Property demand in Japan heats up

July 30, 2016

By Ansuya Harjani, CNBCGlobalPost Writer

Japan’s highest mountain Mount Fuji rises up behind the skyscrapers dotting the skyline of the Shinjuku area of Tokyo at sunset on Oct. 21, 2012.
Kazuhiro Nogi

As Japanese corporate sentiment gets a boost from "Abenomics" the country's sluggish property market is showing signs of life, with office prices in Tokyo expected to surge 10 percent over the next 18 months, according to one of the world's largest real estate funds.

AXA Real Estate, the property arm of Europe's second largest insurer that has 45 billion euros ($59 billion) of assets under management, is now looking at buying office space in Tokyo, says its global head of Asia Frank Khoo.

He forecasts higher demand for commercial property in the coming months stemming from an improvement in corporate profitability in Japan.

"The weak yen is going to help the exporters and smaller manufacturers as well, this should lift confidence and translate into higher demand. With higher demand we should see vacancy coming down and rentals going up," Khoo said. "Companies are going to use current low rental rates to move from outer Tokyo into inner Tokyo for better quality buildings [in turn pushing rentals up]," he added.

He forecasts vacancy rates will fall to 4 percent in 2014 from 8 percent currently, adding that office rents, which have largely remained flat for the past three years, will climb 1-2 percent this year and 2-4 percent next year.

Tokyo's central business district is currently ranked the world's fifth most expensive market to rent office space in, according to global real estate services firm Cushman and Wakefield, down from third place in 2012.

Investors have flocked into Japanese real estate investment trusts (REITs) in recent months on hopes "Abenomics" – or Prime Minister Shinzo Abe's economic revival plan that pushes for both monetary and fiscal stimulus – would drive a recovery in the property market.

Shares of REITs including Japan Real Estate Investment and Nippon Building Fund have surged more than 50 percent year to date. "The REITs are back in the market acquiring assets," Khoo said.

In further evidence of rising optimism over the property sector, Japan's Nippon Prologis REIT, which owns and manages warehouses across the country, raised $1.08 billion through an initial public offering in February after pricing the stock at the top of the range.

Khoo added that with Japanese government bond yields look set to remain low, there has been a shift in attitude towards investing in property among both institutional and retail investors.

"If you look at the mom and pops, they are really hungry for yield. With 10-year Japanese government bonds below 0.6 percent, if you can get a 4 percent yield in commercial real estate, or 3.5 percent investing in a Japanese REIT, I think money will go that way," he said.