With Japanese residential rents on the rise for the first time in decades, top executives from Alyssa Partners, Abrdn, and Dash Living said at Mingtiandi’s 2024 Tokyo Forum on Tuesday that they expect leasing rates to continue to climb as demand for housing in major cities exceeds supply. Watch the full recording>>
Combined with the depth of the country’s multi-family sector and the country’s economic stability, Japanese rental residential properties are set to continue as a favoured asset class for investors, according to Chedli Boujellabia, managing partner and CEO of Japan-focused real estate investment manager Alyssa Partners.
“(Japan’s rental residential sector) continues to deliver what we believe is basically the most important thing that global investors are looking for, which is predictability, scalability and less volatility than other asset classes,” Boujellabia said. “You combine that with a great legal jurisdiction system, great financing, great infrastructure and great tenant base, then you have the best living product in the world. We don’t have rent control, we don’t have any of the challenges that other jurisdictions have, like delinquencies, high vacancy, et cetera. So demand continues to exceed supply.”
Boujellabia was joined on the panel at the Yardi-sponsored forum by Harumi Kadono, head of Japan Real Estate at UK-based investment manager Abrdn; and Aaron Lee, founder and CEO of living operator and asset manager Dash Living. The session was moderated by Paul Davis, Tokyo-based counsel at law firm Baker McKenzie.
30% Rental Growth
Abdrn, which manages a $600 million Japanese residential portfolio totaling 2,150 units on behalf of a Dutch pension fund, is seeing occupancy of 97 percent to 98 percent across the portfolio, with Kadono pointing to opportunities to substantially boost rents in population hubs outside of the capital.
Harumi Kadono of Abrdn on stage at the Mingtiandi Tokyo Forum
“We observe that the rental increase tends to be larger in the regional cities,” Kadono said. “It’s easier to attain a 20 percent to 30 percent increase in Osaka and Nagoya rather than Tokyo, because in Tokyo, the total amount is already very high, so it’s hard to go up by 30 percent from there. But I can observe that in, let’s say Yokohama, two stations away from Yokohama, that’s happening.”
Beyond Yokohama, Osaka and Nagoya, Kadono remains positive on prospects for rental growth in prefectures surrounding Tokyo, such as Chiba, Saitama, and Tachikawa, as well as Fukuoka, Sendai, and Sapporo.
Lee, whose firm oversees a portfolio of 16 living assets in Japan totaling around 300 units, pointed to the importance of boosting net operating income by reducing operating expenses through technology. With Dash Living targeting expatriates seeking flexible leases as well as tourists, Lee says the company has been able to achieve income at least double the levels typically attained under conventional leases.
“For our upside case, we will underwrite rental growth, but for the base case, we look at uplift,” Lee said. “It’s about technology, it’s about how you can get the net operating income higher. For the flexible long stay bucket, you can probably get two to three times uplift from traditional leases. For tourists, three to five times, depending on the season. You take off maybe 25 percent to 35 percent operating costs, you probably have two times uplift on a net basis, compared to a traditional lease.”
Strong Returns and Liquidity
While Japan is one of the only markets in the world where interest rates are increasing, borrowing costs remain low and investors can earn spreads of at least three percentage points on residential cap rates, according to Boujellabia.
“Ultimately, from an investor’s perspective, (Japan) is still the only market where there’s at least 2 to 2.5, sometimes 3 percentage points difference between what you’re paying in cap rate and what you’re borrowing at,” Boujellabia said. “In any other developed market, you buy at a 4 percent cap rate, you borrow at 4 percent to 5 percent. We don’t have that in Japan.”
The executive pointed to strong returns in the residential sector attracting an increasing number of domestic investors including banks, pension funds, and insurance companies, with residential assets yielding better cap rates than office properties in some cases.
In addition to strong returns, the residential sector has also shown high liquidity, with single asset transactions closing in as little as three months.
“The fundamental fact about residential is the liquidity,” Kadono said. “Liquidity is very high. If you want to sell a standalone single asset, you can sell to Japanese corporations or high net worth individuals, within maybe three months period up to closing. If you want to sell a portfolio, you can approach other types of investors. As long as the assets are highly occupied and kept clean, with good quality tenants, liquidity is always there.”
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