By Petra Blazkova on May 30th, 2017
Two recent megadeals have thrust Japan’s second city of Yokohama into the spotlight. The deals are far from one-offs, however, and come after a burst of investment activity in the first quarter.
The Minatomirai Center Building was acquired by Hong Kong’s Gaw Capital for a rumored ¥85.0b ($763m) in April and the Concurred Yokohama property is due to be sold to Daiwa PI Partners in a joint venture with Daiwa Office Investment for $468m during the second quarter. For Q1’17 the investment volume in Yokohama reached $1.2b – more than quadruple the activity of the same period a year earlier.
Yokohama has benefited as investors look outside Tokyo for better returns. In the last five years, Tokyo and its five central wards have been a key target for investors, offering a stable flow of core good-quality buildings across all income-producing sectors. However, with strong competition from both domestic and foreign players, yields have compressed by close to 150 bps in that time frame. Because of the dramatic shift in pricing, investment activity in the capital dropped to the lowest since ‘09 in Q1’17, at $3.1b.
Investors are aware of the potential that Yokohama offers. For instance, Yokohama has a 30-minute commute time to Tokyo and portions of the 2020 Olympics will be held in Yokohama, supporting the solid prospects of the hotel industry. The city also has a sizable stock of office assets and a robust logistics market. Risks usually connected with investing in secondary markets, such as exit strategy and weaker occupier demand, can be mitigated here.
Moreover, the pricing of income-producing assets in Yokohama is favorable. The wide gap in pricing between central Tokyo and Yokohama, combined with the low cost of capital, is an attractive factor for investors. In Q1’17, the yield gap (based on the 4-quarter rolling average of office, industrial and retail yields) was 110 bps.
Looking ahead, Yokohama appears set to be a net beneficiary of investment flows. That said, the window of opportunity may be a short one as the pricing gap narrows. The Minatomirai Center will trade at 3.0% – a property yield comparable with central Tokyo, London, New York, Singapore or Hong Kong.