Tokyo has been crowned Asia Pacific’s most favored destination for property investment for 2024, reclaiming the title for the fourth time in the past decade, according to an annual survey by the Urban Land Institute (ULI) and financial consulting firm PwC.
The Japanese capital took back the number one spot from Singapore which saw its ranking drop to fourth place in the Emerging Trends in Real Estate Asia Pacific 2024 report released.
“For international investors to pull the trigger, it’s pretty much all going to Japan and, selectively, India”, said a fund manager who participated in the survey.
Australia’s two largest cities also placed in the top five most favored investment targets, with Sydney claiming second place and Melbourne at fifth in the survey, which covers 22 metropolitan areas in the region.
Japan Takes the Lead
Described by one interviewee as “one of the last bastions of positive carry”, Japan continues to benefit from low interest rates and a cheap yen, helping the island nation draw in capital which in earlier years might have gone to China or Australia.
Besides Tokyo, Osaka landed at third in the rankings as the country’s third-largest city by population maintains the position it has held in the ULI survey’s top ten since 2018.
Survey respondents pointed to industrial as one of the most appealing sectors in Japan, thanks to a shortage of modern warehouse facilities in the country. According to data from MSCI, investors purchased JPY 278.6 billion ($1.9 billion) in Japanese factories, warehouses and data centres during the third quarter, up 300 percent from the same period a year earlier.
Japan’s rental residential sector was also cited as a top investor target, with one executive with an institutional investor with a large multifamily portfolio in Japan pointing to potential returns from value-add approaches to the market as holding promise.
“I think we should execute more on the value-add side, because the buying stabilised-assets and then rolling through-cap-rate-compression play just isn’t there anymore,” said the investor. “So [today] it’s really about how to build, and then participating in the upside of the development, or taking some leasing risk, because you can still get crazy financing on Japanese multifamily.”
Japan recorded $25.2 billion in trades of income-earning properties over the first nine months of 2023, according to MSCI’s report earlier this month. Despite a 16 percent decline in trades of properties compared to the same period in 2022, the island nation was the most active real estate investment market in Asia Pacific.
Regional Price Gap
The ULI and PwC noted that investment prospect rankings revealed a “surprisingly optimistic outlook” considering the high inflation rates, aggressive monetary tightening, and potential for global recession. The latest edition had six cities in the “generally good” category – consistent with last year – and three in the “ generally poor” range, compared with one last year. Those rankings put sentiment level in this latest study slightly below last year’s findings, but on par with the surveys in 2021 and 2022.
With asset owners showing signs of pricing flexibility as a number of properties have changed hands in recent months at discounts to earlier valuations, interviewees indicated that global funds are eyeing core assets in central business districts Down Under, while acknowledging that current valuations may still exceed buyer expectations.
ULI’s survey stated that investor sentiment toward Singapore dropped from last year as owners of grade A assets have resisted lowering prices on assets, causing deals in the city to drop.
A growing gap between buyer and seller expectations on pricing is also being singled out by MSCI for deals in Singapore during the first nine months of this year having dropped by 29 percent from the same period in 2022.
“For Singaporean office towers, in particular, valuations and transactional pricing has not adjusted downwards much from their peaks,” Benjamin Chow, head of Asia real assets research at MSCI. “In the case of Singaporean offices, many owners are long-horizon investors and there may not be as much pressure to sell in the current climate. Many of these sellers have not been willing to let go of their assets at more substantial discounts.”
Respondents are also upgrading their outlook on prime Indian cities as New Delhi climbed to seventh place in the survey of investment destinations from thirteenth from last year. Mumbai rose to ninth place from twelfth in 2022.
One factor contributing to improved sentiment toward India is the investment potential of the country’s industrial sector, with properties in the country appealing both to clients serving the domestic market and exporters, according to a Hong Kong-based fund manager who picked India as the better opportunity for logistics investments among the region’s emerging locations.
“The challenge with Vietnam is that it’s a pure export play,” said a Hong Kong-based fund manager interviewed for the report. “Whereas in India, it’s a two-fer – it’s like China in the old days; you’re manufacturing for local as well as export demand.”