Investors Diversify Japan Multi-Family Acquisitions in Search of Yield: MTD TV

As global capital pours into Japan’s rental residential market, some of the most experienced investors in the country’s build to rent sector are turning to opportunities in second tier cities, Tokyo’s suburbs or in more specialised subsectors, a panel of experts told Mingtiandi’s APAC Residential Forum on Thursday.

Japan’s robust demand for multi-family housing and the sector’s value as a defensive asset has led to greater competition for assets and tighter yields, said Laurent Jacquemin, head of Asia Pacific head AXA IM Alts – Real Assets, with the French insurance giant adapting its investments to suit the evolving environment.

“We decided for some of our clients to look at more regional markets like Sendai and Sapporo to try to increase the average yield of the portfolio,” Jacquemin said. “There’s still an increasing demand for multifamily [in these areas] but of course, all investors are less interested to go to more regional cities, but for us, it’s a good way to balance and to try to get access to more deals and less competition compared to Tokyo, Osaka and Nagoya.”

Other speakers at the event, which was sponsored by Yardi, provided their own perspectives on how to achieve attractive returns from a multi-family market which witnessed a combined total of nearly $14.8 billion in sales of income producing assets in the past two years.

Opportunities Outside Tokyo

Minoru Machida, chief executive of Tokyo Trust Capital, spoke in favour of opportunities in Tokyo’s western suburbs, in Saitama prefecture north of the capital, and in Kanagawa prefecture to the city’s south.

Machida said that these locations have sustained population growth which has driven demand for rental housing, enjoy easy access to the capital via mass transport, and have more affordable rents which help to provide more consistent returns in case of a downturn.

“If you consider how expensive central locations in Tokyo are then the more stable option might be to look at the more suburban areas that are within 30 to 60 minutes train ride away from the central areas,” Machida said. “If you look very carefully in those areas you might find opportunities which can yield 30 basis points, 40 basis points higher than in the central locations in Tokyo.”

Formerly a managing director with Aetos Japan, Machida also noted that properties in Tokyo’s suburbs had provided more consistent returns during the 2008 global financial crisis, as well as during the pandemic.

“In suburban areas there was really no other place for people to move to and rents are not that expensive to begin with. That’s the way we’d approach our future acquisitions, to focus widely on stable population areas that are populated by middle-income and upper-middle class,” he added.

For Emilia Teo, a managing director with Singapore private equity firm TE Capital Partners – which has already completed a pair of Japanese apartment acquisition – diversification into student housing provides another path to enhanced yields.

Teo revealed that TE Capital is expecting to close its ongoing acquisition of one student accommodation portfolio in Japan in the next couple of weeks – a deal that will quickly follow the set of multi-family residential assets it acquired in July 2021 for $60 million.

“We see student accommodation as an emerging, up and coming asset class in recent years,” she said. “With Japan reopening borders progressively, we’re just expecting that the intake of international students will grow and that will further drive growth in the sector.”

Option 2: Build-To-Rent

Aside from diversification, Richard van den Berg, M&G Real Estate’s fund manager for Asia Pacific, noted that overseas investors can also boost yields by taking on more development risk through investing in build-to-rent property projects still in their early stages, especially as the country’s robust demand for quality housing keeps occupancy rates high.

“Those investors who are chasing yield… they are starting to take more risks. Either they’re going to more secondary or tertiary cities or indeed, they are taking development risk – and development risk in a market like this is something which you can take since the market is very strong,” van den Berg said. “There’s a very high occupancy – we have an occupancy of 97-98 percent and the occupancy even during COVID has never dropped below 93 percent, so it shows a very counter-cyclical strength as well.”

Data from MSCI-RCA showed the volume of apartment transactions in Japan averaged $4.9 billion from 2015 through 2019, outperforming its peers in Asia Pacific significantly as the second-most active market, which is Australia, only averaged $184 million in deals annually over the same period.

“Based on the demand [in Japan], if you get the product right, if you get the location right, I think you can take that development risk and then the only main risk are the construction pricing and leasing, which I think is not too high,” the M&G executive added. “I do think that development is an area where you are able to take that risk if you get all the ingredients right.”

Australia and Debt Financing Up Next

Mingtiandi’s APAC Residential Forum will continue on Tuesday, 29 March with a discussion of the Australian multi-family market featuring Sam Bisla, head of living for Australia at Hines; Laurent Fischler, head of investments for Asia Pacific at Ivanhoé Cambridge; Stephen Gaitanos, managing director and Group CEO for Scape and David Scalzo, managing director with Melbourne-based developer Perri Projects.

The forum will conclude on 31 March with the Trends in Residential Finance Panel, which will feature Nick Shi, global head of real estate investment with Haitong International; Trent Winduss, head of Asia secured debt investments and head of Australian investments for Phoenix Property Investors and Joel H Rothstein, shareholder and chair of the Asia real estate practice at Greenberg Traurig discussing debt strategy opportunities in the region’s housing sector.