(Bloomberg) -- Japanese investors are spending the most in two decades to buy up properties overseas, undeterred by the global real estate slump and the yen’s decline to a 50-year low.
A Manhattan skyscraper, data centers in Toronto and office buildings in London are among the assets that Japanese companies and pension funds have scooped up this year. Flush with cash and in the only developed economy with access to rock-bottom financing rates, their purchases are giving some relief to the market as rising office vacancies and interest rates keep other buyers away.
“They see a window of opportunity at the moment in which they can be more competitive,” said Alex Foshay, head of real estate firm Newmark Group Inc.’s International Capital Markets Group.
Japan-sourced capital has accounted for $7.4 billion of global commercial real estate transactions so far in 2023, more than three times the annual average in the past 15 years, according to MSCI Real Assets. Spending on that scale from Japan has rarely been seen since the late 1980s, when the nation’s asset bubble fueled purchases of iconic places like Rockefeller Center and Pebble Beach Golf Links.
Brokers say their Japanese clients want to continue spending money overseas, particularly in the US, Australia and India. Most are taking a long-term view to diversify income given low returns in Japan. They see attractive prices stemming from the real estate downturn, even as the yen’s weakness reduces purchasing power.
The investment boom is being partly fueled by companies that allocated capital for overseas real estate before the pandemic, said Hiroyuki Takayama, director for cross-border transactions at Cushman & Wakefield in Tokyo. While those firms were unable to travel and evaluate targets during the Covid crisis, this year’s return to normal has unleashed dry powder.
In a deal that helped put Japanese buyers back on the map, Mori Trust Co. bought a 49.9% stake in 245 Park Avenue — a skyscraper behind Grand Central Station in Manhattan — from SL Green Realty Corp. for about ¥100 billion ($680 million) in June.
“Our strength is that we have a good financial base,” said Miwako Date, chief executive officer of the closely held developer. “Even for investments of ¥100 billion, we can raise our own funds without gathering investors and quickly execute.”
Mori Trust began to expand internationally in 2016 to diversify into stable markets with growth potential. The Tokyo-based firm zoned in on the US, acquiring a handful of office buildings around Boston and Washington.
It reached its original goal of investing ¥200 billion in overseas real estate in 2022, five years ahead of schedule. The company is now targeting ¥1.2 trillion in business investments by 2030, of which about a quarter is for abroad, Date said.
Mori Trust had looked at the New York area and spoken with SL Green on investment opportunities for years, but only made a move when the Park Avenue office tower came up, Date said. “If it’s a one-of-a-kind asset, we do our best to acquire it when the opportunity arises.”
Such sales may help to thaw out a market that’s been largely frozen as US workers shun calls to return to the office. After the Park Avenue deal, Mori Trust was flooded with inquiries from around the globe for real estate acquisitions, but hasn’t made further purchases.
“When the Japanese groups are buying on a direct basis they tend to go for prominent assets,” said Brandon McMenomy, executive director of capital markets in the US at CBRE Group Inc. “It provides welcomed liquidity to the US commercial real estate market.”
Elsewhere, among the biggest transactions by Japanese buyers this year was a C$1.35 billion ($996 million) deal for a data center portfolio in downtown Toronto, purchased by mobile carrier KDDI Corp. A joint venture of Mitsui Fudosan Co., Japan’s largest developer by market value, spent £315 million ($398 million) on a London office building near St. Paul’s Cathedral. In Sydney, a fund led by Mitsubishi Estate Co. bought a commercial tower for A$779 million ($513 million).
Pension funds such as Japan’s GPIF, which only began investing in global real estate in 2018, also added to the aggregate figure.
Mitsui Fudosan has been steadily investing overseas as part of its corporate strategy and takes into account economic and geopolitical risks, but isn’t impacted by short-term foreign exchange trends, a spokeswoman said.
Wading into the fragile global market isn’t without risks. South Korean institutional investors plowed billions of dollars into offices before the pandemic, only to see valuations tumble this year.
Back in the late 1980s and into the ’90s, Japanese companies struggled with real estate deals that went bad. Mitsubishi Estate gave up its ownership of the bankrupt Rockefeller Center in 1995 after acquiring the New York landmark at the market’s height. Pebble Beach Golf Links was reportedly sold by a Japanese businessman for about 40% less than what he paid for it two years earlier after he became saddled with debt.
Much of that experience is driving Japanese investors to be cautious, according to Benjamin Chow, head of Asia-Pacific research at MSCI. “This is the first time that they’ve gone against the grain in a long time,” he said.
There are differences with the bubble-era spending, said Stephen Down, head of central London and international investment at Savills Plc in London, who worked in Japan in the early 1990s.
“It’s certainly not on that scale,” said Down, who advises Japanese clients on transactions in the UK and Europe. “It’s a healthy diversification strategy to complement what is steady business within Japan with some slightly more exciting returns.”
Globally, Japan is the fifth-largest source of outbound capital deployed into real estate this year, up from 16th in 2022, according to MSCI. Of the top five most active countries, Japan is the only one to mark an increase. Others like the US and Canada — typically home to investors looking to deploy large amounts of capital — have significantly cut purchases.
The spurt also reflects the cyclical nature of where easy money comes from during downturns. After the global financial crisis, Chinese investors mopped up US assets from luxury hotels to office towers. Now Japanese investors may offer a potential lifeline, Cushman’s Takayama said.
“Many investors are having refinancing problems and are forced to sell,” he said. “Before, they’d probably go to Chinese investors, and I don’t think many Chinese investors are there anymore.”
--With assistance from Natalie Wong and Jack Sidders.
(Adds detail about inquiries to Mori Trust in 12th paragraph.)
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