How are investments in regional Japanese office markets faring?

Find out more about a few big-ticket deals closed recently.

According to the bi-annual investor survey conducted by the Japan Real Estate Institute in October 2023, expected cap rates in Osaka and Sendai tightened marginally by 10 basis points (bps), and were unchanged in the other surveyed regional office markets. 

In a report, Savills said prices remain elevated across most real estate sectors in Japan, and the compressed expected cap rates demonstrate that investors still consider office assets in Japan a popular investment option. 

Here’s more from Savills:

According to initial transaction data from MSCI, total investment nationwide was around 20% lower in the first three quarters of 2023 compared to the same period in 2022. Similarly, transactions in the office sector have also experienced a decline of around 38%. That said, it is important to note that the present figures are preliminary and are expected to increase as more transactions are confirmed. 

There have been a number of notable big-ticket office transactions over the past half-year in Japan’s regional markets. For instance, the KDX Kawasaki-Ekimae Hon-Cho Building, which was sold by Kenedix Office Investment Corporation for JPY42.0 billion, was the largest deal over the past half-year. 

Another significant deal in Kawasaki was Japan Excellent REIT’s sale of a 65% quasi co-ownership interest in the Kowa Kawasaki Nishiguchi Building, valued at JPY16.1 billion. Elsewhere, NTT UD REIT Investment Corporation acquired the Urbannet Shijo Karasuma Building in Kyoto and Urbannet Fushimi Building in Nagoya for JPY9.7 billion and JPY8.8 billion, respectively. 

Cross-border investment activity in the first three quarters of 2023 declined sharply compared to the same period in 2022, according to MSCI. The sentiment in the western office market appears to have driven many overseas investors to sectors with sounder prospects, such as industrial and residential. 

Nevertheless, despite some hiccups in the office market over the past half-year, recovering economic sentiment across Japan’s regional markets and the likely improvement in leasing demand should elevate the image of the office market among investors going forward.