ASIA NEWS: The power of negativity

In a radical and unprecedented monetary policy adjustment, Japan’s central bank has implemented negative interest rates for the first time ever to stoke inflation and spur economic growth. As per last month’s Bank of Japan announcement, all commercial bank deposits with the central bank would be charged a -0.1 percent interest rate, a ploy to encourage banks to lend more.

The move, which follows similar interest rate cuts by the European central bank and other policymakers, will benefit the real estate sector as financing becomes cheaper and yields increase for the Japanese real estate investment trusts (REITs).

Prime Minister Shinzo Abe has long been vocal about the need for Japanese institutions to diversify their bonds-heavy portfolio. The latest policy change will only accelerate the trend of shifting towards alternative assets, according to Yukihiko Ito, managing director of Asterisk Realty.

Indeed, Japan Post Bank, the country’s largest bank by deposits, appointed its first head of real estate in early February, laying the groundwork for its foray into the sector.

Nicholas Wilson, associate director for capital markets at JLL Japan, said a cap rate compression is also expected in the medium term. Currently cap rates hover around 3 percent for Grade A office properties, 3 percent for retail, and around 4.5 percent for industrial investments in Tokyo.

“If investors believe the interest rates will be lower for longer, they will adjust their expectations of the cap rates over the next three to five years,” he said.

This could be partly due to the impact on borrowing costs – lower cost of debt would increase leverage returns and incentivize investors to increase their bid prices – and partly because of an anticipated growth in rental values due to existing supply constraints.

The jury is still out on whether the latest policy change will succeed where three years of quantitative easing failed – adequately revive the Japanese economy. So far, the real estate sector is not complaining.