Japanese Real Estate: A Multi-Billion Dollar Opportunity

Jan 20, 2020 | 2 min

Valued at US$798 million, Japan is the second largest real estate market in the world, representing 35% of the investable real estate in the Asia Pacific region. With over US$30 billion of transactions in 2018, the market is deep and liquid, providing attractive investment opportunities for the capital growth and capital yielding funds.

Japan is the third largest economy in the world, featuring a large domestic economy and industrial sector. The economy has undergone a long and difficult structural adjustment following a massive 1980s boom and the subsequent “lost decade (and a half)” in the 1990s and early 2000s. Since the mid- 2000s, signs of structural recovery have been more consistent and convincing, marked by stronger bank balance sheets, positive inflation and market reforms. The economy is undergoing a durable expansion, with near record corporate profits and unemployment below 2.5%. Demographics are the key longer-term challenges in Japan, particularly the ageing and shrinking population base.

Tokyo dominates the Japanese market landscape with its huge population. The 23 wards (municipalities) in central Tokyo have a population of nine million and the larger Tokyo prefecture has a population of 13 million. The Greater Tokyo Area is the most populous metropolitan in the world with a population of 33 million and has the highest number of Global Fortune 500 headquarters. The demographic challenges facing Japan as a whole are less pressing in Tokyo. A long-running trend in attracting younger, more educated migrants supports robust population growth (+1.0% year on year) and drives a broad spectrum of real estate demand, particularly in the inner wards.

Japan has the world’s second largest real estate investment trust (REIT) sector. Despite the depth of the capital markets, considerable market inefficiencies (often driven by a preference for unpublicized, off-market trades) and fragmentation (especially between institutional and private investors) create compelling arbitrage opportunities. Foreign investors without a credible local presence have limited access to deal sourcing and financing. The continued application of zero-interest-rate policy and yield curve control are prompting cheap financing and eager lenders, especially for established local borrowers.

The cash-on-cash yield in the Japan market is attractive compared to other leading gateway cities driven by low interest rates.

Source: Tokyo Market Overview Q2 2019, JLL

Despite the strong fundamentals, real estate values are still below the prices prevailing before the global financial crisis.

Source: Real Capital Analytics, Global Cities CPPI

2020 is an exciting year for Japan as it hosts the Olympic games. Inbound tourism is expected to grow from 31 million in 2018 to 60 million in 2030. Japanese economic growth is expected to continue through the Trans-Pacific Partnership free trade pact, investments in factory automation and artificial intelligence, and significant infrastructure expansion (e.g. the Haneda Airport extension, new Maglev train lines, cruise terminals, new integrated casinos, etc.).

The Family Office has already made private equity and real estate investments in Japan and is reviewing several capital growth and capital yielding investment opportunities in the office, residential, hospitality and logistics market.

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