As Japanese multifamily residential assets, or rental home properties, become an increasingly sought-after subcategory among real estate fund managers and institutional investors, the market has also become more crowded.
The underlying demand for rental homes in Japan’s largest cities is based on continuously strong fundamentals.
Interest is still strong in the multifamily space, where international investors have been able to assemble large portfolios with core investment profiles.
The market, however, has become increasingly crowded, which has put downward pressures on cap rates, according to Joel Rothstein, who chairs the Asia real estate practice at US-based law firm Greenberg Traurig in Tokyo.
“Those seeking out higher returns are looking beyond markets like Tokyo and Osaka to other cities and are increasingly entering into forward purchase contracts involving properties that are planned or under construction,” Rothstein told AsianInvestor.
These deals are slightly riskier than transactions involving existing and operating properties — but forward purchase deals might offer potentially higher returns, he added.
M&G Real Estate has been investing in the Japanese residential market for over 10 years. Richard van den Berg, fund manager for M&G’s Asia property strategy, recognises the higher number of bidders for deals.
“While the sub-market is indeed getting more crowded with investors, we believe there is continuing strong demand for high quality and institution-owned multifamily housing in good locations given the changing consumer preferences, urbanisation, and generally older stock across the market,” van den Berg told AsianInvestor.
Looking across the Asia Pacific (APAC), M&G’s van den Berg considers Japan’s multifamily residential market the most developed in the region.
Furthermore, he sees the sector continuing to grow as a result of changing consumer preferences such as smaller households and the high cost of owning versus the benefits and flexibility of renting.
Positive net migration, particularly amongst younger people into the key employment hubs of Tokyo and Osaka, saw a total net migration of more than 90,000 and 14,000 across the ages of 15-29 last year, van den Berg pointed out.
“The sector has also shown to deliver steady and resilient income streams during volatile periods such as the GFC and Covid pandemic.
"While rental escalations have been limited given the lease structures and low growth environment generally, we see the current inflationary pressures providing a relatively attractive growth opportunity. These characteristics make this sector an appealing asset class for core investors,” he said.
In the first half of 2023, capital flows into Japan commercial real estate from overseas totalled $4.26 billion, almost the same as the first half of last year ($4.29 billion), according to MSCI Real Assets (formerly Real Capital Analytics) data.
NEWER IS BETTER
One way to circumvent the crowded market for multifamily assets is to build them from scratch.
In August, UBS Asset Management's Real Estate & Private Markets (UBS AM) business launched a multifamily development project in Japan, with a projected value of over $230 million upon its expected completion in early 2026.
“We have mandates to invest in core, value-add and ground-up development and continue to see attractive opportunities across the risk-return spectrum in the Japan multifamily sector. Generally speaking, we like development as a strategy as it provides access to modern products while offering attractive returns and less planning and development risk relative to many other markets,” John Mowat, head of real estate Asia Pacific at UBS AM, told AsianInvestor.
The project in Kiba, east of central Tokyo, is set to deliver 563 apartments over 18 floors, along with ground-floor retail space pre-leased to a supermarket operator.
The project is being developed in partnership with a local listed developer on behalf of a separate account mandate.
“From a capital markets perspective, we have seen cap rate compression in recent years as institutional investors have increasingly come to appreciate the attractive fundamentals and defensive risk profile of the sector," Mowat said.
"Competition for deals remains very strong, institutionalisation of the sector continues, and along with this comes increased liquidity at exit."
Still, from an occupational market perspective, the supply-demand balance remains in check, Mowat argued. He sees a strong net internal migration in major cities such as Tokyo and Osaka.
“There is also a lot of aged stock in the market and tenants will continue to be drawn to new buildings offering modern amenities and leading ESG credentials,” Mowat said.