In 2017, foreign corporations and funds spent a total of 1.1 trillion Yen (approx. 9.7 billion USD) on real estate acquisitions across Japan, a three-fold increase from 2016 and the first time that the annual volume has exceeded one trillion Yen.
This number still pales in comparison to foreign investment in other countries. In Australia, the total value of foreign investment approvals for real estate in the 2015-2016 year was estimated at 10.8 trillion Yen. In 2016, foreign investors pumped the equivalent of 2.2 trillion Yen into commercial real estate in the US.
Almost a quarter of all reported transactions for the year involved foreign corporate buyers. Transactions over 50 billion Yen (approx. 442 million USD) were particularly noticeable. In December, Norges Bank Real Estate Management, part of Norway’s sovereign wealth fund, acquired a 70% stake in a 132.5 billion Yen (approx. 1.17 billion USD) purchase of five commercial and retail buildings in Tokyo’s fashionable Omotesando district. This was their first acquisition in Asia.
Singapore’s sovereign wealth fund GIC announced last month that they will acquire a 43% stake in the Shinjuku MAYNDS Tower for 62.5 billion Yen. In September 2017, they announced plans to acquire a 51% stake in the 1,191-room Sheraton Grande Tokyo Bay Hotel for 51 billion Yen.
Norges expected rental yield is around the 2% range, while GIC’s is around the 3% range.
Acquisitions by foreign investors started to increase from 2013 onwards. Sellers, who had picked up properties at cheap prices following the aftermath of the global financial crisis, were starting to release them on the market, with foreign funds eager to buy. In 2015, the supply of properties available for purchase started to dwindle, resulting in a drop in sales volume. Sales picked up again in 2017 as sellers were keen to offload commercial properties in advance of a potential oversupply in office space forecast in 2018.
Tokyo real estate is attractive to institutional investors for its relatively high yield gap, which is arguably one of the highest in the world’s major developed cities. A yield gap is the difference between the cap rate and the long-term government bond yield. In 2017, yield gaps in Tokyo ranged from 3.5 ~ 4.5% depending on property type. For prime office space in central Tokyo, the yield gap is around 2.8%, which is higher than the 2% found in London and the 1% rate found in New York and Hong Kong. Japan’s yield gap has been supported by low 10-year government bond yields which ranged from -0.009 ~ 0.116% in 2017.
Source: The Nikkei Shimbun, January 6, 2018.