[NIKKEI Asia] Hotels are new darling of foreign investors in Japanese property

Hotels are new darling of foreign investors in Japanese property
Deals expected to maintain 2023 levels, thanks to weak yen

TOKYO — Investors remain bullish about Japan’s property market this year. Funding is easy to come by, despite the county’s first interest rate hike in 17 years in March. Further fueling their optimism is a flood of overseas tourists, workers returning to the office in droves and rising rents.

Not everything will be a repeat of last year, though. Hotels and apartment buildings, rather than warehouses, are expected to be hot in 2024, with less leveraged investors expected to play a more prominent role, including sovereign wealth and public pension funds, said Yuto Ohigashi, senior director of research at Jones Lang LaSalle (JLL), a property market specialist. Such investors are less affected by rising interest rates and have more capacity to deploy capital in overseas real estate, Ohigashi said.

The prospects for persistent inflation and a protracted monetary policy tightening in the U.S. are weighing on financial markets. But the Japanese real estate sector is expected to take those challenges in stride.

“U.S. interest rates not coming down so quickly is actually positive for the Japanese real estate market,” said Yoshikazu Funakubo, an analyst at Mitsubishi UFJ Trust and Banking (MUTB). Japan’s real estate market bucked a sharp 44% contraction in investment worldwide, growing 4% in 2023, thanks to its low interest rates. The attractiveness of the Japanese market would diminish if the U.S. were to cut interest rates sharply, Funakubo said.

Foreign investors typically account for 20% to 25% of property investment in Japan, according to JLL data, and they tend to be large players with deep pockets. “Their activity often sets the direction of the market,” MUTB’s Funakubo said.

Those investors include Singapore’s sovereign wealth fund, GIC, which bought a large portfolio of warehouses from Blackstone last year, and the Norwegian government pension fund, which acquired Mitsubishi Estate’s Tokyo headquarters building in 2020.

“In terms of valuation, property prices are getting relatively expensive,” Ohigashi said of the Japanese market, indicating that investors will be more selective about the types of assets and locations they put their money into. They will look closely at how much cash flow a property can generate.

The dollar-yen exchange rate will also be key. Foreign investors tend to view a cheap yen as positive, pointed out Koji Ishizaki, a senior credit analyst at Mizuho Securities. The weaker yen makes Japanese property less expensive in dollar terms. It has also fueled inbound tourism and lifted the bottom line of the hotel industry.

The yen hit a fresh 34-year low against the dollar recently, following higher-than-expected consumer price inflation in the U.S. in March, a fresh reminder that the interest rate differential will remain wide between the U.S. and Japan.

“I see the dollar-yen movement as a barometer of the interest rate difference between Japan and the U.S.,” said JLL’s Ohigashi. He expects Japan’s real estate market to remain buoyant this year. Real estate investment totaled 3.4 trillion yen ($22.3 billion) in 2023 and is likely to top the 2023 level this year, Ohigashi predicted.

Mizuho’s Ishizaki forecasts that the amount of investment will be flat to a little higher this year. “Most investors use debt to invest in real estate. They take out either long-term debts or short term ones, depending on which one offers more favorable rates,” Ishizaki explained. Reflecting the still relatively loose monetary conditions in Japan, 10-year government bond yields stand at 0.845% in Japan versus 4.622% in the U.S., while policy rates are forecast at around 0.15% at the end of 2024 in Japan, compared with around 5% in the U.S., according to QUICK FactSet data.

Foreign investment slowed sharply in the latter half of last year, but in the first quarter of 2024 foreign investors perked up. In February, a KKR-backed real estate investment trust acquired a portfolio of 29 warehouses from Logisteed, formerly Hitachi Logistics, for some 220 billion yen, while Alyssa Partners bought hotel properties from CapitaLand Ascott Trust, and from Hotel WBF, for 21.5 billion yen in March.

BlackRock bought apartment blocks in Tokyo and Yokohama for an undisclosed sum in January.

Last year, warehouses were the darlings of investors, thanks to the e-commerce boom. This year, warehouses are being outshined by hotels and apartments, with labor shortages and rising construction costs making investors wary of warehouse projects.

There is also talk of oversupply in the warehouse sector. By contrast, office space is in higher demand, with vacancy rates in Tokyo at three-year low of 5.47% in March. Apartment rents are also rising as people shift to renting instead of buying homes. Condo prices are at record highs in the Tokyo area.

An MUTB survey of 40 real estate asset managers in January found that hotels and apartments topped the list of property types where investors plan to put their money, at 45% and 50%, respectively, compared with 40% for warehouses.

Since October, overseas tourism has recovered to pre-COVID levels, resulting in more demand for accommodation and more investment in hotels.

Hotel room rates rose by about 60% on the year in November and December, and they are still rising at a pace of around 30% so far this year, according to consumer inflation data. This allows property owners to charge higher rents to hotel operators.

MUTB’s Funakubo said that rents from hotels have risen about 30% in the past two years, adjusted for inflation, the only property type that has generated solid returns among major categories.

The bullish trend is expected to continue. The United Nations predicts international tourist arrivals, which jumped 34% to 1.29 billion people worldwide last year, will rise another 16% to 1.49 billion people in 2024, surpassing the level of 2019.

Japan is not the only market that is booming, said Mizuho’s Ishigaki. “The number of people who travel is increasing across countries and Japan is merely benefiting from that trend.”

Sellers of hotel assets, however, may have trouble finding buyers if they become too aggressive with their pricing.

In January, there were reports that Singapore’s GLC offered to sell the Hilton Fukuoka Sea Hawk, a 35-story hotel complex, for 85 billion to 90 billion yen, a price tag considered steep. In March, Japanese railway operator Seibu was offering Tokyo Garden Terrace Kioicho, a 36-story office, hotel and residential complex in central Tokyo. The asking price is thought to be as high as $2 billion.

Investors are keeping a close eye on those properties, seeing them as a barometer of global demand for Japanese property assets.

Original source: [NIKKEI Asia] Hotels are new darling of foreign investors in Japanese property