Okamoto-san, what makes the Japanese real estate market special?

Supply and demand did not match due to different price expectations. Potential foreign buyers were reluctant to buy because they saw rising interest rates everywhere outside Japan, which did not suggest any further leeway for price increases. Sellers of real estate on the other hand were unwilling to adjust their asking prices, as financing conditions in Japan remained favourable. Interest rates have remained low, and the willingness of banks to grant real estate loans is still high. Refinancing real estate loans were thus assured and there was no need for them to sell their properties. 

As everywhere else, office vacancies have risen. Nevertheless, the vacancy rate remained low compared to other office markets worldwide. According to a Nikkei article published in January 2023, Tokyo’s vacancy rate increased by only 3.6% points to 4.2% from the end of September 2019 to the end of September 2022 the rent reduced by around 2.5% points. Over the same period, the vacancy rate in New York rose by 8,0% points to 15.4% the rent reduced by 5% points, in Hong Kong the vacancy rose by 4.8% points to 10.4% the rent reduced by more than 10% points, in London the vacancy rose by 3.6% to 8.2% and the rent reduced by over 5% points. Most of all, investors are currently holding back and watching the market because many new large-scale buildings will come on the market this year. Small and mid-size offices were not affected so much by the pandemic, and it is expected that these office segments will not be so much involved in the new supply of large-scale offices. However, it remains to be seen how much effect there will be for offices. In principle, however, Japan’s office property markets are less affected by the home office trend than classic office locations in Europe or the USA. Japanese business and corporate culture are very much built on face-to-face communication.

The pandemic has triggered a huge demand for logistics hubs and warehouses. As a result of Corona, online trade in Japan, which has grown enormously until then, had been below average compared to global standards. This created high demand from investors to invest in logistics lowered the cap rate, and increased the prices so high for the last two years that we are now seeing some rebound of the cap rate and a decrease in the prices in this segment.

Tokyo condominium prices have continued to rise over the past decade. The number of new condominiums for sale in the Tokyo metropolitan area exceeded 30,000 units in 2021. In the past, it was around 50.000 – 80.000. The average price went up in line with this decline in the supply of new condominiums. This trend of the limited supply of condos, and the rising cost of construction, will continue as there is limited space for new developments and a limited number of developers. In addition, awareness of the importance of family and the increase in home time has drawn out the need to live in comfort and quality housing, pushing up the housing market's price. The ratio of rent increase is lower than the ratio of increase of a condo price (3.2% vs 16.7%) in Tokyo. As the price of a condo has become too high for one to purchase (15 times the annual salary in Tokyo), I see strong and steady demand for rental housing.

On the one hand, the market is characterised by a further growing demand. On the other hand, from the international comparison, the prices for urban housing are still bearable compared to European or US metropolitan regions. According to a study of the Japan Real Estate Institute, the price per square meter for a high-end condominium is 11% higher in New York, 81% higher in London, and 118% higher in Hongkong compared to that Tokyo in 2022. So, it is no surprise that foreign investors have invested increasingly in residential real estate for a few years and now account for half the transactions. More importantly, the outlook on Japan's multifamily sector is positive, and its resilient income and attractive risk-adjusted returns benefit a real estate portfolio. Economic growth encourages employment and higher wages, which drives demand for housing. Meanwhile, the housing market in Japan has a limited stock in the development pipeline. The appeal of multifamily assets as an inflation hedge should also drive greater investment demand and help sustain values.

Stable development in value. Even in times of uncertainty and instability. Asia Pacific (APAC) is in times of European crises increasingly seen as a safe haven by institutional investors. Investing here helps them diversify their portfolios and cushion the turbulence in other markets. The combination of lower inflation and a stable labour market means that APAC economies are currently better positioned for economic recovery than others. Tokyo, as an economic powerhouse, will particularly benefit from this trend. The weak yen is an additional incentive to invest here from foreign investors’ perspective.