Tokyo investment volume surpassed London’s $5.9 billion and New York’s $9 billion to become the world’s busiest real estate market during the first-quarter of 2018, according to a JLL report.
The increase in investment volume to $9.1 billion from last quarter’s $4.3 billion was largely driven by Japanese investors seeking more opportunities in the domestic market, JLL reported.
Macroeconomic tailwinds such as a zero interest rate environment and a low unemployment rate helped drive real estate activity by domestic and foreign investors in the city. “Under the zero interest rate environment in Japan, yield spreads between real estate cap rates and government bond yields are wide in all major sectors,” LaSalle Head of Research and Strategy for Asia Pacific Elysia Tse wrote in an email to PERE.
She anticipates the Bank of Japan will maintain low interest rates for the next few years, which should keep yield spreads wide and boost real estate demand across all major property types.
The city’s office properties in particular have attracted a substantial amount of investor capital, as Tokyo is home to the biggest office market in the world, according to GreenOak Real Estate founder and partner Sonny Kalsi, whose firm’s founding partners have been investing in Japan since 1997. GreenOak currently has five office investments in Tokyo, according to its website.
“The biggest asset class is office and so that’s where the majority of their money has gone,” he said.
Although construction between now and 2020 is expected to eventually increase office supply, which can weigh on rental growth, a record unemployment rate of 2.5 percent and GDP growth of 1.8 percent kept office demand in Tokyo strong during 2017, according to the report. With a 3 percent vacancy rate in the sector currently, the city’s office rents will continue to rise in the short term, JLL said.
Japanese investors tend to deploy capital in the domestic market rather than abroad because they feel that investing in a familiar market is safer, according to Kalsi. After suffering from a real estate crash during the 1980s, domestic institutions mostly remain conservative in their approach, although cross-border investments are increasing, he said.
The report observed a sharp drop in outbound investment by the Japanese. Outbound investment totaled $240 million during the first quarter, compared to the $3.4 billion reported for full year 2017.
However, Tse and Kalsi both expect Japanese investor interest in overseas real estate to increase in the long run, given they have large amounts of capital to deploy and will be looking to diversify. For those already investing abroad, countries such as the US, UK, Germany and Singapore are prime targets and there is increasing interest in higher-return strategies, Tse wrote.