Despite predictions that the Bank of Japan will end the country’s negative interest policy next year, foreign investors still saw Japan as a bright spot for real estate investment in the Asia-Pacific region, according to speakers at PERE Network Tokyo Forum 2023 held at Shangri–La Tokyo on Thursday.
Hideki Yano, executive officer at Japanese real estate investment company Revolution, was not worried about an expected interest rate increase in Japan. “The country’s interest rate is still very stable and there is plenty of liquidity in the market. So if you want to buy a property, you can take on good leverage. It is still in a very healthy situation,” he said.
However, a potential change in interest rates should be a cause for concern for investors acquiring Japanese real estate assets at high levels of leverage to generate high returns. “If this is a financial engineering type of investment, you have to prepare for the interest rate hike. Even an increase of 100 basis points can kill your strategy,” said Hidetoshi Ono, country head – Japan at Tsao Family Office. He warned that a rising rate environment is a time for investors to go back to the basics of investing with a focus on real estate market conditions and active asset management. With or without an interest rate hike, investors with operational know-how will “survive and thrive” in the long term.
Isabella Lo, managing director, principal – investments and head of Japan at Gaw Capital Partners, is also positive on Japan’s real estate outlook despite the prediction of a rate hike. “I think it is a timing issue. If there is an interest rate hike, that means there is inflation. Your rent and construction cost will go up, but your rent will eventually catch up as well. You just need to make sure that you have enough holding liquidity to hold the asset until your performance catches up with the market,” she noted.
In addition, picking the right sectors is also an important way to protect your investments from interest rate risk and inflation. Both Lo and Ono are bullish on the hospitality sector due to the high demand for hotels from both domestic and overseas tourists. The sector also offers good protection against inflation, Lo noted. “For hospitality, you can change your rate daily. So I think that is a sector that we really like in this environment versus assets with 20 years of flat leases,” she explained.
Indeed, investor interest in Japan has not dampened but increased. While Ono saw more capital from family offices and high-net-worth individuals flowing into the country for wealth preservation, Lo also witnessed more global institutional investors dialing up their exposure to Japan. Last year, Gaw acquired a portfolio of Japanese residential assets in Tokyo and other major cities through a separately managed account with Qatar Investment Authority.
Regardless of what happens with interest rates in Japan, keeping a low leverage level and diversifying into different property sectors are key ways to mitigate potential risk from a rate hike, Yano added.