Japan’s Investment Property Market – 2016 Summary, 2017 Forecast

Japan Real Estate

Osaka Umeda Skyline

12 Jan, 2017 –

As 2016 draws to an end, it is now time to re-visit last year’s forecasts, compare them with current trends and numbers, as published by regional industry leaders, and attempt to hazard a guess as to what the coming year will bring to Japan’s real estate investment arena.

2016 in a Nutshell

Prices, Vacancies & CPI

As expected, the passing year has seen price rises slowly grinding down to a halt nationally, with final 2015 numbers pointing to a slight overall drop of 0.4% in residential land prices, and a flatline in commercial land prices (“Mitsui Fudosan”). Tokyo, Osaka and Nagoya have still advertised slight price rises of 0.4-2%, and so have other hotspots such as Fukuoka city, the country’s Western capital and gateway to South-East Asia – but coupled with drops in prices in all other areas, this hasn’t done much for the national average.

One of the main reasons for this lack of growth is most likely the facts that rents have risen slightly in the centres of large cities, between 1-2% on average, and commercial vacancies have dropped but – as Jones Lang Lasalle point out in their Tokyo office market overview – with the cost of living as reflected by CPI (Consumer Price Index) and salaries slightly dropping (barring central Tokyo, which has seen real salaries growing slightly), this isn’t likely to be an increasing trend, and certainly not enough to drive yield indexes higher – which was the main hope of investors and real estate firms interviewed last year. Residential rents in the greater Tokyo area have been rising up until mid-2016, mainly due to openings in new buildings, but have now started dropping again, currently only 1.7% higher year on year (“Savills”).

The Bank of Japan’s negative interest rates policy, which has proven to be successful with first time home buyers, has served to buoy the residential property market nationwide (“Reuters”), but increasing construction in Tokyo, Osaka and Nagoya have led to slight oversupply and increasing residential vacancies in those locations as well – even amid an increase in residential property loan, as reported by Yusuke Ichikawa, senior economist at Mizuho Research Institute.

 

Cap Rates Compressed

Price Waterhouse Coopers and ULI (Urban Land Institute), in their joint “Emerging Trends in Real Estate: Asia Pacific 2017” publication, point to compressed yields in 2016 as a regional phenomenon, not limited only to Japan, and advise that the general investor frame of mind in 2017 is likely to feature a change from seeking stability and safe havens, such as Australia and Japan, towards what they label “The Quest for Yield”, which will see investors branching out to emerging economies with a higher risk factor, such as the Philippines, Vietnam and India.

However, institutional funds and other investors which have been primarily active in other market sectors, such as government bonds and equity markets, are still more than satisfied with the current yield levels in well-established economies such as Japan, and are un-phased by cap rates compression since, in comparison to all but non-existent returns in their previous portfolio allocations, even these compressed yields offer a far higher return. And since there doesn’t seem to be too many risk-free alternatives globally, considering the current geo-political state of affairs characterized by the recent US election results and the UK/Euro split (“Brexit”), and considering the size of Japan’s property market as opposed to other safe havens such as Australia and New-Zealand, which offer only a fraction of the assets for purchase, it is highly likely that foreign investment capital will continue to flow into the country in 2017.

 

Tier 1 VS Tier 2 Cities

Transaction volumes have reportedly dropped in 2016, but not due to lack of confidence or suffering market fundamentals – Japan continues to attract investor confidence, despite of lukewarm results from PM Abe’s re-inflation attempts – but simply because existing owners of desired assets continue to hang on to their holdings – as mentioned above, mainly for lack of investment alternatives elsewhere. And the above mentioned negative rates policy, which is forcing domestic funds and other investors to branch outwards rather than “sit” on their cash reserves, will necessitate further capital flow into the real estate market, at home and overseas.

This intense pressure on Tier 1 cities such as Tokyo and Osaka will most likely continue to direct funds into secondary markets such as Nagoya, Fukuoka and Sapporo, which have already been enjoying an immensely active investment market in the last two years – and although investors are initially reluctant to branch out to these secondary metropolitan centres to their historical volatility and short spanned economic cycles, current market dynamics will most likely leave them with little to no other choice (PWC/ULI).

 

Other Highlights

Hotels and other hospitality venues continue to be one of the country’s top property market sectors, in the lead-up to the 2020 Olympics and the increase of international tourism, further strengthened by official policies to turn the country into a global investment destination again.

Another hugely successful sector has been logistics properties, although competition and prices are beginning to be too hot for comfort – there is now a sub-market forming in smaller, more central warehouses and other storage properties, in the central suburbs of large cities, as the e-commerce market continues to develop, and consumers now expect same day service.

Senior assisted living may prove to be the next innovative investment strategy, although, as some PWC/ULI interviewees stated, attractive models for profitable investment have yet to be created in this sector.

(Source – “Ziv Nakajima-Magen“, Pic – Osaka Umeda Skyline / “Loic Lagarde“)

 

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