The real estate sector in Japan is witnessing a remarkable boom, in terms of increasing foreign investments. Benefiting from a number of fundamental factors, most notably the “weak yen” and the financial policies followed by the Bank of Japan.
A report published by CNBC described the current period that the sector is witnessing there as a “golden period,” with foreign investments increasing by 45 percent.
Foreign investment in Japan’s real estate sector has boomed over the past year, supported by a weak Japanese yen and as the country’s central bank continues its ultra-loose monetary policy. Fueling hot demand for real estate in Japan is the country’s favorable lending conditions and cheap yen, industry observers say.
The report quoted CBRE’s head of Asia Pacific research, Henry Chen, as saying:
“It’s a golden period for Japanese real estate.” “Japan is benefiting from ultra-loose monetary policy as global economies go through a tightening cycle. He cited the level of transparency and “strong fundamentals” in the retail and multifamily sectors to be a major factor (multifamily properties are buildings or complexes that contain more than one rentable unit as opposed to real estate A single family that has only one space.) What is boosting demand for the real estate sector in Japan is the country’s favorable lending conditions, with a loan-to-value ratio of 70 percent and the cost of lending hovering around 1 percent, and of course the cheap Japanese yen.
It is noteworthy that the Bank of Japan’s monetary position of keeping benchmark interest rates at -0.1 percent distinguishes it from other major central banks, which have raised interest rates in the past two years in an attempt to curb rising inflation. As a result, the yen has fallen by more than 11 percent against the US dollar this year so far.
According to Koji Nato, Director of Capital Markets Research in Japan at JLL, the volume of foreign investors recorded a 100 percent increase in the first quarter of 2023 year-on-year. JLL said in a recent note that real estate deal activity in Japan was among the strongest in the world this year, and similarly attributed the strength to interest rate policy that is “widely credited with keeping real estate resilient.” The international real estate services company indicated that foreign investors nearly doubled their investments compared to last year to $2 billion in the first quarter of the year. According to the latest data provided by CBRE, total foreign investment in Japan’s real estate market rose by 45 percent in the first half of 2023, compared to the same period last year.
Weakness of the yen
Commenting on this, Mazen Salhab, chief market strategist at BDSwiss MENA, says in an analysis exclusively for the “Eqtisad Sky News Arabia” website, that the weak currency has always been a double-edged sword; It raises internal inflation; Because it raises the cost of imports and imported goods, and this may be negative for the local consumer, but in return it raises the margin of purchasing power for those who have a stronger currency and want to invest in such a weaker currency.
The Japanese yen is an important example, as the decline of the Japanese yen -13.5 percent against the US dollar since the beginning of this year increased the ability of the foreign investor to buy Japanese real estate as well as Japanese stocks priced in yen inside Japan.
He points out that the interest rate in Japan remaining negative (-0.10 percent), which is the only one among advanced economies that has negative interest rates, has made the ability of the US dollar (and the interest rate there is 5.5 percent) better for investing in Japan from two aspects: the purchasing power of the dollar as well as borrowing within Japan to expand. Businesses buy Japanese assets, which enjoy low interest rates and therefore the cost of servicing these debts is lower than their counterparts in America, Europe and Britain.
He added: The numbers indicated that foreign investment in Japanese real estate increased by 45 percent in the first half of 2023 compared to last year. Japan is also gradually trying to transform into a global tourist destination, and this will keep the demand strong for tourist properties and in important geographical locations in major cities such as Tokyo, Osaka and Kyoto.
The chief market strategist at BDSwiss MENA believes that this behavior will not change in the short term, especially if interest rates do not change in Japan or if a global crisis or unexpected liquidity crisis does not occur.
Monetary policymakers in Japan seek to push inflation rates to the target level of 2 percent, while rates currently are still relatively far from this level at 3.1 percent, in an indication of current price pressures. In its latest meeting, the Bank of Japan kept interest rates “very low,” while at the same time pledging to continue supporting the economy until inflation sustainably reaches the primary target of 2 percent. The bank’s directions indicate that it is “in no hurry to phase out the massive stimulus program,” while keeping the short-term interest rate at -0.1 percent, and the 10-year government bond yield around 0 percent. It also left unchanged a reference range that allows the 10-year bond yield to move 50 basis points up and down around the 0 percent target, and the fixed maximum of 1.0 percent set in July. Last August, core inflation in the country recorded 3.1 percent, remaining far from the target for the seventeenth month in a row.
Market sentiment
There may not be a direct positive correlation between the rise in the Nikkei 225 index by 17 percent in 2023 and the rise in Japanese real estate prices, but the issue is related to the current positive market sentiment and benefiting from important opportunities in Japan, where the prices of many assets are still lower than the valuations of their American and European counterparts, according to Salhab.
He concludes his speech by saying: We should not forget that the Japanese real estate price index rose from 115 points in 2019 and has now reached 136, which means an increase of approximately 20 percent. Japan benefits from political and economic stability, while the investor in Japanese real estate, we believe, is considered a long-term investor who relies on commercial and residential real estate returns and is not an emerging market for speculation.
Knight Frank (a real estate consultancy) stated in a recent note in September that the strong recovery in Japan’s tourism sector after the easing of border restrictions led to an increase in hotel occupancy and hospitality investments. In July, Japan saw the largest number of foreign travelers since the Corona pandemic. “Given the limited availability of new hotel rooms for the foreseeable future, the upward trend in occupancy rates is expected to continue,” the Knight Frank note continued. In addition, hospitality sector investments received a boost after getting the green light to build integrated Japanese resorts in Osaka, which would mark the country’s first casino. The project aims to attract international and local tourism spending, according to Knight Frank, noting that the Japanese logistics sector has also witnessed “impressive growth,” driven by the strong performance of e-commerce. The logistics sector includes distribution centers, warehouses and other spaces containing storage facilities.
For CBRE, the retail sector is witnessing the strongest rental growth. Chen also explained that investors are looking to the primary and secondary markets of Tokyo and Osaka where demand for rental contracts is returning, along with the return of tourists.
Singapore and the United States
In addition, CNBC quoted Knight Frank’s head of Asia-Pacific research, Christine Lee, as saying that Singapore is the largest source of cross-border investments in Japanese commercial real estate in 2023, with acquisitions worth $3 billion so far.
American investments in Japan came in second place with a value of $2.58 billion, and in Canada with investments worth $1 billion, according to data from Knight Frank.
The Japanese economy recorded growth in the second quarter of this year, driven by the decline in the yen exchange rate (the decline in the yen helped exporters increase their profits due to the decline in the value of goods compared to international prices).
Estimates from the Bank of Japan indicate that Japan’s economy is likely to continue to recover “relatively moderately,” at a time when inflation rates have shown renewed signs of rising, an indication of expanding price pressures in the third largest economy in the world.
Japan’s economy grew by 4.8 percent year-on-year in the April-June period, down from the first reading of 6 percent, revised data showed. Exports remained strong in the April-June period, with net external demand contributing 1.8 percent to GDP growth, unchanged from the preliminary reading. As revised GDP data show, capital spending and private consumption fell in the April-June period, highlighting the fragile state of the Japanese economy, which is already facing headwinds from weak economic growth in America and China.
2023-10-07 14:47:07
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