Detailed understanding of the neighbourhoods and transport networks of Japan’s major cities is growing in importance as apartment assets in Tokyo now trade at cap rates in the mid-3 percent range, thanks to growing competition for acquisitions, according to senior executives from Ivanhoé Cambridge, Tokyo Trust Capital, and Alyssa Partners. Watch the full recording>>
Proximity to public transportation, construction quality and access to the right amenities can provide opportunities to capture rental growth and boost asset valuations, Laurent Fischler, head of Asia Pacific investments at Ivanhoé Cambridge; Christopher Handte, Japan managing director at Tokyo Trust Capital; and Chedli Boujellabia, managing partner and CEO at Alyssa Partners told Mingtiandi’s 2024 APAC Residential Forum on Tuesday.
“You have to go train line by train line, neighbourhood by neighbourhood and see where people want to live and see how that impacts their lifestyles and their commutes to the office, so it’s not as simple as saying geographical distance from Tokyo Station in a concentric circle,” Handte said in the panel, which was sponsored by Yardi. “It’s more about understanding each separate submarket, the amenities, and how it factors in the lifestyle surveys. And markets do change — some were popular 20 years ago that are no longer now.”
With $6.3 billion in transactions last year, according to MSCI Real Assets, Japan’s living sector ranked as Asia Pacific’s top market for multi-family investors on the back of continued population growth in major cities like Tokyo and Osaka, the reappearance of rent growth and abundant liquidity.
Strong Fundamentals
While Japan’s overall population has been declining, major urban centres including Tokyo and Osaka have seen positive migration due to employment opportunities in those cities as well as increasing numbers of foreign migrants. Tokyo saw net positive migration of 68,285 people in 2023, representing an 80 percent increase from the prior year, according to data from the Japan Ministry of International Affairs and Communications.
“There’s this whole demographic topic in Japan on how the overall population of the country is declining, but the population of the four major cities is still growing,” said Fischler. “So while Japan’s population as a whole may be declining, you’re still seeing people move into Tokyo, Osaka and to a lesser extent Nagoya, Fukuoka. We also have increasing numbers of foreign migrants – it’s starting from a small base, but it’s increasing rapidly. So all of these factors are supporting the residential rental market.”
The re-emergence of inflation in Japan has also increased the country’s appeal for multi-family investors, who are now able to factor rental growth into asset models amid rising wage growth. Japan’s core consumer price index climbed 3.1 percent in 2023, marking the highest gain since 1982, according to official statistics.
“(Rental growth exceeding inflation) is relatively new in Japan, which historically didn’t have rental growth,” said Boujellabia. “Within our own portfolio, we’re delivering 4 percent to 5 percent higher rent for new leases and roughly one in four or five tenants will also accept a 4 percent to 5 percent increase when they renew. So basically getting that 4 percent to 5 percent on new leases and say 1 percent to 2 percent on renewals, that’s definitely a big change, which is basically delivering that plus in our core plus strategy.”
The rental growth comes as Japan’s major cities see high rental demand, with average occupancy in the country’s four largest cities exceeding 95 percent, according to Fischler, while Boujellabia’s portfolio has recorded vacancy rates of less than 3 percent, with major markets like Tokyo and Osaka at full occupancy.
Tight Trading
Despite the Bank of Japan’s recent pivot to positive interest rates, financing conditions and liquidity have remained accommodative in the country. The panelists agreed that investors had largely factored the shift in monetary policy into their underwriting processes in advance, with the official announcement of the change last week having no immediate impact on credit.
“The increase in the base rate has already been priced into the swap rates that banks have been using the last nine to 12 months, so we’re not seeing any change yet in terms of the borrowing costs,” said Boujellabia. “As long as the increase is within the current range – 20 to 25 basis points – given the amount of liquidity in the market and the interest in Japan, and the competitive advantage that we still have in terms of borrowing costs, we don’t see that impacting the appetite or the pricing, especially for multi-family.
The perspective was echoed by Handte, who cited Tokyo Trust Capital’s ability to obtain bank loans at a range of 60 percent to 78 percent loan-to-price.
Ease of financing, coupled with the multi-family market’s attractive fundamentals, have led to tight cap rates as increased competition for assets bids up asset valuations. Consensus cap rates for assets in Tokyo are around mid-3 percent or “slightly” below mid-3 percent for assets with rental growth potential, while cap rates in other major cities range between high-3 percent to 4 percent, according to Boujellabia.
“We have been able to achieve some very, very low cap rates on disposition. But I would say larger portfolios are getting done at around those mid-3 percent rates. It still remains very, very competitive,” said Handte.
Multi-Family Deep Dive Continues
Mingtiandi’s APAC Residential Forum continues Wednesday with a spotlight interview featuring top executives from PGIM Real Estate and Dash Living, fresh off the companies’ acquisition of The Sheung Wan hotel in Hong Kong’s Central district via their second joint venture.
Dash Living founder Aaron Lee joins PGIM Real Estate’s David Fassbender, a managing director who leads Japan at the property investment arm of Prudential Financial, for the 45-minute session on MTD TV. The two guests will delve into the details of their expanded partnership and discuss prospects for Asia Pacific’s diversifying multi-family sector in a chat with Mingtiandi founder Michael Cole.
The presentation, which is sponsored by Yardi, begins at 10am Hong Kong time and will feature a live Q&A session after the chat for attendees to quiz the speakers on their outlook for the multi-family space. Viewers can register their attendance here.
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