Japanese residential property emerges as safe haven amid US-China trade war, geopolitical uncertainties

The number of big, foreign investors flocking to Japan’s residential property market has risen by half from a year ago, as global funds seek safe havens amid mounting uncertainties, according to Hideaki Suzuki, director and head of research and consulting, Japan at real-estate services company Cushman & Wakefield.

“I believe the interest of foreign investors in Japan property will grow further. We are having larger groups of investors becoming interested in the market … particularly in residential,” he said, adding that the number of investors who now included residential in their investment strategy had risen by 50 per cent.

Foreign investment in Japanese multifamily residences – apartment buildings, duplexes and town homes designed to house several different families in separate residential units – has hit US$848.4 million so far this year, compared with US$462.6 million in 2018, according to Real Capital Analytics, which tracks property deals worth at least US$10 million. Cross-border investment in the segment is likely to hit at least US$2.1 billion this year, more than four times last year’s, with deals worth US$1.2 billion still pending.

Two big acquisitions were announced in October itself. Allianz Real Estate, the property investment arm of German insurer Allianz, acquired a portfolio of 82 multifamily residential assets with 4,600 units for US$1.2 billion, while M&G Real Estate, a unit of London-based M&G Investments, acquired a US$57 million residential portfolio of three assets comprising 307 multifamily residential units.

This is Allianz’s first direct investment in Japan, and nearly all properties are located in Tokyo, Osaka, Nagoya and Fukuoka. M&G Real Estate’s properties are located in Kobe and Nagoya.

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Japan, the world’s third-largest economy, has a rapidly ageing population, but big cities such as Tokyo attract net migration, with young people moving in from other parts of the country. In 2018, the Japanese capital’s population rose by 9 per cent, with the addition of about 80,000 people. A government initiative aimed at welcoming foreign workers and allowing them to eventually become Japanese citizens is also likely to increase its population.

This explains why institutional investors are particularly drawn to multiple housing units. Japan is the world’s third largest market for such property.

“In the case of institutional investors, the residential segment was not as popular as it is now, but the global financial crisis proved the resilience of the residential market. Housing expenses and rents are non-discretionary, and people just can’t move houses even in a financial turmoil,” Suzuki said.

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The gross yield for such assets on a net income basis was 4 per cent to 5 per cent, while their capital values grew by 8.1 per cent.

The overall economic picture is rosy as well. Given the US-China trade war and geopolitical tensions elsewhere, Japan – aided by loose monetary policy and reflation initiatives – is bucking the trend and is enjoying its longest streak of growth since the second world war.

“Japan is now being treated like a safe haven for investors. When you look at the geopolitical risks and what’s happening in the region, Japan appears more like a safer destination for their money on a long-term basis,” Suzuki said.

Japan’s “predictable and resilient income streams from real-estate assets coupled with low borrowing costs present an attractive investment opportunity”, said Richard van den Berg, who manages M&G’s investments. The latest acquisition is the fund’s fourth residential portfolio in Japan.

“Japan is one of the largest and most institutionalised real-estate markets in the world,” said Rushabh Desai, Asia-Pacific chief executive at Allianz Real Estate. “Japanese multifamily [assets are] a very good product for investors looking for stabilised cash yields.”