Visitors look out at the view while riding an escalator at the Shibuya Sky observation deck in Tokyo on September 29, 2020. The weakness of the yen has given foreign investors a significant advantage in the competition for Japanese property assets. Photo: Bloomberg
The View
by Nicholas Spiro
The View
by Nicholas Spiro

Why Japanese property will remain a refuge as interest rates rise in other markets

  • The combination of a weak yen, cheap debt, a large and liquid market, and more investible regional cities is an attractive proposition for real estate investors

The end of the era of cheap money is weighing on sentiment in interest rate-sensitive real estate markets. In the Asia-Pacific, commercial property investment transaction volumes were down 16 per cent quarter on quarter in the second quarter of this year and 37 per cent year on year, according to data from JLL.

In some countries, central banks have tightened monetary policy more aggressively than in the United States, where rates have risen at their most aggressive pace since 1994. Australia, South Korea and India have joined a group of 70 central banks that have increased rates by at least half a percentage point in one go this year.

Yet, one economy continues to be the odd one out. The Bank of Japan remains committed to its decade-long ultra-loose policy despite intense pressure to reassess its stance as other central banks race to raise rates to counter the global surge in inflation.

Japan has suffered the same commodity price shocks other economies have endured. However, rising prices have not fed into higher wages as they have elsewhere, a sign Asia’s second-largest economy is still struggling to boost growth and expunge a deflationary mindset.

With borrowing costs stuck at minus 0.1 per cent, the rate differential between Japan and the US has widened dramatically. This has contributed to a further 19 per cent fall in the value of Japan’s currency versus the US dollar since the start of this year.

The weakness of the yen – one of the most popular trades in financial markets this year – has given foreign investors a significant advantage in the competition for Japanese property assets, making them much cheaper in US dollar terms.
This has particularly piqued the interest of Hong Kong investors, who benefit from the city’s currency peg to the US dollar. Some property brokerages in the city have taken several of their retail and institutional clients on luxury tours of Tokyo to view residential and commercial assets.

A second home in Japan’s capital, or in regional cities such as Osaka, has long appealed to wealthy Hong Kong buyers, who are drawn to the nation’s culture, resorts and culinary delights. With Japan slowly learning to live with Covid-19 and much cheaper house prices than in Hong Kong, the plunge in the yen is an added attraction. “It’s the icing on the cake,” said Jason Lam, co-founder of Japan Hana Real Estate in Hong Kong.

Is the falling Japanese yen cause for concern?

Large institutional and private equity investors are also increasingly focused on Japan. Hong Kong-based private equity fund Gaw Capital, which has amassed a large portfolio of commercial and residential assets in Japan, plans to deploy up to US$4 billion in the next two years.

According to data from CBRE, overseas investment in Japanese commercial property in the second quarter of this year rose 37 per cent year on year, driven by a surge in transactions in the office sector. In February, Singaporean sovereign wealth fund GIC bought a portfolio of 31 hotels in Japan from Seibu Holdings for US$1.3 billion, with the strength of the country’s domestic travel market a key factor.

Yet, for global investors, it is Japan’s ultra-low rates that set it apart from other major economies. Although rental yields on prime commercial properties in Tokyo are the lowest in the Asia-Pacific, the cost of debt in Tokyo stands at just 0.6 per cent compared with 3.6 per cent in Sydney, 5.4 per cent in Seoul and 6.1 per cent in Shanghai, according to JLL data.

The much wider gap between borrowing costs and property yields leaves Japan with the largest spreads, providing investors with one of the most attractive “cash-on-cash” returns, or the cash income earned on the cash invested in a property. “You can borrow cheaply and still get a positive spread,” said John Howald, head of international capital, Asia-Pacific, at Colliers.

While there is a limit to how low yields can fall without undermining the investment case for Japanese real estate, the Bank of Japan is not about to start lifting rates any time soon. On the contrary, policymakers see today’s inflationary environment as a rare opportunity to banish deflation once and for all and are fearful of repeating past mistakes, when premature rate increases precipitated a recession.


Japan beef bowls and coffee costing more as workers feel the pinch from food price hike

Japan beef bowls and coffee costing more as workers feel the pinch from food price hike

The persistence of rock-bottom rates will accentuate and accelerate key trends in Japan’s commercial real estate sector, one of the most actively traded and mature markets in Asia.

One of the most important trends is the growing appeal of Japan’s regional cities, notably Osaka, Nagoya and Fukuoka. In 2010, 86 per cent of investment was within the Greater Tokyo region. Last year, this figure had dropped to 69 per cent, according to JLL data. “More investors are deploying capital outside Tokyo,” said Pamela Ambler, head of investor intelligence, Asia-Pacific, at JLL.

The combination of cheap debt, a large and liquid market and more investible regional cities is an attractive proposition for property investors. While the jury is still out as to whether Japan can break the deflationary mindset that has plagued its economy for decades, it will remain a refuge from the monetary tightening cycle for some time.

Nicholas Spiro is a partner at Lauressa Advisory