Research article


A boost in tourism from China, a burgeoning logistics sector and stable rental income from office space means things are looking bright in the Land of the Rising Sun.

Opportunistic tip: Japan Hotels and Hospitality – Medium term

The hospitality sector in Japan is well positioned to capture an inbound growth in tourists, especially from mainland China. Average daily hotel room rates (ADRs) have already grown by 40% over the past three years in Osaka, for example, and by around 20% in Tokyo. We expect this trend to continue as the Tokyo 2020 Olympics draw nearer and the global profile of the city increases. That said, investors in this space must be nimble and prepared to risk disruptive events which can dramatically change the outlook of the industry. These include natural & man-made disasters. Also, cap rates have compressed significantly of late so entry costs can be high. Income growth should justify this as we expect ADRs to rise further.

Value add tip: Japan Logistics – Mid to long-term

The logistics sector has been enjoying strong demand in Japan. E-commerce currently accounts for only 5% of all Japanese commerce compared with 15% in the UK and 10% in the US so has considerable scope for growth. Japan has a well-reported ageing demographic which we think will help e-commerce to grow. This, in turn has an important impact on the logistics sector, particularly ‘final mile’ logistics, which is instrumental in fulfilling orders in the face of what should be significant future demand for the convenience of home delivery. There is a substantial amount of logistics warehouse supply due to complete in Japan during the next year so there may be a temporary softening in values in the short term, possibly offering buying opportunities. In the mid to long term, we expect substantial growth in demand for the right premises in strategic locations, able to service the changeable needs of e-commerce delivery and returns.

Core (stable income) tip: Japan Grade B offices – Medium term

There are opportunities in core locations like Tokyo, Osaka, and Nagoya for investors looking for income. Grade B offices should continue to provide stable income streams to core investors. Potentially rents could even increase as sustained demand for office consolidations and upgrades is likely to continue, and lead to a steady recovery in the prime vacancy rates. Considering the ultra-low funding costs in Japan, the yield carry (NOI – borrowing costs) is currently an attractive 3% to 5%. Cash-on-cash returns should be comfortably higher.

Core plus tip: Japan Grade A offices – Medium term

Despite Grade A rents in Tokyo having risen steadily for consecutive quarters since Q2/2012, the rental average remains approximately 40% below the previous cyclical high of 2007. This not only mitigates downside risk but indicates that the market has an upside potential. In combination with strong occupier demand and reduced availability, the recovery in rents is expected to continue although tenants will tend to be price-sensitive in the event of any economic uncertainty. Recent uncertainty in the global economy has made property investors cautious, although slow but steady growth is expected in the rental market.

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