Investment in Tokyo properties is surging on prospects that rents will rise, boosting returns, even after a 20 percent gain in prices since Japanese Prime Minister Shinzo Abe took office almost two years ago.
“There is a sense of value here that you don’t find in other major office markets,” said Jon Tanaka, Tokyo-based managing director of Angelo Gordon & Co., an alternative asset manager with about $27 billion in assets. “Japanese and offshore core buyers have capital available and they are very eager to find investment opportunities in Tokyo.”
Real estate investment in Japan rose 70 percent to 4.6 trillion yen ($44 billion), the highest level since March 2008, in the 12 months ended in March from a year earlier, according to a report published in July by Deutsche Asset & Wealth Management. Among deals in the past week, a unit of China’s Fosun Group acquired the Citigroup Center building in Tokyo and Mori Trust Co. bought an office and banquet hall complex in the capital for more than a $1 billion.
Office rents for the best buildings in Tokyo are estimated to rise by about 30 percent over the next three years, giving potential investors a chance to capitalize on rental incomes, according to CBRE Group Inc.
While Abe’s efforts to revive the nation’s economy and end more than a decade of deflation have led to a recovery in the property market, prices in Tokyo, the world’s third-biggest real estate investment market, are still 20 percent below their 2007 peak, according to an estimate by Deutsche Asset. In an effort to restore economic momentum, Abe reshuffled his cabinet today, 20 months after taking office.
The Topix Real Estate Index tracking 45 property-related companies rose 0.6 percent to close at the highest since Aug. 1 in Tokyo.
Relative yields on office acquisitions that are higher than in other major international cities also are luring investors. The difference between the return on equity and long-term interest rates is more than 400 basis points above 10-year bond yields, according to Deutsche Asset. That compares with less than 100 basis points in Singapore and Hong Kong, and 200 basis points in London and New York.
Private real estate investment trusts, which started in Japan with $200 million of assets under management in 2011, have expanded and become key investors in the property market, said Koichiro Obu, the head of research and strategy in the Asia-Pacific region at Deutsche Asset.
Total assets under management by private REITs rose 46 percent to $6.75 billion as of March 2014 from a year earlier, according to the German bank’s report. Pension funds probably account for 30 percent of investments in private REITs, Obu said.
“It used to be hard for pension funds to invest in private REITs because they were very small,” Obu said. “Now they have gained in size and established a track record, investments from pension funds have begun to flow into the private REITs.”
Acquisitions by Japanese REITs accounted for about half of the $34.5 billion in transaction volume in the year ended June, while foreign capital accounted for 16 percent, according to an estimate by Deutsche Asset.
“The market is heating up,” said Kunihiko Okumura, regional director of acquisitions at LaSalle Investment Management, with $50 billion of assets. “The competition among core investors, REITs and private REITs has intensified.”
The biggest transaction in Japan in the second quarter was Tobu Railway Co.’s purchase of two Tobu department stores for 103 billion yen, according to the report. Other large transactions included the purchase of Kokusai Akasaka Building by Sekisui House Ltd., Japan’s second-biggest homebuilder, for 74 billion yen, it said.
Angelo Gordon’s strategy is to renovate vacant buildings and boost occupancy rates, Tanaka said. It acquired 67 percent of Sphere Tower Tennozu, an office building near Tokyo Bay, in December from Global One Real Estate Investment Co. for 9.5 billion yen. The New York-based firm plans to refurbish the building, which currently is less than 40 percent occupied, and sell after leasing it, he said.
More properties are being put up for sale as prices rise. Idera Capital Management, a unit of Fosun, China’s biggest closely held conglomerate, acquired the 25-story building completed in 1992 in Tokyo’s Shinagawa ward, according to a statement on Idera’s website dated Aug. 27.
Mori Trust, Japan’s second-biggest closely held developer by sales, said on Aug. 29 it acquired the 37,000 square meters (398,265 square feet) Meguro Gajoen in central Tokyo, known for its gardens and as a favored wedding location. Mori paid about 130 billion yen to buy the property from Lone Star Funds, people familiar with the deal said, asking not to be identified because the information is private.
Mitsubishi Estate Co., Japan’s biggest developer by market value, said a special purpose company it partly owns is seeking to sell a stake of more than 10 percent in an office complex next to Tokyo Station for 43 billion yen.
The capitalization rate, a measure of investment yield, for office buildings in Tokyo fell to the lowest level since August 2009 in June, according to New York-based Real Capital Analytics Inc. The yield declined to 4.80 percent in June from 5.04 percent a year earlier. A drop in the cap rate, which is derived from a property’s net income divided by the purchase price, usually signals an increase in prices.
Not all are expecting prices to continue rising. The rate for office buildings in Tokyo’s central five wards is about 4.4 percent and it probably won’t decline further, according to Yoko Fujinami, an analyst at IB Research Inc. in Tokyo.
“Even as prices for office building are rising, rent growth hasn’t caught up,” said Fujinami. “That will keep the cap rate from falling further.”
The nation’s largest developers such as Mitsui Fudosan Co. and Mori Building Co. also are announcing plans to re-develop their properties as they expect demand to rise.
Mitsui Fudosan, Japan’s biggest developer, raised about 330 billion yen in its first share sale in 32 years, saying that the real estate environment has changed “dramatically” since December 2012, when Abe came to power. The proceeds will be used for property development, it said.
Mori Building, Japan’s biggest closely held developer, said in June it plans to develop about 10 projects in central Tokyo worth an estimated 1 trillion yen with partners as the city prepares for the Olympic Games in 2020.
“Development projects for under-utilized land will lift up property values in those area,” said Hiroshi Okubo, executive director and head of research at CBRE. “That will in turn boost the attractiveness of Tokyo.”
Rents for grade-A buildings in Tokyo in the second quarter gained at the fastest pace since CBRE started compiling the data in 2005. Japanese banks’ lending for the property industry remained at the highest level since June 2007 in the second quarter, according to the Bank of Japan’s Tankan Survey.
“We are in an early stage of a cyclical recovery,” said Angelo Gordon’s Tanaka. It is “mainly driven by improved fundamentals in the market place, increased investor confidence, as well as lenders’ confidence in the market.”