This fuelled a sharp rally in the yen, causing a disorderly unwinding of the yen-funded “carry trade” and contributing to a staggering 20 per cent decline in the Topix index, one of Japan’s two main equity gauges, in the first three trading sessions in August. The meltdown in Japanese stocks caused an eruption of volatility in global equity markets, heightening concerns over the BOJ’s exit from negative rates.
Japan’s real estate industry is not immune to the fallout from the move away from ultra-loose policy. In the residential market, about 75 per cent of mortgages are floating-rate loans tied to the Tokyo Interbank Offered Rate, which fluctuates according to market conditions. Mitsubishi UFG Financial Group, Japan’s biggest bank, said it plans to raise its short-term prime rate for home loans for the first time in 17 years, with other lenders expected to follow suit.
Monthly mortgage payments in Japan can only be reset once every five years, delaying the pain for mortgage holders. However, the signalling effect of higher rates in an economy where consumer confidence has been hit by persistent price rises and the yen’s 27 per cent fall against the US dollar since the start of 2022 poses a significant risk.
05:46
Why investors can expect more market volatility after recent global stock sell-off
Why investors can expect more market volatility after recent global stock sell-off
In the commercial property market, Japanese-listed real estate investment trusts (J-Reits) account for a large share of investment transactions, according to data from CBRE. While higher borrowing costs would weigh on property prices and reduce J-Reits’ net asset value, a sharper and sustained fall in stock markets would make it difficult for the trusts to issue equity and grow.
However, while the end of negative rates has brought the vulnerability of Japan’s property sector to the fore, the resilience and appeal of the market should not be underestimated.
First, the BOJ is having a hard enough time normalising policy, never mind raising rates sharply. With one of the highest public debt burdens among the world’s major economies, a large share of floating-rate mortgages and a fragile economy still struggling to overcome a decades-old deflationary mindset, Japan will be lucky to raise rates further without causing more severe turmoil.
The BOJ admitted as much on August 7, when deputy governor Shinichi Uchida said the central bank would refrain from increasing borrowing costs when markets were volatile. This is a strong signal to property owners, investors and developers that policy will remain highly accommodative, supporting the real estate market.
Second, Japan has many unique attributes. No other country in Asia has such a large, mature, liquid and relatively transparent commercial property investment market. A bigger premium is placed on Japan’s political and economic stability given the severe deterioration in foreign sentiment towards China, the other large and widely traded market in Asia. For many global investors, “there is no alternative” to Japan, said Shai Greenberg, a senior director at JLL.
Houses and residential buildings in Hadano, Kanagawa prefecture, Japan, on August 4. The Bank of Japan’s second interest-rate increase in nearly two decades is set to hit millions of personal mortgages, raising borrowing costs for homebuyers for the first time in a generation. Photo: Bloomberg
Moreover, the investor base in Japan is quite diverse. While domestic institutional investors account for the bulk of transaction volumes, Japan was the second-largest recipient of foreign investment in Asian commercial real estate in the first half of this year.
The country also boasts the only institutionalised rental housing market in the region. Unlike in the US, offices are not a dirty word, with the sector accounting for the largest share of investment activity since the Covid-19 pandemic erupted.
Third, Japan has emerged as an unlikely source of rental growth following decades of deflation and meagre rent increases. In June, nominal wages grew at an annualised pace of 4.5 per cent, the fastest rate since 1997. At a time when investors are finding it much more difficult to generate attractive returns, the prospect of decent rental growth in Japan is a boon to the multifamily market. “Until recently, nobody dared to assume there’d be strong rental growth,” Greenberg said.
Customers wait outside a restaurant in Tokyo, Japan on, August 2. In June, nominal wages in Japan grew at an annualised pace of 4.5 per cent, the fastest rate since 1997. Photo: Bloomberg
However, the risk is that other leading property markets attract more interest. Commercial real estate prices in Japan, like most other Asian markets with the exception of Australia, have been slow to adjust to the rise in global rates.
Although Japanese assets offer a positive spread over the cost of debt, US properties have repriced sharply. When the Fed starts to ease policy, US assets could hold more appeal. From a pricing standpoint, Japan is in danger of becoming “the odd one out”, said John Howald, managing director, real assets and private equity, at Newells Capital. “Other markets are starting to look more attractive,” he said.
Still, the United States has its own problems. Japan will continue to benefit from low borrowing costs, political and economic stability and, at least in Asia, the lack of an alternative. It is an enviable and potent combination.
Denial of responsibility! Chronicles Live is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – chronicleslive.com. The content will be deleted within 24 hours.
