International investors re-evaluate Japan real estate investment

Amidst the turmoil of COVID-19, the presence of foreign investors is rapidly increasing in Japan market.

October 07, 2020

The restrictions on movement of people due to the COVID-19 outbreak restrained economic activity of corporations. Consequently, commercial real estate investment activity in Japan in the 2Q20 decreased by 21% y-o-y and 47% q-o-q, amounting to JPY 912 billion.

Most notably, inbound investment into Japanese real estate has remained strong. Overseas investors accounted 34% of total investment volume in 1Q20 and 39% in 2Q20, and remained well above the 21% mark for the full year 2019. This is partly because Japan’s safe haven status during the COVID19 pandemic, and also because the country has one of the most sizable commercial real estate market backed by an advanced economy.

Overseas investors are also attracted by an abundant stock of investable assets, especialy the mature logistics and multi-family sectors. Several large-scale office buildings in Tokyo CBD and Osaka CBD, as well as a multifamily portfolio in Tokyo Prefecture were transacted in 2Q20. Moreover, a significant number of large-scale logistics facilities have been transacted since the beginning of 3Q20.

Figure 1: Decrease in the total transaction volume, Increase in the ratio of oversea purchasers

Source: JLL Research, 2Q20

The rapid expansion of foreign investment is mainly because they have become more active in Japan’s multifamily sector. Acquisition of multifamily portfolios by overseas investors, which was unheard of just a few years ago, continues to grow.

Looking at second-quarter figures, overseas investors remained positive towards Japan’s real estate despite the influence of COVID-19. Even the restrictions on overseas travel did not hinder many foreign investors, who have substantial and experienced workforce on the ground that able to complete the deal.

Rather, in the global turmoil caused by COVID-19, the impact on Japan’s society and economy—the third-largest economy in the world—is generally mild compared to the United States and Europe. The mature and stable real estate market seems to raise the preference of investment in Japan. In particular, during this turbulent period, despite crises such as the global financial crisis and the Great East Japan Earthquake, foreign investors rediscovered Japan’s stable returns and low-risk investments.

Foreign investors are also showing great interest in offices and logistics facilities. As for office buildings, the number of properties for sale was small as compared to potential demand. As such, overseas investors are interested in good quality properties with strong demand from tenants. Almost unaffected by the COVID-19, interest in logistics facilities continues to grow, indicating they are becoming more popular.

Demand for real estate investment is expected to continue to increase steadily in the future, as low-interest rates continue to prolong around the world. It is unlikely that the turmoil due to the COVID-19 will soon settle. Therefore, capital is likely to move toward Japan’s mature real estate market as investors seek stable returns.

It is expected that investment opportunities for overseas investors, which until now have been relatively limited, will increase. For office buildings, as the concept of office changes, the evaluation of the location and grade of office buildings will change accordingly. Thus, office portfolios for sale will increase as a result of more portfolios coming under review. As for logistics facilities, developers who are refraining from development projects are likely to sell more for capital recovery. In addition, investment for multifamily sector have a long history in Japan and many existing properties, so there are many opportunities for investors.

From a global perspective, it is natural for overseas investors to pay attention to Japan’s real estate, which is a stable market with low risk and attractive investment opportunities.