mapletree.



(Source – “Wall Street Journal” Pic-Fukuoka / <heiwa4126’s Photo Stream)

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