Japan’s property sector sees ‘golden period’ as foreign investments surge 45%

Foreign investments into Japan's real estate sector have been flourishing in the past year, buoyed by a weak Japanese yen as the country's central bank maintains its ultra-loose monetary policy.

"It is a golden period of Japanese real estate," Henry Chin, head of Asia-Pacific research at CBRE, told CNBC.

"Japan benefits from an ultra-loose monetary policy while global economies are in the tightening cycle," he added, citing the level of transparency and "strong fundamentals" in the retail and multifamily sector to be a key factor. Multifamily properties are buildings or complexes that have more than one rentable unit unlike single-family properties with only a single space.

Boosting the demand for Japan's property sector is the country's favorable lending terms, where the loan-to-value ratio stands at 70% and the cost of lending hovers around 1%, Chin explained.

And of course, a cheap Japanese yen.

The Bank of Japan's monetary position to hold benchmark interest rates at -0.1% sets them apart from other major central banks, which have lifted rates in the last two years in efforts to tame spiraling inflation. Consequently, the yen has weakened more than 11% against the U.S. dollar this year so far. 

"Foreign investor volume saw 100% increase in Q1 2023 on a year-on-year basis," JLL's Research Director of Capital Markets in Japan, Koji Nato, told CNBC via e-mail.

Real estate deal activity in Japan has been among the strongest in the world this year, JLL said in a recent note, similarly attributing the robustness to the interest rate policy that "has been widely credited for keeping its real estate resilient."

Foreign investors almost doubled their investment from a year ago to $2 billion in the first quarter of the year, the global real estate services company noted. 

According to latest data provided by CBRE, total foreign investments into Japan's real estate market has risen 45% in the first half of 2023, compared to the same period last year.

The solid rebound in Japan's tourism sector following the ease in border restrictions has sparked a rise in hotel occupancies and hospitality investments, Knight Frank said in a recent September note. In July, Japan saw the highest number of foreign travelers since the Covid-19 pandemic.

"Given the limited availability of new hotel rooms in the foreseeable future, the upward trend in occupancy rates is anticipated to continue," Knight Frank's note continued. 

In addition, hospitality investments were given a sharp boost following the greenlighting of the construction of Japan's integrated resorts in Osaka, which would mark the country's first casino. The project is aimed at drawing both international tourist and domestic spending

The Japanese logistics sector has also experienced "impressive growth," fueled by the strong performance of e-commerce, Knight Frank noted. The logistics sector encompasses distribution centers, warehouses and other spaces with storage facilities.

For CBRE's Chin, the retail sector is seeing the strongest rental growth. Chin also elaborated that investors are looking at prime and secondary markets in Tokyo and Osaka where demand for leases is coming back, alongside the return of tourists.

Singapore is the largest source of cross-border investments into Japanese commercial real estate in 2023, with $3 billion worth of acquisitions year-to-date, said Knight Frank's Head of APAC Research Christine Li.

U.S. investment into Japan came in second place at $2.58 billion, and Canada with $1 billion worth of investments, according to data from Knight Frank.

So how long will investments continue to pour in?

"A tightening decision can deflate investor sentiment in the short term," Li forecasts, but she highlighted that a policy shift due to evidence of broadening inflation can extend the bullish outlook.

CBRE's Chin highlighted how it is hard to predict the turning point, and noted how prices can be "extremely sensitive" to any interest rate hikes and relative pricing of real estate in other countries' markets. However, he remains optimistic.

"We expect to see investors continue to deploy capital into Japan and it is unlikely to change in the coming few quarters," he said.