Japan highlights from the Emerging Trends in Real Estate Asia Pacific 2022 report

The Urban Land Institute (ULI) together with PricewaterhouseCoopers (PwC) published their report on Emerging Trends in Real Estate Asia Pacific 2022 at the beginning of November.

REthink Tokyo reviewed the 60-page report, highlighting relevant sections on Japanese residential real estate.

While the report was written with institutional investors in mind and covers not only residential but also office, hotel, logistics, warehouse and data center sectors, even the real estate of the individual investor or homeowner can be affected by the same influences, the institutional one Have real estate in mind for the next year.

How the report was made

According to the report, “Emerging Trends in Real Estate Asia Pacific 2022” reflects the views of those who completed surveys or were interviewed as part of the research process for this report.

The views expressed herein, including any comments in quotes, are derived solely from these surveys and interviews and do not reflect the views of either PwC or ULI.

The respondents and survey participants represent a broad spectrum of industry experts, including investors, fund managers, property developers, real estate companies, lenders, brokers, advisors and advisors.

ULI and PwC researchers interviewed 101 people in person and received survey responses from 233 people. “

Japan key topics (page 28)

Historically, Japan has been a major draw among overseas property investors for its reputation for stability, liquidity, and cheap debt.

In addition, with the exception of the incoming tourism sector, the Japanese economy remains quite independent. Domestic demand accounts for 95 percent of the retail market and around 91 percent of the accommodation market, making it less exposed to the threats of global travel bans, foreign imports and supply chain restrictions.

Recently, Japan’s construction and rental housing sectors have become a magnet for foreign funds. Once out of fashion, multi-family assets caught the attention of high-profile institutional investors a few years ago looking for long-term, low-risk places to invest.

As the only mature multi-family market in the Asia-Pacific region, Japan fulfills these criteria, as it is assigned a low leasing risk and potential for rent increases.

Although the cap rates for Japanese multi-family assets have steadily decreased over several years (from around 5 percent to currently 3 percent or less), the competition for the purchase of portfolios is stronger than ever.

A fund manager said, “If you look at European investors and house prices are in Europe, they still think that even with a capitalization rate of 2.5 or 2.75, residential real estate in Japan looks pretty attractive, especially given the low cost of borrowing.”

Further compression therefore seems likely.

Property type Outlook – Residential (page 44)

In Japan, therefore, cap rates of only 3 percent have proven acceptable for institutional buyers, especially when combined with Japan’s ultra-low-cost borrowing (i.e. 1 percent or less), which is leveraged at 60 percent plus.

Investors also expect to generate incremental profits in other ways – be it through yield compression, rent increases, added value of various kinds, or even conversion into co-living facilities.

With tight competition and hard-to-find products, investors have turned to forward buying to quickly build platforms, increase returns, and resolve supply bottlenecks.

In doing so, they often take a rental risk in order to increase their income.

Although this has become a game of choice for overseas funds in Japan, the risk-reward prospects have been questioned. Aggressive underwriting leaves little room for error in both pricing and rents, according to a Tokyo-based fund manager.

“One of the big problems for living is [high] Change of tenants, ”he said. “We hear that they are having trouble finding tenants – downtime can last well over a year, and then you have to attract tenants half a year ago, say 3 to 3.5 [percent cap rate], and your rents are now down 20 percent and you are having problems with renting too, you could be in the 2.0, 2.5 percent range very quickly, and if you borrow at 70 percent [LTV] You would find yourself in the area of ​​negative net cash flow relatively quickly. “

One reason for the increasing rental risk is the changing tenant preference. As people now spend more time at home, the quality of the construction and the size of the apartment are becoming increasingly important as many tenants are looking for a larger floor space or an additional space for the home office.

Outlook on the property type – Hotels: Destination Japan (page 48)

According to a fund manager in Singapore, “Before COVID-19, the Japanese had a very steep curve in visitor arrivals and with their infrastructure and other general offerings, we were very optimistic about Japanese hospitality over the long term.

It also has the benefit of a large domestic population so it has some level of buffer, but it misses out on that domestic market.

We’re launching a new Japanese hotel fund, probably a club, targeting hotels in Japan that are looking for more of that value-added proposition that owners may have a little capital on. “

Japan is also of interest to investors looking to balance an imbalance between stocks serving different subsectors. According to a local investor, performance between luxury hotels and budget hotels has varied dramatically. There has been an alarming increase in [the number of] Budget hotels, which will make a recovery in their sales structures almost impossible.

But we believe this will provide a business opportunity for asset repositioning in 2022 and later, such as condos for sale. “

further reading

Emerging Trends in Real Estate Asia Pacific 2022 Full Report (ULI & PwC; November 2021)