Tokyo’s property boom looks built to last

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SINGAPORE- Tokyo is bustling. Office vacancy rates in the Asian city are around 3 percent, sharply lower than 15 percent for New York and 8 percent for London. Japan’s rising appeal to financiers, tourists and global buyout firms alike, plus its enduring low interest rates, will underpin another strong year for its commercial property market.

Total transaction volume in real estate, including offices, hotels and logistics, stood at $23.6 billion in the first half of 2024, per MSCI, the highest level since the global index compiler began collating such data in 2007. That’s up nearly 30 percent from the first half of 2022. Capital and income returns are eye-catching too. These rose to a combined annualized 4.8 percent by mid-2024 in local currency terms, up from 4.4 percent in 2023, compared to declines of between 1 percent and 7 percent seen in 2023 in the United States, the UK and Australia.

Japan is benefiting from a strong recovery in office-going culture after the Covid-19 pandemic. The weak yen means visitor numbers are surging, opens new tab too: from January to October 2024, Japan saw 30 million visitors compared with 25 million for the whole of 2023. Hotel occupancy rates are high too.

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Meanwhile, Japanese companies are under official pressure to improve shareholder returns; disposing of non-core property is one of the fastest ways to achieve the goal. Property and railway firm Seibu, for example, tapped potential buyers including Blackstone and Singapore state investor GIC in 2024 for a central Tokyo office building for at least $1.95 billion, per Reuters. That’s lucrative because such assets are usually held on a seller’s books at acquisition cost.

Though the Bank of Japan has started to reverse a decade of ultra-cheap money, it is taking baby steps. The short-term interest rate may only rise 50 basis points to 0.75 percent in 2025: with commercial real estate financing rates hovering under 2 percent, both local and foreign buyers should be able to cope with small increases.

The chart shows Japan’s half yearly property investment Volumes.

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