Japanese real estate: a flash in the pan?

Last October, one by one, the financial media were extolling the virtues of foreign investors' enthusiasm for Japanese real estate. Attracted by low interest rates and the yen, the strength of the Japanese economy, high yields and market transparency, foreign investors boosted their investments in the country throughout 2022, and by 45% in the first half of 2023 compared to H1 2022 (CBRE). The volume of foreign buyers was even up 100% year-on-year in Q1 2023.

These buyers, mainly from Singapore, the United States and Canada, and to a lesser extent from Europe, favored logistics warehouses, boosted by e-commerce, and offices, which in the archipelago are not experiencing the telecommuting crisis. Then hotels, betting on the solid occupancy rates of tourist facilities.

However, this enthusiasm seems to have been short-lived. This week, the Japanese daily Nikkei Asia was already reporting a relative cooling of the situation, starting in the second half of 2023. Investment has plummeted and sales by foreign owners have doubled, levelling off at 2018 levels.

There are many reasons for this lack of interest. First and foremost, observers point to speculation about an imminent rise in Japanese interest rates (42% of foreign investors expect a rise within the year, according to CBRE). Others point to the market's high liquidity, which would encourage faster capital movements. For European investors, it's an arbitrage phenomenon: on the lookout in their own territory, which is in the throes of a major real estate crisis, they are reserving their capital for these future bargains. Finally, the lack of supply and the downturn in construction would justify the normalization of the sector.

Stock prices of a selection of major Japanese real estate groups:
Mitsubishi Estate, Mitsui Fudosan, Daiwa House Industry, Nippon Building Fund, Japan real Estate Investment Corp.


A slight upturn in the UK?

On the other side of Eurasia, the situation is quite different. Plagued by a sharply declining economy, high inflation, exposure to persistently high interest rates (the highest in 16 years) and falling house prices and sales, the UK real estate sector has been slowing steadily since 2022.

This is evidenced by the £2.5 billion acquisition earlier this week of Redrow (valued at £2 billion) by its rival Barratt Developments (valued at £4.5 billion), the country's largest housebuilder. The deal will create a new entity called Barratt Redrow, which should be better equipped to face the headwinds sweeping the sector. Last year, the acquirer cut its workforce by 10%, reported a 28% fall in production in H2 (Financial Times) and eliminated two regional divisions.

Comparative chart of Barratt Developments and Redrow share prices

However, the market seems to be showing some signs of recovery, with UK house prices rising in January for the fourth month running (Halifax) - up 1.3% on December, and 2.5% on January 2022 - reaching their highest level since October 2022.

This slight improvement is due to a softening of inflationary pressures, the resilience of the labor market, and a significant drop in real interest rates on new mortgages for the first time since 2021 (BoE). The chronic housing shortage, exacerbated by strict building regulations and government shortcomings in this area, should also support this trend in the medium term.