The Japanese real estate market makes up a majority of the investable world of Asian real estate for institutional investors due to its sheer size and Japan`s low-risk, developed country profile within Asia.
Compared to other high growth and higher risk countries within the Asia region, Japa's real estate performance has been sluggish and effected by recent turmoil in the domestic economy and global securitization markets.
However, after posting an unprecedented steep decline in economic activity in 2009 with a contraction of 5.2%, the growth rate in Japan turned positive, rising 4.2% in the first quarter of 2010, thanks to the increase in external demand and positive effects from the government's stimulus package.
Despite policy reforms, back to basics and investment conservatism taking centre stage, foreign investor interest into Japan has been positively encouraging. An anticipated rebound of the Tokyo economy, coupled with high commercial yield spreads from the size, depth and maturity of its office sector, has presented attractive buying opportunities abound this undervalued and overlooked market.
As noted by Mr. Michael Bowles, National Director of Asia Capital Markets, Jones Lang LaSalle Japan, due to its strong domestic orientation and subsequent extremely low correlation to other markets, Japan's real estate also holds strong investment attractions. In particular, stable fundamentals, lower volatility and yield spreads among the highest in the world are urging investors from abroad.
Jones Lang LaSalle, which was formed by the 1999 merger of LaSalle Partners Inc. and Jones Lang Wootton, is a leading global provider of comprehensive real estate and investment management services with offices in about 180 key markets on five continents. Jones Lang LaSalle K.K. was established in 1985. In June 2000, Jones Lang LaSalle strategically merged with LBM (Land Building Management), to establish an outstanding property management service delivery platform in Japan. In January 2006, Jones Lang LaSalle Facilities K.K was established to provide a wide range of corporate real estate services, specially focused on facilities management services for manufacturing facilities.
Mr. Bowels is National Director of the Asia Capital Markets team, which focuses on cross-border investment into and from Japan. He currently leads the delivery of sales disposition and investment acquisition services for a number of well-known multinational investor and domestic clients. In the past three years, he has advised on the cross-border acquisitions and divestments of assets located in Japan valued at $2.4 billion.
He doesn't believe that the Japanese market is saturated. He said that investors in other emerging markets like China look at a diffferent criteria. While it is a growth story, it is riskier and less transparent. Japan, on the other hand is stable, predictable, less volatile and attracts a lot of core plus investors.
Cap rates for prime offices in Tokyo's CBD1 have stabilised since mid-2009, and some compression is now evident. The average yield spread of all reported commercial real estate transactions in Japan seems to have peaked in 2009.
In Tokyo, where the market appears to be taking longer to stabilize, the rate of rental decline is beginning to slow down. Unlike other markets, future supply is also limited when compared to the last five years; hence, now really is the time to take advantage of tenant-favorable market conditions before rents hit bottom, he said.
While there may not be many opportuinities in Grade A office spcae, there are still other pockets of opportunity in Grade B offcie space. Also, while most foreign investors concentrate on the main cities like Tokyo, there are also opportunities in the suburban areas along the commuting lines. They are of good quality and offer better returns.
“Most buyers stick to central locations and do not have confidence to buy outside central locations. I relaized that this is because they do not have long term experience' he said
Since the peak in 2007 there have been significant decreases in rental levels. The rents in Grade A are bottoming out, but the worst is over.”
He noted that the vacancy in Grade A is now 7 % and expected to decline. Moreover the Japanese investment market is starting to find traction and has recorded one of the largest increases in commercial real estate volumes globally, up 90% in Q1 2010. Almost half of the offshore capital in Asia flows into Japan.
Secured Capital Japan recently acquired Pacific Century Place, a Grade A office property located in the prime business district of Marunouchi, Tokyo. The 32-storey, 81,000 square metres property is one of the best known developments adjacent to Tokyo Station. The price, in excess of US$1.5 billion, makes it the largest transaction in Japan since the start
of the global financial crisis.
Foreign funds are keen to acquire prime assets in Japan. German-based fund SEB Asset Management bought a fully-let shopping centre in Chiba for US$126.7 million, while RREEF Alternative Investments acquired Frontier Ebisu, an office building in Shibuya-Ku, Tokyo, for US$51.4 million.
The REIT sector has seen some revival. Simplex REIT Investment acquired the land and building of the former Mitsukoshi Ikebukuro Department Store, owned by Mitsukoshi Ltd. (now Yamada Denki Japan Head Store) in Toshima Ward, Tokyo, for JPY75 billion.
Most of the Japanese clients who want to buy offshore assets are interested in US and Europe, while being lesss interested in emerging markets. The Japanese companies are doing their homework on emerging markets, but are not yeat ready to invest in markets like China or Vietnam, he said.
Speaking on the outlook for the world economy, he said recent research suggests that the economic data have highlighted an increasingly uneven growth pattern for the global economy as it moves from the 2008-09 recession.
The US and Japan are now decelerating following a relatively strong post-crisis bounce both economies are still growing but only slowly. In contrast, economic growth in the UK and the Eurozone has accelerated, with Germany, in particular, witnessing record growth in Q2 which has boosted confidence and underlined a new-found strength in retailing. While China is continuing to engineer a soft landing, economic growth is still in double-digits and retail sales remain strong. Brazil and India are also motoring strongly, helping to boost their retail markets.
With the world's three largest economies decelerating, the risks of a global double-diphave risen in recent weeks, but the more likely scenario is for the world's advanced countries to move into a period of sluggish growth as austerity measures kick in. Meanwhile, emerging markets appear to be in a much healthier position - they are expected to drive the global recovery, accounting for over half of the world's economic growth during 2011.
A combination of strengthening economic growth and employment prospects, returning business confidence, improved credit conditions, rising leasing volumes and falling vacancies is underpinning a revival in the Asia Pacific investment market. Land and residential property are the main investor focus, but commercial real estate transactions have also been strong in Q1 2010, up by a further 15% during the quarter and by 43% on Q1 2009. Domestic investors, many of whom have purchased for their own occupation, still dominate,
particularly in Greater China. Nonetheless, foreign funds are still keen on securing prime assets that generate stable and secure rental income.
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