By Benjamin Chow on September 23rd, 2019
Traditionally, domestic players account for the lion’s share of Japan’s real estate volumes. However, virtually nonexistent restrictions on foreign ownership, coupled with the sheer size of Japan’s market, have attracted a steady stream of cross-border investment into the country, at around $8 billion per year over the last decade.
A big beneficiary of cross-border interest in recent years has been Osaka, Japan’s second largest metro by deal volume. The share of overseas investment has risen steadily from 15% in 2013 to 40% this year, helping to push overall Osaka investment volume in the first six months to a decade-high of $2.4 billion.
With the uptick of foreign capital flows, liquidity in Osaka’s investment market has improved. Osaka was the only market in Japan where capital liquidity increased in Q2 2019 compared with a year prior, according to preliminary RCA Capital Liquidity Scores data.
At the same time that overseas investors are gaining a stronger foothold in the Osaka market, Japanese companies have increasingly sought to diversify their holdings by investing abroad. In the 12 months through to midyear 2019, Japanese investors deployed $5.4 billion of capital overseas.
Over the same period, they sold $1.6 billion worth of Osaka real estate to cross-border groups, including mid-sized apartment, office and hotel portfolio assets to the likes of CBRE Global Investors and GreenOak Real Estate. In return, Japanese buyers purchased only half that amount from cross-border players.
For the 12 months through to midyear 2019, cross-border investors bought $0.8 billion more of Osaka commercial real estate assets than they sold. This level was last seen over a decade ago, right before the Global Financial Crisis (GFC) struck. Net acquisitions touched $2.2 billion in early 2008, based on 12-month trailing data, but this was followed by a rapid unraveling over the next five years as troubled assets were disposed of and the trade balance swung back in Japanese investors’ favor.
There are reasons to be more sanguine about Osaka’s prospects this time round. Fundamentals appear to be stronger, with tight supply and strong rental growth in the short run and potential growth catalysts over a longer horizon.
Osaka’s successful bid to host the World Expo in 2025, along with emerging plans for a new integrated resort on Yumeshima, has renewed interest in the hotel and retail sectors. Continued population growth and urbanization should also support office occupancies as the city develops, particularly in the north of the CBD.
Office pricing has surpassed pre-GFC levels and RCA’s Hedonic Series cap rate for Osaka’s office market contracted by some 30 basis points over the past year. Yields still remain some 30 basis points higher than those of Tokyo office market assets.
Undoubtedly, risks remain in the immediate term, against a backdrop of geopolitical tensions, slowing economic growth, and the impending consumption tax hike next month. Nonetheless, Osaka appears to be at an earlier stage in the cycle compared with most other global cities, and this should help maintain its relative appeal.
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