Japanese real estate loses its appeal

Speculation that Japan will raise interest rates for the first time in 17 years this spring is causing foreign investment in domestic real estate to fall to a five-year low.

Negative interest rate policy is coming to an end

Foreign investment funds have been selling off large real estate assets in Japan in the last quarter of 2023. Singapore's Mapletree Investments sold a commercial building in Osaka for 54 billion yen to electronics retailer Edion. US-based Fortress Investment Group sold a resort hotel in Okinawa to a real estate investment trust under its umbrella for about 40 billion yen.

According to CBRE, the world's largest commercial real estate investment and services company, new investment by foreign companies fell 80% in the fourth quarter of 2023 compared to the same period in 2022. In the first nine months of 2023, real estate sales by foreign investors more than doubled year-on-year to 1.05 trillion yen ($7.1 billion), while their purchases fell about 20% to 830 billion yen.

For the full year of 2023, foreign investment in Japanese real estate fell about 30% to 1 trillion yen ($6.7 billion), while property sales doubled to about 1.37 trillion yen, marking the first full year of net sales since 2018.

While many real estate properties are being sold off, many construction projects in Japan are also stalled due to a lack of workers. Photo: NIKKEI ASIA

The property sell-off is partly due to the Bank of Japan's (BOJ) ability to adjust monetary policy. BOJ Governor Kazuo Ueda recently reinforced the possibility of the BOJ raising interest rates this spring. According to experts, the BOJ is getting closer to a decision to end its negative interest rate policy in April 2024. Investors are worried that once interest rates start to rise sharply, borrowing costs will increase and reduce the returns on property investments.

Building sale

Sluggish overseas property markets also played a role in the sell-off. Higher interest rates and a steady trend toward working from home have pushed office prices down in the U.S. and Europe. Some investors have cut their losses by selling early, taking profits from assets in Japan, where prices remain relatively high compared with other markets.

The international investors who once fueled Japan’s office market are now the first to sell as rents fall due to oversupply and rising interest rates. Analysts predict that foreign investors will continue to sell Japanese real estate through 2024.

Singapore’s sovereign wealth fund GIC began the process of selling a majority stake in Tokyo’s Shiodome City Centre skyscraper this summer, but how well that will go remains unclear. GIC’s nominal annual return over the five years to March 2023 was 3.7%, its lowest since 2016. As office prices fell in the US and Europe, GIC sold property in Japan, where prices are higher, to offset those losses.

According to the Real Estate Securities Association, office buildings are at the heart of Japan’s real estate investment market, accounting for about 40% of the portfolios of Japanese real estate investment trusts. Although demand for other types of properties such as residential and hotels remains strong, the weak office market is making it difficult for some real estate investors.

Transaction volume for office buildings was particularly hard hit, falling 40% to 1.08 trillion yen, the lowest since 2012. According to Nikkei Asia, the office vacancy rate in Tokyo hit an 11-year high, even though rental prices have fallen 30% from four years ago.

Foreign investors have been drawn to Japanese real estate largely because of low borrowing costs under the BOJ’s ultra-loose monetary policy. But the prospect of higher interest rates this spring is casting a shadow over the market. In 2019, 89% of foreign investors said they were optimistic or somewhat optimistic about Japanese real estate, but that has now dropped to 28%, according to a survey by Mitsubishi UFJ Trust and Banking.

HAPPINESS

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