Institutions beef up Japanese real estate exposure

While there has been a drop-off in investment activity from investors based in the US and Europe into Asian real estate, Japan is bucking the trend, according to industry experts.
Institutions beef up Japanese real estate exposure

Although allocations to Asia’s real estate markets saw a drop in first half of 2023,Institutional investor interest in Japanese bricks and mortar persists even as allocations to Asia's real estate markets saw a drop in the first half of 2023.

A spate of international investment firms have opened new – or bolstered existing – Tokyo offices this year, including actors in and around commercial real estate investments such as JLL, LaSalle Investment Management, Hines and Heitman.

In this sector, international fund managers and overseas institutional investors that have teams on the ground in Japan have significant advantages over offshore investors with no physical presence in Japan.

Joel Rothstein,
Greenberg Traurig

Many deal opportunities are sourced based on relationships, which are hard to foster from a distance, according to Joel Rothstein who chairs the Asia real estate practice at US-based law firm Greenberg Traurig out of Tokyo.

“That being said, Japan – in contrast to a number of different markets across Asia – is somewhat transparent. Market information is available and there is a developed infrastructure of professional brokers, consultants and advisors that can help source deals and assess opportunities,” Rothstein told AsianInvestor.

Benjamin Chow,
MSCI Real Estate

Benjamin Chow, head of real asset research in Asia for MSCI Real Assets (formerly Real Capital Analytics), pointed out that one of the biggest changes in capital flows in Asia Pacific this year has been the drop-off in investment activity from investors based in US, Canada and Europe.

These investors slashed their investment in the regional assets by two-thirds year-on-year for the first half of this year.

Also read: Investors continue exodus from Asian property: report

“However, the one market that they have been continuing to do deals in is Japan. In particular, European and Canadian investors have focused almost entirely on the Japanese market in the first half, while Singaporean investors have also ramped up their activity significantly,” Chow told AsianInvestor.

In the first half of 2023, the capital flows into Japan from overseas totalled $4.26 billion, almost the same as last year's first six months ($4.29 billion) according to MSCI data.


Chicago-headquartered real estate investment management firm Heitman opened its first Japan office 12 years ago and has gradually expanded its presence. It added Akira Nishimura as managing director for client service and marketing, and Japan head of institutional sales, in June.

In addition to providing better service to its Japanese clients, Heitman sees strong potential in the Japanese real estate market in an Asia-Pacific context.

Bradley Fu, Heitman

“Investors may have requirements around income return versus growth. Currently, the income return coming from the Japanese real estate market is among the highest globally. If the investors’ demands have a weight towards cash-on-cash yield, it is not unusual that we would have a higher allocation from that strategy into the Japanese market,” Heitman’s Asia-Pacific head of acquisitions for private real estate equity Bradley Fu told AsianInvestor.

He elaborated that investors mainly ask the manager to identify relative value across the region and to deploy the best opportunities. Only in rarer cases do they start with a fixed allocation strategy to find opportunities in a specific market.

Heitman had a global AUM of $52.2 billion as of June 30, 2023. The firm does not disclose regional or country allocations.


Nevertheless, even with a team on the ground or access to qualified advisors, certain types of assets, like Grade A trophy office properties, have not and will not be readily available to international investors, Rothstein and Fu agreed.

However, with sufficient boots on the ground in Japan, there are still plenty of opportunities for international investors across all asset classes – particularly if they are willing to invest beyond Tokyo and Osaka, take on construction risk, or do some nitty-gritty asset management.

One model is to aggregate several smaller assets to build scale and reposition its tenancy or through capex to new usage. Heitman is pursuing this strategy in the industrial space in Japan, among other markets, to build a portfolio of self-storage assets.

“Investors are expanding into new asset types which have some operational aspects such as senior living and care facilities, student housing, self-storage facilities and life sciences real estate,” Rothstein explained.

Another opportunity for overseas investors and managers is in the grade B office space. Among others, Heitman is currently seeing opportunities into grade B office assets combined with a more defensive semi-retail component. These are in locations that are highly accessible but emerging in their nature as commercial hubs around Japan’s major cities.

For instance, the firm bought a grade B office in Tokyo northwestern Ikebukuro district, and converted it into a serviced office concept. After leasing out the space, Heitman then sold it to a domestic private REIT. The asset manager is now looking to replicate that strategy to other grade B office assets in emerging commercial areas around Tokyo, Fu explained.

“The liquidity around grade B offices is actually quite high. The nature of buyers is quite diverse as it is not only the foreign funds but also local listed companies that are looking for investments or self-use – or even in some cases ultra-high net worths that can absorb this type of ticket size,” he said.

Also read: Wealthy investors return to Asian property as retail, tourism climb

Rothstein agreed that grade B office assets are the type that are most often traded and available to the international investment community, although with some caveats.

“Well priced, well-located properties which do not require expensive earthquake safety retrofitting could trade and find buyers. Office properties which do not meet this criteria may have difficulty attracting buyers,” Rothstein said.


Investing in locally listed real estate investment trusts or listed property developers is another way for overseas investors to gain exposure to the parts of the real estate market tightly held by local actors.

As is the case for the broader equity market, real estate-related stocks are starting to see a shifting paradigm in conservatively managed, corporate Japan.

“Less so in sector allocations, there is more uniquely growing activity around M&A in the listed real estate side. We see that as being helpful for the efficiency in that market, and ultimately for capital flows coming into Japan,” Heitman’s Fu said.

Also read: Can soaring Japanese equities go even higher?

“M&A activity and opportunities over time in the listed real estate space would be an important factor in considerations around how our Japanese equities team deploys across the different real estate names,” Fu said.

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