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PERE Japan: Foreign investment reviving

Foreign institutional investors are increasing their investments in Japanese real estate, even if the market remains dominated by domestic investors.

Led by Prime Minister Shinzo Abe’s structural reforms and pro-growth strategy, foreign investors are stepping up their activities in the Japanese private real estate markets, delegates at the PERE Japan Forum 2014 in Tokyo heard today.

Panelists at the one-day event agreed that the government stimulus and also Tokyo’s successful bid for the 2020 Olympic Games has played a part in boosting international investment in the country.

According to statistics shared by Mikihisa Hirai, representative director and chairman, IDERA Capital Management, on an early panel, one third of the total real estate investment in 2013 was made by foreign institutional investors; an increase over last year.

“The declining cap rate compression in Japan compared to overseas is not that bad,” he said. “On the rental side, there has been a three percent increase in the rent over last year. As a result, a lot of overseas funds are shifting towards core strategies.”

Looking ahead, Christian Mancini, chief executive officer for North East Asia at Savills, the London-based property broker, predicted a significant increase in European institutional activity in the market, especially ones with a pan-Asia strategy.

Getting more specific, he noted: “By 2015, investment volumes are expected to come off in China, Hong Kong and Singapore. Foreign fund managers are starting to take notice of Japan.”

One high profile example of overseas investment that was discussed was GIC’s ¥170 billion (€1.21 billion; $1.56 billion) impending purchase of Maranouchi’s Pacific Century Place from Secured Capital. According to research by broker Jones Lang LaSalle, Tokyo witnessed the highest level of commercial property transactions in the first quarter of 2014, with that sale ranking as the country’s biggest deal since the financial crises.

Nonetheless, despite the increase in overseas investment, panellists agreed the Japanese real estate market has remained predominantly a domestic play with local investors enjoying considerable competitive advantages. “In Japan, the debt cost is low for Japanese corporations. They have a lot of deposits but less places to lend to. When there is a real estate loan deal, they try to provide their loan at attractive terms,” said Daisuke Hayashi, chief Japan representative, at Hong Kong-based Phoenix Property Investors. 

There is a supply shortage of Grade A office assets in prime areas like Tokyo’s central business district, and the existing assets are mostly held by large Japanese conglomerates, pointed out Mancini.That is prompting investors to branch out to other cities such as Osaka, Nagoya and Fukuoka. In Hayashi’s view, due to high yields available there, opportunistic investors have started venturing to these cities, even though deals are typically smaller in scale.