Japan Real Estate Witnessing Slowing of Inflow of Global Funds

Money from international investors helped fuel a sharp rise in Japanese property values, but the inflow of funds has slowed recently amid stress in the financial markets. Japanese land prices jumped at the fastest rate in 15 years, Japan's Ministry of Land, Infrastructure and Transport said. Commercial real estate in Tokyo, Nagoya and Osaka showed some of the biggest gains on the year.

International investors -- aided by a historically weak yen -- spent roughly 1.35 trillion yen ($10.2 billion) in 2022 on Japanese real estate, according to the real estate services group CBRE, up 12% from a year earlier. But in the fourth quarter, investments plunged 42% from a year earlier. One Japan manager at a U.S. investment fund noted a dramatic reversal from previous conditions where buyers would immediately snap up Tokyo properties.

The percentage of international investors describing their appetite to invest in Japanese real estate as strong or moderately strong declined by 33 points over a year to 48% in a January survey conducted by Mitsubishi UFJ Trust and Banking, marking the first reading below 50% since 2013. 

The denominator effect comes into play in a portfolio when a specific asset class becomes overweight, prompting a rebalance by holding off on additional investments or selling off portions of the holdings in that asset class. Global equity markets suffered a downturn last year, and without a rebound in stock values, investors will shy away from real estate investing.

Market players are also on edge over the risk of a global economic slump. The collapse of Silicon Valley Bank has demonstrated that the side effects from rate hikes have already started to impact the financial ecosystem. There is growing concern that the economy could weaken more than expected if banks tighten financing, which would erode demand for real estate.

In a survey conducted by NLI Research Institute, 82% of respondents in the real estate industry expect Tokyo's property values to peak by 2023. A retreat by foreign investors would undermine the prospect of land values rising further.

Japanese real estate remains a relatively attractive investment. The margin between the investment return from lease incomes and long-term interest rates exceeded 2 points for Tokyo offices at the end of last year.  For Sydney, that rate spread stood at negative 0.3 point.

However, this is an artifact of the Bank of Japan adopting policies that kept down long-term yields. Kazuo Ueda, who will step in as the new BOJ governor next month, has touched on the side effects of yield curve control. International investors face the need to account for a potential policy shift by the BOJ.