Global Investors Keep Faith in Japanese Apartments Despite Tighter Yields

Average rents in Japan’s multi-family residential sector grew less than 1 percent between 2020 and 2022 despite rising occupancy rates and ongoing urbanisation, however, international investors continue to favour opportunities in Asia’s largest rental housing market, according to a report released this month.

Despite rents holding steady, annual investment in the sector, which averaged $5.4 billion from 2017 to 2021, dropped to $3.3 billion last year, down 39 percent. Grade A properties in Tokyo witnessed a decline in their yields, lowering from around 4.5 percent a decade ago to approximately 3 percent in 2023, according to the study by JLL.

The general downturn can be attributed to market saturation and white-collar workers moving away from city-centres during the pandemic, the property agency said. That population decline now shows signs of potential reversal, as positive net inward migration was recorded in central Tokyo and Osaka in 2023. Each of those markets recorded inward migration of more than 18,000 people since the start of this year, according to a report by Savills.

With citizens moving back to urban hubs, rental accommodation in major markets such as the Tokyo Metropolitan Area and Nagoya had occupancy of over 95 percent at the start of the year, helping to keep major international investors like Blackstone active in the well-established market.

“Overseas investors were all over Japan in the second quarter, drawn by the positive yield spreads still on offer,” said David Green-Morgan, global head of real assets research at MSCI.

International Investors Pile In

Solid market fundamentals and stable performance in Japan’s rental housing sector have prompted a number of high-profile transactions in the island country by international investors in the last two years, including UK-based M&G Real Estate purchasing 30 residential properties in Tokyo, Nagoya, and Osaka from Blackstone for $424.3 million in March last year.

In September, Singapore’s City Developments Ltd acquired 25 apartment buildings across central Tokyo’s 23 wards from North American fund manager BentallGreenOak for $230 million. That purchase marked the group’s first move into Tokyo after other acquisitions of rental properties in Osaka and Yokohama.

Paris-based AXA IM Alts expanded their apartment portfolio with 33 more properties in Tokyo, Greater Osaka, and Nagoya in February, raising their held Japanese residential units up to 7,800 units. The fund manager purchased its latest batch of homes from the asset management division of JP Morgan for $459 million.

Foreign investors made almost half of all purchases of multi-family assets in Japan from April to June this year, according to Knight Frank.

Australia and China Promise Upside

Despite these ongoing deals, compressing yields in Japan are leading some investors to turn to alternative rental housing markets which may provide greater potential for increases in capital values.

Investors committed almost $1 billion to rental housing ventures in both Australia and China in the first half of this year. In 2021, Australia took in $70 million in investment in the sector, while China received just $220 million in commitments, with JLL pointing to these markets as providing opportunities for growth.

Official estimates predict that Australia’s population will grow by 1.5 percent per annum over the next decade, driving economic growth. Major cities Down Under also have rental vacancy rates of less than 2.1 percent. The rental housing market in Shanghai tightening with occupancy exceeding 90 percent at the end of June, according to JLL.

“Investor interest in core multifamily assets has never been stronger. It’s a rapidly evolving market and with more investable products coming into the pipeline, wider participation from institutional investors in the sector and strong fundamentals, we expect demand for core multifamily product in APAC to outgrow investible stock,” said Robert Anderson, director of Asia Pacific capital markets at JLL.

Investment in rental properties in Asia Pacific, which is dominated by Japan, China, and Australia, reached $5 billion in the first nine months of 2023, representing a 12 percent increase from the same period a year earlier despite a 24 percent decline in total real estate investment volume in the region over the same period, according to figures from MSCI.

During that same period investment transactions in other real estate sectors plummeted across Asia Pacific, with office deals falling by 56 percent compared to the same quarter a year ago, the information providers data shows.