By Petra Blazkova on September 12th, 2016
At the MIPIM Japan conference in Osaka in early September, the vast majority of exhibitors came from across Japan and just one was from overseas. We are proud to say that visitor was Real Capital Analytics. This picture of participants reflects the sources of capital for Japanese real estate investment, which are primarily domestic. Cross-border volume currently represents only 15.1% of direct real estate investment based on rolling annual figures. It wasn’t always so low.
Until H1’16 Japanese real estate represented an investment haven for foreign investors looking for exposure to a major market and long-term, stable cash flows, and also diversification. This was in spite of strong domestic competition. However, there was an important shift in the market structure early in 2016. Since then the cross-border share of investment volume has declined dramatically and foreign buyers have become net sellers for the first time since 2007.
The reasons are various. Primarily, it is an effect of pricing, which is at the highest point in the current cycle and difficult for foreign investors to justify. Property yields have compressed since the last peak in Q3’12 to reach 4.0% in Q2’16. Secondly, the dominant J-REITs – representing 37% of all transaction activity – have largely edged out cross-border investors. Last but not least, many foreign institutional investors took advantage of yen strength, as much as fund expiries, to exit the market.
In a nutshell, the fundamentals of Japanese real estate have changed, and the drivers for Japanese investors to go global have become more obvious. Higher yielding but perhaps riskier assets are available offshore for traditionally domestic Japanese investors. Also, crucially, the yen strength of recent months has made foreign real estate more attractive.
Going forward, Japan will still receive a considerable inflow of foreign capital, however, aggressive pricing and domestic competition will limit the activity, forcing investors to look for opportunities elsewhere. For Japanese investors, the motivators of diversification and higher returns will become paramount regardless of their experience and risk profile. As such, new Japanese investors, led by Japanese pension funds, will start to look internationally for opportunities.