How Japan’s Economic Reawakening Is Creating Real Estate Investment Opportunities

One easy target for Japanese companies looking to make their balance sheets more efficient: their substantial real estate holdings. As of March 2024, 40% of listed companies with a market capitalization of more than ¥10 billion are trading at a P/B ratio of 1.0x and sit on roughly ¥180 trillion in fixed assets.² Many of these companies are not primarily real estate companies and lack proactive strategies to manage the assets and maximize their value, in our view.

We recently completed a transaction that shows the trend in action. After our colleagues completed a private equity corporate carveout of a logistics business from a large conglomerate, we purchased 32 logistics warehouses in a sale-and-leaseback transaction with lease terms ranging from 15-20 years. The transaction enabled the company’s transition to an asset-light business model and gave our investors access to what we feel is a leading logistics business at a time when the sector has strong tailwinds. Manufacturing is returning onshore, the semiconductor trade is booming, and e-commerce penetration is still quite low compared to the United States and Europe.

2. A Tourism Resurgence

The number of tourists arriving in Japan is back to pre-pandemic levels even though Chinese tourism has not yet fully recovered. American tourists are part of that mix, but we are also seeing more travelers from across Asia, especially Southeast Asia and Korea, as well as domestic tourists. By 2030, we expect Japan to welcome 80 million visitors each year, well above the government’s target of 60 million.

We see opportunities to partner with best-in-class partners and strong brands to develop new luxury hotels. However, we also think there is a strong market for more affordable places to stay in the notoriously expensive country, particularly for visitors coming from Southeast Asia. Operators in the mid-scale, limited-service hotel sector are fragmented, presenting an opportunity to consolidate assets, rebrand and institutionalize operations.

Hospitality could also benefit from corporate divestitures. We recently purchased the Hyatt Regency Tokyo, an iconic hotel in one of the most energetic districts in the world, from Odakyu Electric Railway Company which had run the asset for more than 40 years, and are looking to enhance the hotel’s offerings to guests while retaining its unique heritage.

3. Growing Cities

Though Japan’s overall population is declining, its largest cities are growing. Both central Tokyo and Osaka saw net inward migration in 2023. Meanwhile, household sizes are getting smaller and rental occupancy rates in major markets such as Tokyo are already high at more than 95% at the beginning of 2024.³ It all points to high demand and tight supply in the multifamily residential market.

Meanwhile, the available housing stock is relatively old. Roughly 60% of the housing in the three largest metropolitan areas was built before 2000.⁴ Operators who can invest and improve properties should be able to demand higher rents, particularly given Japan’s strong wage growth trends.

Keys to Success in Japan

Japan’s economic reawakening and the big shifts occurring in Japanese society make for attractive real estate investment opportunities. Taking advantage of these opportunities, however, is not straightforward. Property deals in Japan are often based on personal relationships and a long track record of doing business in the country. We feel that managers with deep local knowledge, on-the-ground presence, and a strong level of trust with both corporate and real estate partners, are best positioned to take advantage of Japan’s moment in the sun.