How Japan’s Economic Reawakening Is Creating Real Estate Investment Opportunities
The land of the rising sun is enjoying a moment in the spotlight. Deflation is giving way to inflation after 30 years, a longstanding push for corporate reform is bearing fruit, tourism is booming, manufacturing is moving onshore, and the populations of the country’s major cities are growing.
These trends have implications for real estate investors. The inflationary environment makes real assets more attractive, while other structural changes bode well for specific sectors. The surge in tourism opens up opportunities in hospitality, for example, while government-supported corporate reforms are encouraging divestitures of non-core real estate assets. Taken together, we think there are a wide variety of interesting themes in Japanese commercial real estate, but executing them depends on having the right relationships in an incredibly localized market.
A Supportive Macro Backdrop for Real Estate
Japan’s inflation resurgence brings with it rising wages, rising rents, and rising revenues for real estate investors. Our global macro team thinks it’s a trend with staying power. The labor participation rate has gone about as high as it can go (Exhibit 1), and wages have already risen sharply. The latest annual wage negotiations point to a 5.3% hike in pay for union workers, for example. A tight labor market should support elevated wage growth moving forward, which in turn should continue to feed inflation. Retirees have not benefitted from wage growth, however, and as a result their spending growth has been the weakest of all age groups. In a country where 29% of the population was over 65 as of March 2024,1 our macro team has flagged this trend as a risk to future growth. Indeed, the team recently also downgraded growth estimates for the year slightly from 1.4% to 1% for this and several other reasons.
EXHIBIT 1: Japan’s Pool of Surplus Labor Has Been Fully Depleted
Japan: Population vs. Employment, Millions of Persons
Nevertheless, monetary policy should remain easy. Our global macro team expects the Bank of Japan to raise interest rates, but not nearly as dramatically as in the United States and Europe. The team foresees the 10-year Japanese government bond yield rising to between 1%-2% in 2025, up from 0.43% in 2022. Real yields should remain negative, encouraging investors to put money to work, particularly in assets that can also serve as potential inflation hedges, such as real estate.
In this environment, we see three trends driving real estate opportunities.
1. Divestitures Driven by Corporate Reform Measures
The Japanese government has been trying to get large corporations to become more responsive to the needs of shareholders for more than a decade. Activist investors have joined the chorus, and even the country’s largest stock exchange has incentivized companies to improve low price-to-book (P/B) ratios.
These efforts are working. The proportion of corporate revenue going to shareholders grew at a compounded annual rate of 10% between 2010 and 2022 and return on equity is increasing.
EXHIBIT 2: Shareholder Returns Are Rising
TOPIX: Return-on-Equity (%)
One easy target for Japanese companies looking to make their balance sheets more efficient: their substantial real estate holdings. As of March 2024, 40% of listed companies with a market capitalization of more than ¥10 billion are trading at a P/B ratio of 1.0x and sit on roughly ¥180 trillion in fixed assets.2 Many of these companies are not primarily real estate companies and lack proactive strategies to manage the assets and maximize their value, in our view.
We recently completed a transaction that shows the trend in action. After our colleagues completed a private equity corporate carveout of a logistics business from a large conglomerate, we purchased 32 logistics warehouses in a sale-and-leaseback transaction with lease terms ranging from 15-20 years. The transaction enabled the company’s transition to an asset-light business model and gave our investors access to what we feel is a leading logistics business at a time when the sector has strong tailwinds. Manufacturing is returning onshore, the semiconductor trade is booming, and e-commerce penetration is still quite low compared to the United States and Europe.
2. A Tourism Resurgence
The number of tourists arriving in Japan is back to pre-pandemic levels even though Chinese tourism has not yet fully recovered. American tourists are part of that mix, but we are also seeing more travelers from across Asia, especially Southeast Asia and Korea, as well as domestic tourists. By 2030, we expect Japan to welcome 80 million visitors each year, well above the government’s target of 60 million.
We see opportunities to partner with best-in-class partners and strong brands to develop new luxury hotels. However, we also think there is a strong market for more affordable places to stay in the notoriously expensive country, particularly for visitors coming from Southeast Asia. Operators in the mid-scale, limited-service hotel sector are fragmented, presenting an opportunity to consolidate assets, rebrand and institutionalize operations.
Hospitality could also benefit from corporate divestitures. We recently purchased the Hyatt Regency Tokyo, an iconic hotel in one of the most energetic districts in the world, from Odakyu Electric Railway Company which had run the asset for more than 40 years, and are looking to enhance the hotel’s offerings to guests while retaining its unique heritage.
3. Growing Cities
Though Japan’s overall population is declining, its largest cities are growing. Both central Tokyo and Osaka saw net inward migration in 2023. Meanwhile, household sizes are getting smaller and rental occupancy rates in major markets such as Tokyo are already high at more than 95% at the beginning of 2024.3 It all points to high demand and tight supply in the multifamily residential market.
Meanwhile, the available housing stock is relatively old. Roughly 60% of the housing in the three largest metropolitan areas was built before 2000.4 Operators who can invest and improve properties should be able to demand higher rents, particularly given Japan’s strong wage growth trends.
Keys to Success in Japan
Japan’s economic reawakening and the big shifts occurring in Japanese society make for attractive real estate investment opportunities. Taking advantage of these opportunities, however, is not straightforward. Property deals in Japan are often based on personal relationships and a long track record of doing business in the country. We feel that managers with deep local knowledge, on-the-ground presence, and a strong level of trust with both corporate and real estate partners, are best positioned to take advantage of Japan’s moment in the sun.
1. Statistics Bureau of Japan as of March 1, 2024. https://www.stat.go.jp/english/data/jinsui/tsuki/index.html
2. Source: Mitsubishi UFJ Morgan Stanley Securities Analysis as of March 11, 2024.
3. Source: Savill’s Tokyo Residential Leasing Q1 2024. https://www.savills.com/research_articles/255800/215504-1
4. Source: CBRE Research as of July 2023.
