Institutional investors both domestic and foreign are piling into Japan’s real estate market. As of the end of June 2021, REITs and private placement funds held a total of over 44 trillion Yen (approx. US$400 billion) in real estate – the highest level in history.
Why Japan and why Japanese real estate?
With an ultra-low interest rate environment, domestic regional banks and overseas investors are drawn to the stable yields that real estate in Japan can provide. Yields are currently around the 3% range. Although this may not seem high, it is better than the 0% long-term interest rate and one of the higher yield gaps available in a mature market.
As the pandemic rages on, some domestic companies have had to sell off their prized real estate holdings, with funds eagerly buying them up. These assets are not exactly being sold at bargain prices, but investors are keen to pay a premium to acquire properties that would not have made it to the market in normal circumstances.
The Urban Research Institute Corporation estimated that domestic companies (excluding those in the real estate and construction industry) offloaded 658.3 billion Yen of their real estate holdings in the first half of 2021. This is the highest level seen since the first half of 2008.
According to the Sumitomo Mitsui Trust Research Institute, total assets under operation by REITs and funds reached 44.1 trillion Yen as of the end of June 2021, up 3.4 trillion Yen from one year prior. This total has risen consistently since the Bank of Japan introduced its monetary easing policy in 2013.
Private placement funds represent over half of the total real estate holdings, supported by regional banks and credit unions.
Foreign funds are also becoming more prominent. CBRE reported a 24% increase in investment in Japanese real estate by foreign investors in 2020. Buying activity has continued into 2021. In March 2021, Blackstone Group acquired eight hotels from Kintetsu Group Holdings for around 60 billion Yen. In May, the Singapore-based Mapletree North Asia Commercial Trust paid 40 billion Yen for the head office building of Hewlett Packard Japan.
However, the potential for future tightening of monetary policy is something to watch out for. The US Federal Reserve Board could slow down on monetary easing and raise interest rates. Higher interest rates in the US could curtain some international real estate investment flows.
Source: The Nikkei Shimbun, September 12, 2021.
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