Japanese investors step up global exposure to real estate

Japan stands out globally as one of the few markets where real estate transactions have been holding up relatively well in the past 12 to 18 months, according to Tom Leahy, Head of EMEA Real Estate Research at MSCI.

In the past cycle, during which central banks worldwide embarked on an unprecedented period of quantitative easing, the Bank of Japan took a completely different approach to monetary policy, he explained during a panel on global capital flows at EXPO REAL. “They’ve shifted it slightly, but they haven’t seen the aggressive tightening that we’ve seen elsewhere in the world. That aggressive tightening has created the current uncertainty in pricing which is now manifesting itself elsewhere in a slowdown in deal volumes.”

European commercial real estate registered the seventh consecutive quarter of falling investment in the third quarter, MSCI’s latest Europe Capital Trends shows. The volume of completed transactions plunged 57% year-on-year to €32.8 billion, the weakest activity since 2010. Overall investment for the first nine months of 2023 now stands at €119.0 billion, less than half the level for the same period in 2022.

Japanese capital has also become more active in global property markets, Leahy said. “The Bank of Japan has spent 30-plus years trying to encourage inflation and now they’ve finally got some, they’re not going to kill it off by increasing interest rates. So, we’ve seen Japanese capital – which can borrow very cheaply at home and spend abroad – put a bit of a floor under Manhattan office pricing, for example, which had previously shown quite a lot of weakness.”

A lot of European investors are heading to Asia and North America, according to Dilip Awtani, Universal, Senior Real Estate Portfolio and Investment Manager at Universal-Investment.  “GDP growth has been very very slow across the Western hemisphere. It’s picking up in the US but in Europe it’s been very flat for a long time.  Our European investor base is much more interested in going into Asia and other markets where they think there’s more GDP growth. In Germany on the other hand, we’re seeing a slight decrease.”

But while North America is basically a single market, Asia consists of different markets in totally different environments, he added. “We also have had a business in Asia for a number of years and we’re now looking at new strategies. A broad Asia strategy that includes China is, however, something that needs a lot more narrative around the long-term benefits of investing in that country, so that does impact sentiment and capital flows.”

China is, nevertheless, a very stable market, he added. “China has zero inflation and a 2.7% interest rate. But most people are scared off by western China because they don’t understand the markets and the local legislation. So, many more factors come into play, and it does require a lot more analysis if you want to do deals in China.” 

Most western investors in Asia are attracted by the relatively low inflation and interest rates, Awtani said. “The only exception is India but that’s a very particular market because it’s a self-sufficient market. It has high inflation interest rates, but it is still growing incredibly fast. It may be coming from a low base, but the growth is fantastic, and it is still one of the most populous countries and biggest economies in the world.”

Investors are looking for growth in terms of geography, agreed Stephen Miles, head of strategic partnerships for Europe at Schroders Capital. “But I still see a lot of demand for the the deep, transparent core markets and I don’t see that that abating dramatically.”