Foreign investors flock to Japan to buy warehouses and offices - Other hot segments during the first half were residential and hotel investments

TOKYO -- Foreign real estate buyers are turning to Japan as an investment haven, hunting for properties like logistics facilities and offices while taking advantage of the country's low interest rates to finance their purchases.

The opportunity in warehouses and other storage spaces has been created by tighter restrictions on delivery drivers' working hours, a coming change intended to safeguard safety and health. Office buildings have benefited as Japanese workers have largely returned to the office.

There are other enticements. Easy financing is available, and the yen is sitting at a 33-year low against the U.S. dollar. That is at least partly because the central bank remains committed to its decade-old ultra-easy monetary policy. Businesses, meanwhile, are doing well, and demand for space is high.

In many other countries, by contrast, rates are rising, credit conditions are tight and large numbers of workers refuse to return to the office.

"Japan has captured the limelight," said Anthony Couse, chief executive of Asia Pacific for Jones Lang LaSalle, a global real estate services company. "Japan has always been attractive. It's just more attractive today because the other countries are not so attractive."

In the past five years, Japan has been home to the greatest number of real estate transactions in the Asia-Pacific region, according to real estate services company CBRE. It is now also considered the region's most attractive country for cross-border investment, according to surveys by JLL and CBRE.

The availability of cheap credit is an important factor for many foreign investors, who typically finance their deals with loans taken out in yen. "You get a positive cash-on-cash" -- or a return on the property minus the financing cost, Couse said. Japanese banks also have grown more willing in recent years to lend against real estate assets.

Analysts remain bullish even though market players are anticipating that the BOJ will modify its policy in response to sustained inflation and the sharply depreciated yen, and have started pricing in the possibility of 10-year government bond yields rising to 1%, the upper limit of the BOJ's target. On Wednesday, the yields hit 0.8%, doubling in less than two months and marking the highest in more than 13 years.

"Provided the interest rate growth in Japan is moderate, it will still remain a very attractive place to invest because the availability of onshore debt is there for investors," Couse said. "The FX rate will change, and surely the yen will appreciate, but it still remains a fundamentally attractive place because of the macro drivers of the market."

Money is attracted to certainty, and uncertainty is relatively limited in Japan, he said. Office buildings and other commercial real estate in Japan have more stable occupancy rates and profitability than other Asia-Pacific countries. At the same time, there are fewer geopolitical risks than in a place like China, where tensions with the U.S. are growing and the property market is distressed.

"I think Japan is topping Asia Pacific for some time to come," Couse said.

Investments patterns in Japan did begin to shift late last year, said Asuka Honda, director of research at CBRE in Japan. Some foreign investors have cashed out their investments or switched between asset classes. Singapore's GIC is reportedly considering a sale of a 43-story skyscraper in downtown Tokyo for over $2 billion.

Office investment, the leading category for 2021 and 2022, was overtaken by industrial investment -- mainly logistics facilities -- in the first six months of this year.

CBRE expects demand for logistics facilities to remain strong because of the so-called 2024 problem -- an expected labor shortage due to tighter restrictions on delivery drivers' working hours. As a result, demand is expected to increase for transit locations between large cities as well as larger and more advanced facilities to keep more stock and accommodate self-driving vehicles.

Other hot segments during the first half were residential and hotel investments. Many opportunistic investors focused on hotels and higher-yielding residential opportunities such as long-stay hotels, serviced apartments and student housing, Couse said. "People are diversifying their portfolio."

Meanwhile, new offices are opening in Tokyo, where small old office blocks are being redeveloped into giant office towers.

In March, Mitsui Fudosan opened a 45-story 240-meter office and hotel complex in front of Tokyo Station. Last week, Mori Building christened a 49-story, 266-meter office tower in the Toranomon business district.

In November, Mori Building will also open a 64-story 330-meter residential and office complex in upscale Azabu. It will be the tallest building in Tokyo, at least for the next five years. Also next month, Tokyu Land will open a 39-story office tower next to a train terminal in trendy Shibuya.

On Sept. 27, Mitsubishi Estate broke ground on a 385-meter 62-story office-and-hotel complex right next to Tokyo Station. The building is due to open in 2028.

The construction binge comes even as some Japanese companies move their head offices out of downtown Tokyo to save costs and embrace remote work. Building materials maker Lixil last year moved its headquarters to a smaller building in Tokyo. IT company Fujitsu will leave Tokyo in 2024. The massive amount of office space and the greater embrace of a hybrid workstyle have pushed up central Tokyo's office vacancy rate to around 6.5%, a nine-year high, according to Tokyo real estate broker Miki Shoji. Still, JLL data shows Tokyo has a lower vacancy rate than most other global cities.

The fact that developers are pressing ahead with massive projects may be an indication of the amount of confidence in Japan's office market, Couse thinks. "We are confident that there is not going to be a huge rental correction," he said, "because that demand, the fundamentals I keep referring to, is enough to fill the new Grade-A office buildings."

CBRE's Honda says that if Tokyo wants to attract more inward investment, there should be a greater focus on profitability, as interest rates are likely to go up even in Japan.

In the first half of 2023, inbound investment in Japanese real estate more than doubled to $5 billion, according to CBRE data. Singapore led the push, pouring in $2.1 billion -- a fourfold increase from a year ago. The figures are estimates, with projects often financed by multiple players from multiple countries, making difficult to assign a single investment origin.

Most recently, Singapore's City Developments invested 35 billion yen ($230 million) in acquiring 25 Tokyo apartment buildings.

GIC, the country's sovereign wealth fund, bought logistics facilities from Blackstone in June for $800 million, while Singaporean real estate developer CapitaLand acquired apartment blocks in Osaka for $105.9 million in April. In May, Singaporean real estate investment trust MapleTree Industrial bought a data center in Osaka for 51.8 billion yen.

Canada has also emerged as a major investor in Japanese assets. BentallGreenOak, a real estate investor, in January bought the Rihga Royal Hotel in Osaka for $385 million. In June it purchased the Ritz-Carlton Fukuoka for an undisclosed sum.