3 factors driving firms to invest in Japan's real estate

Investors can get a 5%-6% annual yield when investing in the Land of the Rising Sun.

Back in February, when borders were still closed, Peter Young and his team invested in real estate assets in Japan. And whilst that time was full of uncertainties, he was confident and driven to invest in the country because of three factors: currency play, growing housing demand, and stability.

In 2022, the yen hit a 32-year low against the US dollar, primarily driven by interest rates.

"The [currency] is creating a lot of interest in investing in Japan, particularly in real estate. With a lot of the concerns in the market about interest rates and inflation, Japan is a market that, historically and currently, has very attractive and low-interest rates and low inflation," Young, CEO and Co-founder of private equity investment firm, QIP, told Singapore Business Review.

"Japan has historically been an investment market where you arguably see stability over growth," he added.

Young also said that Japan is amongst the three Asia-Pacific countries, alongside Singapore and Australia, that may benefit from the stabilisation of the volatile markets.

Currency play and stability, however, are not what is mainly driving interest in Japan, but rather the growing demand for housing in the country. 

According to Young, the population is still growing in Japan, particularly in four Tokyo, Osaka, Nagoya, and Fukuoka. This comes as a shock to most investors given that Japan is known to have a shrinking population.

"Twenty years ago,  the average household in Japan had 2.7 people in a single household. Now it's 2.2," Young said.

In Osaka, where QIP made its first series of investments, Young said it has seen a 1.5% growth in population.

Over the same period, Young said about eight million new households came into the market as more people needed to be in working locations in the four cities.

"There are jobs, people are moving into these cities, the urbanisation story of these four major cities is very much happening. More homes are being created, smaller households are being created," Young said.

"Growing population in the urban cities and the growing needs
for housing are what is driving these big four major cities to be attractive investment locations in Japan," he added.

Since investing in February, Young said QIP has seen "reasonable capital value appreciation."

With a US$100m investment, Young said investors can look at a 5%-6% annual yield on the back of very low-interest rates in Japan.

"You can [also] look to secure early double-digit annual return, typically over a medium-term of about five years," Young said.

"I  think roughly a 6% yield return annually with a 10% internal rate of return or annual compounding return over a five to seven-year period; that is what we're looking at in terms of our investment returns," he added.

Looking ahead to the new year, Young believes Japan will continue to be an attractive location for real estate investment

"Many investors are still seeking stability and stable risk-adjusted growth as opposed to seeking opportunistic return so I think investors will continue to look at Japan," he said.