State of the Market

According to the Nikkei, J-REITs, private domestic funds, and foreign funds each currently have around 3 trillion yen of real estate assets under management. Because of the fierce competition for good buildings, expected yields for prime Tokyo office have declined from 6.3% in 1999 to 4.4% now, and the best assets can command less than 3.5%. At the same time, average leverage has gone up, from around 60% last year to more than 70% now. The search for yields has forced fund managers to diversify their strategies, making huge inroads into more risky plays such as regional retail, leisure/hospitality, and redevelopment. J-REITs are feeling the heat, too: many are also dabbling in development and some have been prompted to sell off less profitable buildings.
Meanwhile, more investors, both domestic and foreign, have continued to enter the market, expecting to make average leveraged yields north of 10%. Once a field dominated by US investment banks, foreign investment in Japan's real estate market now also involves real estate firms, hedge funds, and institutional investors from the US, Asia, Australia, Europe, and the Middle East. The reasons are twofold: expectations of a rise in rental income as the Japanese economy recovers, and also a sense that the US and European real estate markets are heading toward a cyclical decline. It should be noted, however, that their interest is speculative, and may not be sustainable if conditions in Japan become slightly less attractive, such as an interest rate rise. That being said, Japan's standing as a mature economy with the deepest and broadest real estate market in Asia, and the fact that its markets are finally recovering after a 15-year slump, should ensure continued investor interest for some time to come.
So when is the current cycle going to end? The jury is still out, as Andy Xie of Morgan Stanley wrote this week:

The global savings glut is the key factor in the rise of the global financial economy… he abundance of savings globally has made it more and more difficult to achieve high returns from physical investments. It has made financial speculation an attractive alternative for achieving returns. The rising demand for risk assets has made these assets less volatile, which increases their value ... if demand for risk assets is permanently higher, their value should be higher. It is still too early to say whether this higher risk appetite is a cyclical or permanent phenomenon.
The price of the growth is a declining risk premium…As long as the world keeps lowering the risk premium, financial markets can sustain growth by moving money across the world effortlessly, and I believe it would take a shock to trigger the risk reduction trade that could spell the end of the current cycle.

Japan Real Estate Blog
Tags : japan, real estate, property, investment, 不動産