Why Japan's demographics have not scared off Singapore property groups

SINGAPORE'S real estate firms are not shying away from investing in Japan, despite the country's shrinking population and its subdued economic growth.

The recent asset purchases suggest that investors are undeterred by the weak demographics, and turning their attention to the stable returns.

Japan's population is estimated to have declined from a peak of around 128.1 million in 2008 to around 125.5 million in 2021. Over 28 per cent of the population is aged 65 and above.

Gross domestic product fell in 2020 and was growing at an average of close to 1 per cent per annum in the prior five years.

In late May, the manager of Mapletree North Asia Commercial Trust (MNACT) announced the purchase of an effective interest of 98.47 per cent in a freehold single-tenanted office building in Tokyo, known as Hewlett-Packard Japan Headquarters, for an agreed property value of 38.8 billion yen (S$474.7 million). With the purchase, contribution from Japan to the trust's assets under management (AUM) rose from nearly 17 per cent to over 21 per cent.

In June, Ascott Residence Trust (ART) completed the purchase of three rental housing properties in Sapporo, Japan, for 6.78 billion yen. Post the acquisition, ART's portfolio in Japan comprises over 4,500 units in 22 serviced residences, hotels and rental housing properties in nine cities.

Last November, Mapletree Investments announced the purchase of a 116,319 square metres (sq m) plot of land in Kyushu, Japan, on which it will build logistics facilities with a gross floor area of 231,648 sq m for total investment of over S$550 million.

In May, ARA Asset Management increased its strategic stake in Kenedix, Inc from 20.27 per cent to 30 per cent. Kenedix is Japan's largest independent real estate asset management group with 2.3 trillion yen in AUM as at end-2020.

The purchases span various asset classes. What they show is that a country with a sophisticated economy, which is the world's third largest, and high gross domestic product per capita, can continue to present opportunities to investors.

Singapore groups are seeing steady gains from buying Japanese assets.

In 2020, amid the Covid-19 pandemic, ART's 11 rental housing properties in Japan enjoyed an average occupancy rate of 96 per cent.

Mapletree Logistics Trust (MLT), which has Japan contributing 11.1 per cent of its S$10.7 billion of AUM as at June 30, 2021, saw stable occupancy of 95.9 per cent as at end-June for its Japanese portfolio, unchanged from three months ago.

Cap rates for MLT's Japanese assets tightened slightly from a range of 4.2 per cent to 5.9 per cent as at March 31, 2020 to a range of 4.0 per cent to 5.8 per cent as at March 31, 2021. MLT's manager said its portfolio in Japan is underpinned by long leases and continues to provide stable income streams.

CapitaLand made estimated gains of close to 9 billion yen on a recent divestment of its two remaining retail malls in the Greater Tokyo area. Recently, the group has been expanding in logistics properties in Japan.

For Parkway Life Reit, Japan's ageing population is a draw. The healthcare trust has a portfolio of 49 nursing homes in Japan worth S$769 million based on latest appraised values.

Perhaps, what really attracts buyers to investment properties in Japan is the attractive yield relative to risk free rate and low cost of borrowing.

In its presentation on the Tokyo office acquisition, the manager of MNACT noted that Tokyo has the highest yield spread of prime office cap rate against relevant 10-year government bond yield compared to other major Asian cities such as Beijing, Shanghai, Seoul, Hong Kong and Singapore.

MNACT's acquisition is at a net property income (NPI) yield of 3.6 per cent which is over 350 basis points more than the 10 year Japanese government bond yield.

Borrowing in Japan is also cheap with short-term yen Tokyo Interbank Offering Rate at just over zero per cent.

In comparison, buying an office asset in Singapore for a NPI yield of around 3 to 4 per cent represents a yield spread of between 170 to 270 basis points to the 10-year Singapore government bond yield of about 1.3 per cent.

The purchase of leasehold Grade A office property Keppel Bay Towers in Singapore for S$657 million by Keppel Reit, which was completed in May, was at a NPI yield of around 4.0 per cent, including rental support.

The sale by Suntec Reit in June of a 30 per cent interest of leasehold Grade A office property 9 Penang Road to Haiyi Holdings at an agreed property value of S$295.5 million, represents a NPI yield of about 3.3 per cent on a stabilised basis.

Getting freehold property with better yield spread in Japan appears sensible for Singapore property players.

As with any overseas investment, watch out for currency movements.

Over the last 12 months, the Singapore dollar is up by around 5 per cent versus the yen. Concerns over yen weakness may potentially hold back some Singapore groups from seeking yield in Japan.

Still, excluding the effects of translating the capital value of the Japanese assets to Singapore dollars, any yen weakness need not be problematic as revenue and expenses of the properties are both yen denominated.

The recent hosting of the Olympics in Tokyo without spectators curtailed ART and CDL Hospitality Trusts, which have hospitality assets in Tokyo, from cashing in on the event.

Still, people globally had great moments to treasure from the Olympics, and brand Japan may have received a boost from hosting this global event in an unprecedented time. And persistent low interest rates that help facilitate decent yield spread will continue to lure groups searching for yield.

Trusts owning Japanese properties that listed here may have headed for the exit - Saizen Reit has delisted and unitholders have approved the winding up of Accordia Golf Trust, which could be delisted in due course.

But investors can get exposure to Japanese property via the investment of local property groups in Japan.

In portfolio construction, Japanese assets can be useful for providing income stability, while leaving the potentially larger growth in rental and capital value to be contributed by other faster growing markets.

Meanwhile, in the last decade, China's population grew at its slowest rate since the 1950s according to the country's census released in May. Amid predictions of a shrinking population, China will now allow couples to have up to three children.

Singapore's population is also growing slowly. According to the Census of Population 2020, Singapore's total population grew by around 1.1 per cent each year over the past 10 years - the slowest rate since independence in 1965.

Still, Singapore groups are not likely to run from these core markets on demographics shift alone. As the experience from the Japanese property market shows, property groups still sleep well with fewer babies to mind.