Market Trends

Investing in Japanese Real Estate Outside of Tokyo

In its Q2 2015 Japan Quarterly Investment Survey, CBRE reported that one of the key real estate investment trends in Japan is that more investors are looking away from Tokyo and towards regional cities.

The proportion of all respondents naming cities outside Greater Tokyo as “the most attractive city to invest in” spiked to 23% in April 2015, versus 5% in April 2014. In 2014, total J-REIT investment in regional cities was 366 billion yen (about 3 billion usd at today’s exchange rate), the highest amount to date.

The report also finds that the real estate market in regional Japanese cities has recovered and should continue to grow in the coming years, with the overall number of real estate investment transactions in regional cities above the pre-Lehman shock peak. This benchmark number is about 200.

Closing the Yield Gap

The main cause of this shift, according to CBRE, is that Japan’s regional cities are closing the yield gap as a result of the intense competition for investment property in central Tokyo. Investors are increasingly looking at cities such as Osaka, Fukuoka, and Nagoya in search of higher yields.

In the survey, expected yields, based on Net Operating Income (NOI), for central Tokyo offices fell to their lowest point since the first survey in 2003. However, it also showed that the downward trend in expected yields for office property is also evident in regional cities. This is because investors are expecting vacancy rates to decline and rents to increase regionally.

Net Operating Income (NOI) is found by subtracting operating expenses from gross operating income and is used to calculate the yield or cap rate. Operating expenses include things like property management fees, repairs, real estate taxes, and insurance, but not depreciation. Operating income includes the rental revenue itself and other revenue like parking and common area maintenance (CAM) fees. For a more in-depth explanation of yield and NOI, please see this article, Is Tokyo Residential Real Estate a Good Value?

Economic Rebound and Structural Changes

Ongoing economic improvement is another factor in increased investor interest in regional markets. CBRE reports that it expects Japan to return to positive growth in Q3 2015 (compared to a contraction in Q2), based on a recovery in private consumption and corporate capital expenditure.

This economic rebound is gradually spreading to Japan’s regional cities. According to CBRE, outside the greater Tokyo metropolitan area, almost all cities with populations greater than 500,000 have achieved overall unemployment that is lower than before the global financial crisis.

With rising employment, office demand has also risen. This has caused vacancy rates to decline. CBRE found that vacancy rates were on a downward trend in almost all regional markets it survey in 2014. At the same time, rents have reached a low point in many regional cities and are beginning to rise.

Structural changes, such as rising inbound tourist demand, the ageing population, and the growth of e-commerce, are also continuing to play out in regional markets.

Increasing Liquidity

CBRE sees clear evidence that liquidity in regional markets, especially Osaka, Nagoya, and Fukuoka is rising. This is supported by looking at the ratio of the number of investment office transactions to the stock of office buildings, as a measure of the liquidity of each city’s investment market.

Domestic Investors in the Lead

Both domestic and foreign investors decreased their investment in regional markets as a result of the global financial crisis, but since 2011, both J-REITs (Japanese Real Estate Investment Trusts) and overseas funds have increased their activity outside Tokyo.

In regional cities, Japanese investors account for 80% to 90% of all transactions.

Overseas investors’ share of all investment transactions in regional cities fell to 8%, but recovered to 18% in 2014, with prominent investments by North American and Asian investors, especially from Singapore and Hong Kong.

Preference for Office and Retail

In regional cities, as in Tokyo, office and retail are the most popular asset types.

Until 2010, office and retail together accounted for more than 70% of transactions by volume, but has decreased to about 60%, suggesting that investor interest is broadening across asset types.

Residential Sector

Since 2010, the share of the residential sector, by count of all transactions has been about 22%. By value, in 2013, residential investment totalled 139 billion yen (about 1.1 billion used at today’s exchange rate), higher than the pre-Lehman shock figure of 132 billion yen. The 2014 total was 124 billion yen, a year-on-year decline, but still above the 100 billion yen mark for two consecutive years.

Source: CBRE’s “In Japan’s regional cities, investor interest grows,” August 26, 2015

You may also be interested in: Osaka investment properties, Nagoya investment properties

Top photo: Nagoya, Japan


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