Japan’s resurgent real estate market: A haven for Singapore investors

WHEN it comes to the commercial real estate (CRE) market, Japan stands as the third most sought-after investment destination in Asia-Pacific for Singapore investors, trailing the Chinese mainland and Australia, albeit by a considerable gap.

Over the period from 2013 to the second quarter of 2023, an estimated US$16.2 billion has been poured into Japan’s CRE sector. Notably, 12 per cent of this investment occurred in the first half of 2023, underlining the burgeoning interest of late.

Undoubtedly, the Japanese government’s divergent monetary policies to lift prices domestically have been a boon to real estate investors, as the yen revisited multi-year lows against major global currencies.

However, against the Singapore dollar, the depreciation was more evident as it plummeted to its lowest ever in 2023, despite recent tweaks to its yield curve control targets. The added firepower has put Singapore as the top cross-border investor in Japanese real estate so far this year.

Tactical shift to logistics

Historically, the bulk of CRE capital inflows from Singapore have targeted the office sector in Japan, trailed by investments in industrial and hospitality assets over the past decade. However, the unexpected rise of hybrid work arrangements in Japan, coupled with substantial supply looming on the horizon, has caused a shift in investors’ preferences. The spotlight has now shifted towards growth-oriented asset classes such as logistics and hospitality, poised to ride the upward trajectory.

The Japanese logistics sector has enjoyed remarkable growth, propelled by the robust performance of e-commerce and third-party logistics. This surge in demand for institutional-grade assets has led to a significant undersupply, driving substantial rental growth, and rendering the sector appealing for Singapore-based investors.

The first half of 2023 saw an influx of capital from Singapore, with some US$1.68 billion invested in Japan’s logistics assets – the highest volume recorded in a decade. Notably, GIC acquired six logistics facilities in the country from Blackstone for more than US$800 million.

While a high injection of new supply this year is likely to slow rental gains, the sector’s strong fundamentals mean well located, modern facilities will be able to provide resilient cash flow and high occupancies.

Rekindled interest in hospitality

Following the relaxation of border restrictions by the Japanese government from October 2022, international tourists flocked to the country, boosting hotel occupancy rates and average daily rates. A study by US hospitality research firm STR found that Japan’s average room rate in March 2023 was already 21 per cent higher than pre-pandemic levels, indicating a robust tourism recovery. With limited new hotel room supply on the horizon, occupancy rates will likely remain high.

Hospitality investments also received a shot in the arm in April, when the government approved a plan to build the country’s first integrated resorts (IRs) in Osaka. The US$8.1 billion project will feature Japan’s first casino, as well as hotels, conference facilities and shopping malls, which could give Singapore’s IRs a run for their money.

The confluence of resurgent tourism demand and constrained supply has reignited Singaporean interest in Japan’s hospitality sector. Singapore-based investors are capitalising on the sector’s significant tailwinds, investing US$898 million in hotel assets in 2022. Investments year-to-August 2023 are already higher at US$942 million, supported by a significant July transaction: A consortium led by SC Capital Partners, Goldman Sachs Asset Management and the Abu Dhabi Investment Authority acquired a portfolio of 27 resort hotels from Daiwa House Industry for just under US$1 billion.

As asset repricing navigates uncertain terrain and yield spreads tighten globally, Japanese CRE emerges as a beacon of opportunity for Singapore investors seeking to invigorate and diversify their real estate portfolios. Recent monetary policy adjustments by the Bank of Japan are unlikely to significantly impact CRE investments by domestic or international investors.

With Japan’s resilient economy, mild inflation and favourable financing costs, the current landscape presents an opportune juncture for investors to ride the wave of Japanese CRE recovery.

The writer is head of research, Asia-Pacific, at Knight Frank