Institutions make U-turn on Japanese real estate flows
After record-breaking flows in the first quarter of 2024, investors into Japan’s real estate sector deserted the sector in the second quarter, as investors anticipated Bank of Japan’s July rate rise by pulling allocations.
About $6 billion flowed into the sector in the second quarter, 39% lower than the same period one year earlier, according to MSCI’s Asia Pacific Capital Trends Q2 report, published in early August.
The first quarter was also the biggest quarter on record for Japanese real estate, when $13.4 billion flowed into the sector (MSCI began collecting data in 2007).
Savills Japan
Andy Hurfurt, director, institutional investment advisory, at Savills Japan, pointed to institutional investors’ greater caution in the run up to the Bank of Japan interest rate hike.
“Similarly, interest from family office and high-net worth investors seeking to capitalise on the weak yen began to subside as the prospect of a stronger currency began to materialise,” he told AsianInvestor.
It was also the largest decline in flows among the region’s major markets, and the second largest across the entire region in percentage terms, after Taiwan, according to the report.
The report pointed to “trades of office buildings slowing markedly from the first quarter tally” on the back of “expectations of rate rises, which were eventually realised in July, [which] may have tempered investor expectations for traditional real estate sectors.”
REACTION OR ANTICIPATION?
However, Hurfurt suggested the latest flow data could be misrepresenting sentiment.
“Many second quarter transactions are yet to be made public and a number of significant transactions on track to complete before the end of the year,” he said.
He pointed to last year’s high baseline of transactions, with several large deals closing in the same quarter last year.
These included the ¥92 billion ($636 million) sale of Tokyu Plaza Ginza and the ¥65 ($450 million) billion sale of GLP Alfalink Sagamihara 4.
Alice Crowley, director, international capital at Knight Frank in Singapore told AsianInvestor that although July’s rate rise was small, it could still push up the sector’s yields, which are already tight.
Knight Frank Singapore
It also makes investors hold off new allocations, as they keep an eye on wary of exchange rate and future rate rises.
“[Rising] interest rates widened bid-ask spreads… and pressure on real estate yields compelled investors to revisit their cashflow projections and examine the impact on exchange rates as well as future monetary decisions, resulting in delayed decision making in the second quarter.
“Buyers expecting a discount due to the rise in funding costs are unlikely to be met with acquiescent sellers and there will be a period before expectations converge.
"Most investors have adopted a wait-and-see approach. However, we expect this to be a temporary blip as interest in Japanese real estate remains strong,” she said.
DOMESTIC LEAD
The slowdown was driven more by domestic investors, whose flows fell by 60% between the first and second quarters, than those from abroad, where flows fell by 20%.
“This is interesting because we would typically associate foreign capital as being more sensitive to Japan macro factors, including interest rate rises,” James Kemp, head of Asia-Pacific real estate, Macquarie Asset Management, Sydney told AsianInvestor.
Japan’s real estate sector has been a principal beneficiary of investors waning interest for China in the past 18 months.
However, the growth in cross-border transaction volumes has also been masked by increasing appetite for the sector on the part of domestic investors.
“During 2023, cross-border transactions by institutional funds, family offices and high-net-worth-individuals comprised approximately one quarter of total transaction volumes, in-line with the 25% to 30% range seen in prior years. This reflects the continued dominance of domestic blue-chip real estate companies, especially when it comes to the largest volume transactions,” said Hurfurt.