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The Reiwa Era: a new dawn for Japan commercial real estate?

If the Japanese real estate market is to avoid a repeat of the past, it will need to grow into a market that foreign investors cannot afford to leave.

May 15, 2019
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After three decades on the throne, Japan’s Emperor Akihito has handed power over to his son, marking the end of the Heisei era.

The Reiwa Era has begun. New eras are traditionally a time when the Japanese reflect on the past in order to gauge what may lay ahead. For many in commercial real estate, these reflections will linger on the market crash in 1992, the Asian Financial Crisis of 1997, zero interest rates, an aging population, natural disasters and a nuclear meltdown. 

But for the future of the industry, perhaps nothing is as important as considering the ramifications of the 2008 financial crisis.

An era of flux

During the Heisei era, nothing had a bigger impact on real estate than the global financial crisis, says Kenichi Negishi, Head of Capital Markets, JLL Japan.

Before the crisis, foreign investors had flocked to Japan, which was viewed by European and U.S. investors as one of the best buying opportunities in the world.

When Lehman Brothers filed for bankruptcy in September 2008, it was initially regarded as “a fire on the other shore” that would only have a trivial impact on the Japanese economy. But the country subsequently found itself mired in a recession that would last longer than anywhere else in the world. Liquidity dried up as foreign investors retrenched to their home markets. Memories of the sharp drop in the prices and number of transactions remain fresh today.

“I was struck by cases in which European financial institutions didn’t withdraw from the U.S., where they’d suffered most of their losses, but did withdraw from Japan, where their losses had remained comparatively light,” says Negishi.

“As the world entered a recession and became compelled to make more considered decisions about risk, investors became reluctant to put money into an opaque market for which the necessary data wasn't available. So, it chose a more transparent one.”

A new dawn

If the Japanese real estate market is to avoid a repeat of the past, it will need to grow into a market that foreign investors cannot afford to leave.

Foreign investors account for about 35 percent of Tokyo’s real estate investment market. With its shrinking population and an economy with little prospect of high growth, Japan’s market needs more overseas capital.

In this environment, transparency is key.

Japan commercial real estate transaction volumes have totaled around 4 trillion yen since 2013, according to JLL data, far smaller annual growth than comparative international markets with greater transparency.  

Improving the transparency will significantly contribute to attracting more foreign investors, says Negishi.

“When there is a crisis, foreign investors tend to look for highly-transparent markets so that they can accurately determine the relevant risk factors at that time,” he says, pointing to the U.K., U.S., and Australia. “The Japanese market will not be able to ensure that it continues to get chosen unless it improves its transparency further in the Reiwa era.”

Right now, the fundamentals of domestic real estate in Japan are strong. Despite a decreasing population on the nation level, populations of major cities are growing. Office vacancies in Tokyo and Osaka are at, or below, 1 percent while rents for offices and residential properties in these cities are still growing. Bank finances are robust, and affordable asset-backed loans will continue.

“In this market environment, it’s the right time to enhance transparency, so that when the market turns, Japan will be a place to stay,” Negishi says.