Over the last two years there has been some hesitation by investors into the commercial property market. This change in sentiment has not only been an Australian phenomenon but felt across the globe, with transaction volumes for commercial property as low as 50 per cent down in 2023 for some countries. Both buyers and sellers are choosing to sit on their hands and wait until more certainty comes to the economy, however, elevated interest rates and inflation rates felt across the world have put a dampener on confidence levels. For most commercial assets this has resulted in increases in capitalisation rates putting downward pressure on values.
However, over this time there has been an emerging trend of investment by Japanese funds into international property, notably into Australia as well as investment into Japanese commercial property from funds around the world. For Australia, the reduction in volumes has been felt across all asset classes. Uncertainty in the office market has been a major contributor to reduced activity, together with the increase in financing cost deterring many buyers until yield movements are more aligned to these changing fundamentals. Foreign investment into the safety of the Australian property market has followed this same trend with $11.8 billion changing hands (25.5 per cent of which is from Japanese funds) in the 12 months to March 2024 after peaking at $36.2 billion in the 2021/2022 period where Japanese investments represented less than 2 per cent of all foreign activity.
Australia historically has been an attractive commercial property market for offshore buyers to invest in given its “safe haven” status with the long term stability of Australia’s economic performance. The bulk of investment interest comes to the Sydney and Melbourne markets, however, in recent years we have seen increased investment growth into south east Queensland and Perth. While activity in office transactions has seen some reduction, growth has been significant in the development site and broader residential space with interest in particular in the multi-family type property which is an established asset type in many nations including Japan, however, interest lies in build-to-rent, student housing, aged-care and high rise residential sites.
Availability of funds by Japanese investors is not a new story. For Japan the negative interest rate policy adopted in 2016 was a rather unconventional way to stimulate the economy by encouraging the investment (or spending) of funds rather than leaving it in the bank which could be negatively impacted by inflation. We saw an initial spike in investment interest in Australia during this time, before Japanese investors reacquainting themselves with Australian property in more recent times, having an advantage over most of the world which has been growing interest rates. Japan is known as the world's largest creditor which is now set to be tested, as in March, Japan has grown their interest rates into positive territory to combat inflationary pressures and the languishing value of the yen.
While Japan has been keen to invest funds internationally, the spotlight has also been on Japan as an attractive location to invest. Their unconventional monetary policy kept economic growth positive, however, the weakening yen over the last few years enticed international buyers into the commercial property market resulting in strong appreciation in values across all asset classes during a time of subdued activity around the world.
So will Japan continue into 2024 as a powerhouse of commercial property? While the yen remains low against the US dollar, the attractiveness of Japanese investment will remain high. While Germany is tipped to overtake Japan as the greatest creditor in the world, the interest rate story for this region remains compelling with expectations surrounding the economy remaining robust. Investment into Japan is likely to continue with quality expectations surrounding asset classes such as office, retail and hotel, with the development and multi-family sector most likely to benefit given generation changes in household size.
