Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.
Just like in every other business sector, China’s growing presence is having an increasingly large impact on the Japanese real estate market. Initially, the impact was mostly negative, as global institutions tired of waiting for the long-promised recovery in Japan turned their attention to the booming property market in China.
More recently, however, rising Chinese wealth and a variety of government and business risks have led to a more complex situation resulting in growing inward investment in Japanese property from Chinese individuals and companies.
Since the Lehman shock, China has been one of the few bright spots in the global property market. In 2009, with the U.S., Europe and Japan still in deep distress, China property prices boomed to the extent that the Chinese government has been looking for ways of cooling down excess speculative investment by restricting bank lending.
Given the legal and business complexities of buying Chinese property, major global funds have generally been cautious about making large investments.
An increasing number of leading international and Asian property funds have made their first investments in China by now, and China’s allocation in global and regional funds is only expected to continue rising, mainly at the expense of Japan’s share.
In the U.S., distressed investment opportunities abound, reducing the need for many funds to look abroad. In the UK, the debt market has recovered much faster than the U.S. or Japan, helping prices to recover somewhat, but more importantly, facilitating greater liquidity through higher transaction volume.
Illustration by Phil Couzens
In Japan, by contrast, debt remains scarce and leverage is low—at most 50 percent of the transaction price. Outside the central five wards of Tokyo (Minato, Chiyoda, Chuo, Shibuya and Shinjuku), debt is virtually impossible to obtain. Prices on medium- to high-quality properties remain stubbornly high, however, yields remain too low to be attractive to any but the most conservative, so-called “core” investors.
Institutional investors tend to focus on the office market, which is generally the most transparent and easiest asset class to manage. At the moment, though, the office market has the worst fundamentals of any real estate asset class in Japan, so many international funds have been turning their attention increasingly to China.
Japanese real estate companies and real estate investment trusts (REITs) have not yet been active in China, although that could change soon. Over the last few months, the Japanese capital markets have improved to the extent that blue-chip property companies and their affiliated REITs have been able to tap the public markets for equity and debt offerings, giving them fresh dry powder to make acquisitions both domestically and potentially in China.
While the Japanese property sector has been largely absent from China so far, Japanese retailers and manufacturers have been going to China in droves. Japanese consumer and industrial brands are extremely popular in China and with few growth prospects for the domestic market, many Japanese companies have come to the conclusion that their only hope to survive is the Chinese market.
Back in Japan, the presence of Chinese individuals and companies is rapidly growing. Walk down Chuo-dori in Ginza and it feels like there are more Chinese tourists than Japanese spending money at the department stores. During the recent Chinese New Year, ski slopes in Karuizawa and Niseko were full of Chinese visitors. I frequently hear that Chinese individuals have been buying resort condos around Japan.
In the commercial property sector, Chinese investors are said to be the winners of recent auctions for hotels in Hakone and Niseko. These trends are good for the Japanese property market, the Japanese economy and Japan-China relations. Unless the Japanese government does something else to stimulate banks to lend more, however, the Chinese may soon be the only investors left willing to buy Japanese property.
