JAPAN GAINING UPPER HAND IN ATTRACTING FOREIGN CAPITAL

But investors remain ‘very silent on China’ despite support measures and loose monetary stance

The end of Japan’s ultra-loose monetary policy is unlikely to deter foreign investors from snapping up commercial property in the world’s fourth-largest economy, as Tokyo and other large metropolises remain attractive destinations for capital looking to acquire assets such as hotels, multifamily buildings and logistics facilities, according to analysts.

This view on Japan was in contrast to the outlook for China, where various support measures and a loose monetary stance had failed to revitalise foreign investment demand for commercial property, they said.

Last month, the Bank of Japan (BOJ) wound up its eight-year policy of negative interest rates, which had been put in place to encourage consumption and boost investment. The central bank pegged rates to between 0 and 0.1 per cent and signalled a potential rate rise if consumer prices continued to firm up.

Meanwhile, China’s central bank has been on an easing trajectory, cutting 25 basis points in banks’ five-year loan prime rate, the largest shave since the rate was designated as the main benchmark in 2019, as recently as February.

“From the commercial property perspective, the appetite is quite a tale of two countries: foreign investors continue to look for opportunities in Japan but remain very silent when it comes to China,” said Henry Chin, global head of investor, thought leadership and head of research for Asia-Pacific at CBRE.

The flows of foreign money into commercial property reflect the shift from China to Japan.

In 2019, foreign investment in Chinese commercial property reached US$12.3 billion, almost double the US$6.2 billion invested in Japan, based on transactions worth US$10 million or more tracked by CBRE. By 2021, this gap had narrowed, with China getting US$10.1 billion and Japan US$6.5 billion. In 2022, the two received roughly the same amount, US$8 billion for China and US$7.7 billion for Japan. Last year, the tables turned, with Japan taking in US$5 billion and China getting just US$3.2 billion.

China’s share of total foreign investment in property fell from 38 per cent in 2019 to just 8 per cent last year, while Japan’s share had been relatively steady at 21 per cent in 2019 and 17 per cent in 2023, data cited by JLL showed.

“Foreign investors’ appetite could not be stronger for Japan at the moment,” said Pamela Ambler, head of investor intelligence for Asia-Pacific at JLL. “Despite the recent BOJ announcement, Japan is still the only market with accretive cashon-cash returns. In fact, monetary policy may drive domestics to look overseas, opening up opportunities for foreign investors to enter the market.”

Hotels are a particularly strong lure for investors, as tourists continue to flock to destinations such as Kyoto and Osaka.

Hong Kong-based private equity fund Axe Management Partners is making a major bet on Japan’s commercial property prospects. In March, it completed the acquisition of three hotels in Osaka for 10.7 billion yen (HK$552.5 million).

Currently known as WBF Honmachi, WBF Kitasemba East and WBF Kitasemba West, the hotels have a total of 500 rooms. They are slated to relaunch in the last quarter of the year as part of Garner hotels, a brand under British-headquartered IHG Hotels & Resorts. They will be the midscale brand’s first hotels outside North America.

“It’s very easy to see that this is an attractive market,” said Gary Kwok, founder and CEO at Axe Management. “In terms of the interest rates, it has a positive carry, and that obviously attracted foreign capital looking for a positive yield. In our view, one of the key asset classes is hospitality.”

Axe Management, which had earmarked more than US$85 million for the acquisition and renovation, was aiming for a return of as much as 20 per cent on the investment, Kwok said.

As for China, opportunities were still present, especially with a number of distressed assets available in the market, said Sam Lau, Axe Management’s founder and managing partner.

“The market is very huge, and China is a place that we can never ignore,” he said.

However, the company was more selective about investments there, he added, looking into hotels, retail and student housing in first-tier cities but avoiding residential properties and offices.

Both Chin of CBRE and Ambler of JLL expect continued strength in the Japanese commercial property market.

“Japan has strong fundamentals with its strong, stable and transparent economy,” Ambler said. “The yen has also depreciated against major currencies such as the US and Singapore dollars and has interest rate differentials to other countries, which leads to favoured lending terms and yield differences.”

Foreign investors, meanwhile, were likely to have a limited appetite for China for some time, Chin said.

“Japan and China are in different cycles when it comes to commercial property,” he said. “We continue to see growth in Japan while China is currently going through repricing with limited leasing demand.

“The Japanese economy continues to outperform, as the country has seen real wage growth … But the Chinese economy faces challenges while the unemployment rate remains high.”

Foreign investors’ appetite could not be stronger for Japan at the moment PAMELA AMBLER, JLL