Meanwhile, the People's Bank of China has been on a path of monetary easing, with its latest decision in February cutting banks' five-year prime lending rate (LPR) by 25 basis points, the biggest cut since the LPR was designated the key interest rate benchmark in 2019.
People take photos in the Shinjuku area of Tokyo on March 30, 2024. Photo: AFP
“From a commercial real estate perspective, demand is split between the two countries. Foreign investors continue to seek investment opportunities in Japan but have remained silent on China,” said Henry Chin, CBRE's head of global investor, thought leadership and research, Asia Pacific.
Foreign capital inflows into commercial real estate reflect a shift from China to Japan.
Foreign investment in commercial real estate in China reached $12.3 billion in 2019, nearly double the $6.2 billion in Japan, according to all transactions tracked by CBRE that are over $10 million. By 2021, the gap had narrowed, with China at $10.1 billion and Japan at $6.5 billion. In 2022, the two countries received roughly equal amounts of foreign investment, with China at $8 billion and Japan at $7.7 billion. Last year, the tables were turned, with Japan at $5 billion and China at just $3.2 billion.
China's share of total foreign investment in real estate fell from 38% in 2019 to just 8% last year, while Japan's remained relatively stable at 21% in 2019 and 17% by 2023, according to data cited by JLL.
“Foreign investor interest in Japan is currently at an all-time high,” said Pamela Ambler, head of investor relations for Asia Pacific at JLL. “Despite recent announcements from the Bank of Japan, Japan remains the only market where cash-on-cash returns are on the rise. In fact, monetary policy may encourage domestic investors to look overseas, creating an opportunity for foreign investors to enter the market.”
Tourists continue to flock to tourist destinations such as Kyoto and Osaka, making hotels a particularly attractive investment destination.Hong Kong-based private equity fund Axe Management Partners is one of the investors making big bets on the future of Japanese commercial real estate, having bought three hotels in Osaka for 10.7 billion yen (US$71 million) in March.
Currently known as WBF Honmachi, WBF Kitasemba East and WBF Kitasemba West, the hotels will have a total of 500 rooms. They are scheduled to reopen in the last quarter of this year as part of Garner Hotels, a brand of UK-based IHG Hotels & Resorts. They will be the mid-scale brand's first hotels outside of North America.
“You can clearly see that this is an attractive market,” said Gary Kwok, founder and CEO of Axe Management Co. “There's positive carry on the interest rate side, which has obviously attracted a lot of foreign capital looking for positive yields. And one of the key asset classes, in our view, is hospitality.”
Axis Management has invested more than $85 million in the acquisition and renovation, and is aiming for a return of up to 20 percent on its investment, Kwok said.
Sam Lau, founder and managing partner at Axe Management, said there were still opportunities in China, especially given the large amount of distressed assets in the market.
“The market is so big, China is a place we could never ignore,” he said, adding that the company is being more selective about its investments in China, looking at hotels, retail and student housing in first-tier cities, but avoiding residential properties and offices.
Both CBRE's Chin and JLL's Ambler expect Japan's commercial real estate market to remain strong.
“Japan has a strong foundation with a strong, stable and transparent economy,” Ambler says. “The yen has also weakened against major currencies such as the US dollar and Singapore dollar, and interest rate differentials with other countries create favorable lending terms and yield differentials. Japan has clear exit routes and is also a relatively liquid market.”
Meanwhile, foreign investors are likely to have limited interest in China for the time being, Chin said.
“Japan and mainland China are in different cycles when it comes to commercial real estate,” he said. “Japan continues to see growth, while China is currently seeing limited rental demand and a rebalancing of prices.”
“The Japanese economy continues to perform well, experiencing rising real wages. However, the Chinese economy faces challenges as unemployment remains high.”