Japanese outbound real estate investment hit a record high in 2023

It was an exceptional year for Japanese real estate investors in 2023 as the group recorded its highest outbound investment volume in commercial real estate since MSCI started collecting the data in 2005, according to MSCI.

Japanese investors put $7.46 billion into overseas real estate in 2023 as of December 18, more than tripling its $2 billion outbound investment volume in 2021. Among the group of investors, Japanese developers such as Mitsubishi Estate, Mori Trust, Mitsui Fudosan, Daiwa House and Daibiru dominated the transactions.

While there was not a clear driver for the significant uptick in Japanese outbound investment into commercial real estate, Benjamin Chow, MSCI’s head of real estate research, Asia, pointed to the lack of competition in the market due to the pullback of other investors as one key factor.

“The fact that you don’t have 50 bidders on one asset makes it easier for them to purchase what they want. You can afford to be selective,” said Chow. With most institutions slowing down their investment activity in 2023, Japanese investors rose from the 16th in 2022 to the fourth most active global capital source in commercial real estate in 2023, the firm’s data showed.

Another possible reason could be investors shifting their capital from bonds to commercial real estate as defensive properties such as logistics and residential became a “higher-yielding and more stable substitute” for fixed-income securities, according to an MSCI blog post written by Chow. Japanese investors offloaded US Treasuries in 2022 amid increasing currency hedging costs and anticipated changes in Japanese monetary policy, he wrote.

While the US has always been the biggest overseas real estate market for Japanese investors, the group also increased their investments in Asia-Pacific. Japanese investors deployed a total of $3 billion in the region last year, the highest since MSCI started collecting the data in 2005. Australia and Indonesia were the second and fifth most popular markets, with $1.9 billion and $404 million of inbound capital from Japan, respectively.

Not only had the group of investors dialed up their total investment volume in Asia-Pacific, but they also expanded into sectors outside of residential development, according to Chow. In June, Mitsubishi Estate bought stakes in Mirvac’s build-to-rent portfolio in Australia. Daiwa House also partnered with Lendlease on a build-to-rent project in the Melbourne Quarter in October.

“Back then, Japanese investors invested almost exclusively in residential or mixed-use developments in Asia-Pacific, but we started to see them going into commercial real estate sectors such as industrial and build-to-rent. This is quite a departure from what they used to do,” said Chow.

Meanwhile, Japanese investors continued to be bullish on offices while other investors were shying away from the sector. Traditional office represented the largest share of Japanese outbound capital in commercial real estate, accounting for $2.89 billion, or 39 percent, of the total transactions, according to MSCI. Some of the biggest deals included Mori Trust’s acquisition of 245 Park Avenue in Manhattan and Obayashi Properties’s acquisition of a 50 percent stake in office block 20 Gracechurch Street in London.

“It is notable that the Japanese investors also bought offices that were vacant or not fully occupied, presumably with a value-add strategy in mind. They are not just looking to buy and hold but to target higher returns from their investments,” Chow said.

While 2023 was an unprecedented year for Japanese outbound investment into commercial real estate, Chow was less certain about how active the country’s investors would be in 2024.

“I think if the players are increasing their overseas direct real estate holdings for diversification or other strategic purposes, the challenging dealmaking environment could offer a unique window of opportunity – one that may not last for much longer given that interest rates are projected to start falling in the middle of next year,” Chow noted.