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Japan negative interest rates to boost RE demand

The surprise interest rate cut by the Bank of Japan is expected to lead to further cap rate compression and increased demand for commercial properties.  

The implementation of a negative interest rate policy in Japan for the first time ever in the country is expected to boost the domestic economy and benefit the public and private real estate markets.

On January 29, the Bank of Japan announced the interest rate cut, whereby it would charge a 0.1 percent interest rate on all commercial bank deposits with the central bank. The reduced rate would only be applicable to cash deposited after February 16.

The policy change is being seen by industry experts as a surprise change of direction by the Japanese central bank away from its sole focus on quantitative easing to prevent the country sinking back into deflation amid global economic uncertainty.

For the real estate industry, the news is more than welcome.

With lower financing costs, further cap rate compression is expected in the overall property market, including office properties in Tokyo. Currently, cap rates for Grade A office properties in Tokyo’s central business district are around 3 percent, according to JLL estimates.

“The main impact of negative interest rates will be around the determination of cap rates in the medium term,” said Nicholas Wilson, associate director for capital markets at JLL Japan. “Investors will adjust their expectation of cap rates over next 3 years to 5 years so we may start to see a downward pressure on yields over the next year.”

Property market fundamentals in Japan have largely remained positive since last year with low vacancy rates and stable rental growth in Tokyo. In fact, as Wilson said “while Japan was technically in recession last year the property sector was the one sector that was not in recession.”

A weaker yen that followed the interest rate reduction would further boost office demand as corporate sentiment improves. In a research note published after the policy announcement, CBRE said Grade A office rents in Tokyo are estimated to rise by approximately 10 percent over the next few years.

Demand for high street retail assets and hotels is also expected to increase as tourists continue to trickle in amid a falling local currency.

“The wider interest rate gap between Japan and the US will mean a weaker yen against the US dollar. This will support the continued growth of inbound tourism which had been at risk of a slowdown due to recent weakness in the RMB,” the report said.

Japanese Real Estate Investment Trusts (REITs) will be the other beneficiary. Following the news, the Japan REIT index rallied 5.5 percent to reach a 5 month high, and dividend yields of J-REIT shares are expected to become more attractive in the days to come.