Cross Border Capital Flows into Japanese Properties in 2015-Risk-Off Sentiment Restrains Property Transactions-

4.Concentration on Tokyo

Cross border capital has shown an increasing preference for Tokyo, with the ratio of acquisitions in Tokyo growing larger (Chart-7).
Incidentally, investment property stock in Japan has been diversified with growing sectors such as logistics and healthcare facilities, which are primarily located outside of Tokyo. Even with this diversification the ratio of acquisitions in Tokyo has been higher, suggesting the trend toward Tokyo cannot be ignored.
It looks like foreign investors are concerned about the nationwide stagnation of the Japanese economy due to demographic declination. On the other hand, Tokyo can expect to improve its infrastructure in preparation for the 2020 Tokyo Olympic Games. However, even in Tokyo, quite a few investors will appear to consider only short term investments until the Olympic Games. It is imminent thus to maintain and reinforce the competitiveness of Tokyo as one of the prime Asian cities from a long-term perspective.

Chart-7 Volume and Ratio of Acquisitions in Tokyo by Cross Border Capital

5.Capital Inflows from the U.S. and Asia

The volume of Japanese property acquisitions by both U.S. capital and Asian capital declined by about 30% y-o-y in 2015. Though Asian capital increased its ratio slightly through the abovementioned aggressive hotel acquisitions, the volume of acquisitions by cross border capital shrank, regardless of the country.
While during the global financial crisis in 2009, U.S. capital drastically lost momentum as Asian capital maintained its pace, both declined to a similar degree in 2015 with U.S. capital holding steady and Asian capital suffering the effects of concerns over the Chinese economy.

Chart-8 Volume and Ratio of Acquisitions by U.S. Capital/Chart-9 Volume and Ratio of Acquisitions by Asian Capital

6.Final Note

In contrast to financial markets, the Japanese property market has not been noticeably affected by the risk-off sentiment. Leasing markets have been improving as representative Tokyo office rents continue rising (Chart-10), and quite a few market participants still forecast property prices to appreciate for the time being¹ with the stagnating equity market (Chart-11). In addition, the recent negative interest rate policy will possibly push excess liquidity into the property investment market.
However, different from the equity market where stock prices are available every day, the movement of property prices is difficult to grasp with limited transaction data. Therefore, transaction volume is considered as important data to understand the property investment sentiment, however, as seen above, the transaction volume declined in 2015, and, in particular, acquisitions by cross border capital declined noticeably.

Chart-10 Tokyo Office Market/Chart-11 Peak Period of Property Prices

With the uncertainty concerning the hard-landing of the emerging Chinese economy and the pace of U.S. economic growth, accompanied by the appreciation of the Japanese yen, it is not likely that cross border capital acquisitions of Japanese properties will increase for the time being. What is closely monitored is how much domestic capital generated by the negative interest rate policy will support the property investment market.
Although the trend of increased cross border capital acquisitions of Japanese properties ended in 2015, acquisitions of Japanese hotels by Asian capital still increased. As seen in the hotel case, properties with a growth driver, or positioned to benefit from the improved infrastructure of Tokyo will continue to attract cross border capital.

¹ Mamoru Masumiya “Outlook Reverses, Divergence in Forecasts of Property Price Peak from 2015 to 2018～The Twelfth Japanese Property Market Survey～” Real Estate Analysis Report, February 2, 2016