Category: Swhengtee Article Published: Thursday, 20 August 2015 18:17
There is a seismic change in investors’ attitude towards Japan as ‘Abenomics’ takes hold and this is reflected in the rising foreign appetite for Japanese real estate. A gaijin insider, Ziv Nakajima-Magen, explains the dynamics behind this.
Japan, known to most of the world as one of Asia’s (and the world’s) top culinary, historical and technological hotspots, also has several less known but equally significant titles it can boast of. One of the most interesting crowns it wears is that of being Asia-Pacific’s largest and most active property investment market, and the fourth biggest market globally.
This fact comes as a surprise to most. After all, Japan has gained international notoriety as being a closed, culturally isolated environment; suffered from economic malaise and deflation over the last two decades; and lost its innovative, cutting-edge technological “mojo” to countries like South Korea, Taiwan and China since the early 1990s. Why then, does it remain so popular for property investment?
The answer lies in several combined factors:
- Since PM Shinzo Abe rose to power in 2012 on an agenda consisting mainly of economic rejuvenation policies dubbed “The Three Arrows”, or more fondly “Abenomics”, consumer sentiment and international approval have soared. The country’s economy – although in a temporary “hang-over” slump for one quarter following a consumption tax hike – has managed to halt and reverse the deflationary trend that has plagued it since its bubble burst back in 1989. It has clawed back to a steady 1.5% annual growth although the IMF predicts a slight drop to 1% for 2015, due to the aforementioned tax hike and another hike scheduled for October. Unprecedented monetary easing by GDP ratio (or “money printing” as some like to label these Quantity Easing efforts), alongside infrastructure spending and local currency devaluation efforts, have seen exports and development projects take off as they haven’t done in over 20 years – leading to significant logistics, commercial and retail property market activity boosts, followed closely by residential condominium transactions.
- The great West to East shift in wealth, which has seen capital pouring into Asia and away from the USA and Europe, has been met with strict cooling measures in some of the region’s top financial markets such as Singapore, Australia and Hong Kong. These large cash reserves are being directed into other countries such as the Philippines, India, Indonesia – and Japan.
- Of these latter countries, Japan offers the most stable and well regulated business environment. While in other Asian countries, the English-speaking investor is faced with armies of Englishspeaking, sale-trigger happy property professionals, and then has to sift through the rabble trying to locate the rare few trustworthy, reliable operators; in Japan the picture is exactly the opposite. The vast majority of professionals are entirely reliable, trustworthy to a fault (and leave a paper trail several miles long) and the tenants are among the world’s best, with reliable, clean and damage-free, long tenancies being the norm. However, the Japanese are extremely foreigner-shy, do not speak English as a rule and are reluctant to deal with non-Japanese even when these foreigners speak Japanese or live in Japan. Once that cultural barrier is penetrated, Japan offers a smooth, easy to navigate and headache-free purchase, management and sale environment.
Magnet for investments
All of the above, together with the government’s outspoken decision to “open Japan up to the world” (a policy which is still very much a pipe dream and has yet to trickle down to the ground), have resulted in huge amounts of foreign capital directed towards Japan’s equity and property investment markets since 2012. Even local capital, which Japan has huge amounts of due to the Japanese tendency to “sit on” cash reserves, is finally being invested as opposed to the tight-fisted policy practised over the last two decades.
In PricewaterhouseCooper’s annual “Emerging Trends in Real-Estate: Asia-Pacific” paper, one of the industry’s top analytical publications, several paragraphs stand out as a chronological chart of events in Japan over the last few years–
2013: “…Japan provides a level of stability that really doesn’t exist in [some] other markets…although many foreign funds have shut down their Japanese operations in recent years, new arrivals are now putting feet on the ground…next year…[is]… going to be very competitive…”
2014: “…increase in sovereign wealth and institutional capital now aimed at Asian markets…in the post-global financial crisis environment…One of the biggest recipients of these (and also of global) flows is Japan, where the government has begun a massive monetary stimulus program aimed at jump-starting inflation in the economy…”
2015: “…competition from local real estate investment trusts (REITs) forcing investors to branch out to cities other than Tokyo…substantial amounts of pension funds capital emerging…[REITs] remain the biggest buyers in Japan…highest transactions volumes in 2013 since 2007…investor sentiment remains generally positive…overall shortage of core product…rising prices and demand…”
It’s important to note, however, that these reports reflect the movement of the global investment herd. Early birds with some foresight, such as Goldman Sachs and Deutsche Bank, have been positioning themselves in Japan since late 2011 – at the first sign of stabilising commercial rents, which many interpreted as the market having bottomed out.
Challenging but rewarding
Japan is a promising market and a fiercely competitive one too, particularly in and around Tokyo and Osaka, the country’s biggest and most well-known metropolitan centres.
Large companies such as investment banks, sovereign and insurance/ pension funds can afford to establish offices and hire local staff, apply for local company registration, bank loans, and so on. Other investors may lack similar resources and even if they can afford it, have to “justify” those expenses by investing in upper market assets, living up to bank loan benchmarks as far as deal size, location and other criteria go – all of which tend to put a dent in the diversity available to them.
When it comes to smaller investors, be they individuals, families, or small to medium businesses, further challenges arise:
- Japan is highly ethnocentric and foreigner-shy, in spite of the government’s official attempts to drag it screaming into the global arena. Real estate agents, insurance companies, building management companies, renovation/repair specialists, property managers and bank personnel simply do not speak English (or any other language besides Japanese); have no inclination to deal with foreigners, let alone those residing outside of Japan – and have no real reason to do so, considering the size of the local market at their disposal. The situation isn’t as bad in Tokyo and Osaka – but these cities unfortunately provide very low returns, and offer fierce competition for every deal, as PwC reports above and as our experience suggests.
- Banks, like the rest of Japan’s businesses, are also very difficult to deal with, and do not offer workable solutions for foreigners who wish to open local accounts and access them from overseas. They have almost no English-speaking staff, do not communicate via email, and have no convenient online/ international transfer facilities. Coupled with the fact that almost no company in Japan will be able to accept payments or remit funds overseas (think bill payment, rent collection, etc), this becomes an almost insurmountable obstacle for any foreign investor who doesn’t have a local presence.
- Statistical data on locations, types of properties, actual listings, population figures, industry information and even transportation simply do not exist in English, which makes deal analysis and mining nearly impossible for anyone without a local presence.
How then does one capitalise on this attractive and huge market? More on that in our next instalment in this series.
Ziv Nakajima-Magen, an Australian, has been deeply immersed in Japan’s culture and business environment since 2003. He and his Japanese partner later established Nippon Tradings International (NTI) to assist investors in capitalising on Japan’s vast and lucrative property market.