November 9, 2017 4:37 pm JST

Asia's big money reigns over Japan's property market

Singapore, South Korea and China players cheer weak yen and ultralow rates

TAIZO WADA, Nikkei staff writer

Investment in Tokyo real estate is delivering solid profits for investors.

TOKYO -- Overseas investment funds are increasingly buying real estate in Japan, attracted by the country's weakening currency and ultralow interest rates.

For the first half of fiscal 2017, property purchases by overseas investors expanded 3.3 times from a year earlier to 657 billion yen ($5.81 billion), according to Urban Research Institute, a Mizuho Trust & Banking unit. That accounted for 36% of all transactions disclosed by companies and institutional investors tracked by URI.

Foreign money, especially from Asian countries, thus became the biggest force in the market -- overtaking Japanese funds, developers and public institutions. This is the first such shift since data became available in fiscal 2000. 

By amount, purchases by foreign buyers for the six months through September hit the second-highest level on record, after the 782 billion yen seen for the second half of fiscal 2014.

Inflows of money from overseas are behind the soaring property prices in Japan.

Asian money

Asian investors were particularly keen to sign large deals. Singapore's sovereign wealth fund, GIC, partnered with a Japanese real estate-investment fund in September to buy Sheraton Grande Tokyo Bay Hotel, located near Tokyo Disney Resort, for some 100 billion yen. 

Lee Kok Sun, chief investment officer of GIC Real Estate, said the fund will continue looking for quality assets with stable cash flow potential.

China's Anbang Insurance Group, on the other hand, bought about 200 blocks of residential assets, estimated at roughly 260 billion yen, from Blackstone Group. The U.S. investment company had bought most of them in 2014 from General Electric's Japan unit, but the Chinese insurer persuaded Blackstone to sell at an attractive price.

During the first half of fiscal 2017, Nomura Real Estate Development dealt with purchases of Japanese properties by South Korean investors at an aggregate amount up 50% on the year. Buying by Japan's neighbor surged particularly around the time South Korean President Moon Jae-in took office in May.

Political uncertainty at home seemed to motivate investors to move their assets to safer locations, said a Nomura representative.

Outside Asia, U.S. investment company Fortress Investment Group in July acquired some 500 public apartment blocks for approximately 25 billion yen. The residential buildings were built to accommodate the elderly, disabled and unemployed.

Solid profits

The biggest attraction at present for foreigners is the country's ultralow interest rates. Investors can squeeze profits from properties even with low investment yields, as long as yields are higher than interest on loans.

Global property investors always watch the gap between interest rates and investment yields. This yield gap is typically around 2% in New York and London, and less than 1% in Hong Kong and Shanghai, according to Cushman & Wakefield, a real estate service based in the U.S. In Tokyo, the gap is as much as 3.2%.

The yen's current weakness yen is another advantage, making Japanese properties bargains for foreign buyers and attractive investment targets.

On the other hand, listed domestic REITs -- or property-specialized investment vehicles which used to control the largest share in the domestic property market -- are downsizing their investments. Their total purchase amount for the first half of fiscal 2017 fell 40% on the year to 445 billion yen, the lowest since the first half of fiscal 2012.

With surging real estate prices, many REITs can no longer find properties with suitably high returns.

CBRE, another U.S. property service, said expected returns on Japanese properties have sunk to record lows since the company began compiling data in 2003. Japanese buyers are clearly in a "wait-and-see" mode amid surging market prices, while foreign investors expand their holdings by leveraging their advantages.

"Although prices are currently rising too much, well-financed foreign buyers will likely continue acquiring Japanese properties," said Kunio Kitamura of Sumitomo Mitsui Trust Research Institute.

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