Japan’s commercial real estate market is expected to remain strong as solid fundamentals and limited new supply mitigate the impact of rising interest rates on valuations, according to top executives from Mizuho Bank, Tokyo Trust Capital, L Catterton Real Estate, and Goyoh speaking at Mingtiandi’s 2024 Tokyo Forum on Tuesday. Watch the full recording>>
In a panel discussion at the Yardi-sponsored forum, Takashi Imanaga, general manager of real estate finance at Mizuho Bank pointed to rising rents in office and the broader commercial sector as offsetting the impact of increasing borrowing costs on valuations, with the strong fundamentals continuing to provide a favourable backdrop for real estate investment.
“I’m not so pessimistic about the impact of interest rate (increases),” Imanaga said. “The rising interest rates by the Bank of Japan is expected to be moderate. And there is a time lag before the rise in interest rate is reflected in the cap rate. Also, we can see that rents are on an upward trend. Rising rents have been most obvious in the housing sector but also in office and commercial properties…it is unlikely that real estate values will decline in the future and the environment for many investors to invest in Japanese properties will continue.”
The session, which was moderated by Zoe Ward, chief executive of local property brokerage Japan Property Central KK, saw Imanaga joined onstage by Christopher Handte, CEO of Tokyo Trust Capital; Taku Yamaumi, partner and head of Japan for L Catterton Real Estate; and Yukihiko Ito, CEO of local proptech firm Goyoh.
Luxury Retail Demand
The positive outlook for Japan’s commercial property market was echoed by Handte, who expects cap rates to maintain current levels. Handte, whose firm manages investments into Japan as well as outbound deals from the country, said rising borrowing costs have not been a major impediment to the asset manager’s investment strategies.
Takashi Imanaga, general manager of real estate finance at Mizuho Bank
The executive pointed to investor demand across a broad spectrum of assets classes in Japan, with strong fundamentals and urbanisation fueling investor appetite, beyond the advantages of a cheap yen,
“We’re definitely seeing interest in Japan because of (the cheap yen), but I think still, primarily investors are driven by the great fundamentals,” Handte said. “In our case, we have active mandates across several sectors. We do see demand for office, for residential, logistics and hospitality. And within each one, we’ve defined different strategies.
In Japan, Handte pointed to desk space as potentially the most attractive strategy in the current market. “Probably our most active sector right now is office, and we are seeing a lot of demand and interest in better located, better spec’ed, higher amenity buildings,” he said.
While his company has invested in office projects in Japan, L Catterton Real Estate’s Yamaumi favours Japan’s high end retail and hospitality projects as the sector benefits from a large base of domestic luxury consumers and surging foreign tourist arrivals.
“The trend of expansion of Japan’s hospitality business and luxury sector and Japanese consumption of luxury is still quite strong, because this market is largely supported by a very large (base of) domestic consumers, so the fundamentals are strong,” Yamaumi said.
L Catteron Real Estate, the real estate investment and development unit of LVMH-sponsored private equity firm L Catterton, has identified Japan as one of the best markets globally for luxury retail and hospitality property investment, Yamaumi said.
Supply Restrictions
Alongside strong fundamentals, Mizuho Bank’s Imanaga sees commercial property valuations being bolstered by limited new supply amid Japan’s chronic labor shortage.
“Building costs have been skyrocketing recently because of materials inflation and labor shortages, Imanaga said. “I think materials inflation will settle down in the future, but there are no prospects of resolving the labor shortage issue. So the supply of new properties will be slower than in the past.”
Ito, whose firm Goyoh provides ESG solutions to asset managers and global institutional investors in Japan, sees opportunities for investors to further boost valuations by incorporating sustainability objectives and data into leasing, operating, and capital expenditure decisions, which will provide a boost to net operating income across the risk spectrum.
“We are seeing that ESG data could make a financial impact,” Ito said. “And this you can use for any strategies – to protect your asset for core strategies, and enhance your net operating income for core plus or value add. And if you find the chance to improve (stranded assets), that’s a great opportunity for opportunistic strategies. So I’m very positive on the potential of ESG data.”
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