As the world starts to open up, Japanese investment in European real estate is set to flourish as institutional investors go in search of higher-yielding assets.

Rob Sim

Rob Sim

Japan’s current political and social stability, combined with attractive borrowing options, means that its real estate market offers security when there is uncertainty. Tokyo was ranked as the city with the most investment prospects for 2022 in the Asia-Pacific region by the Urban Land Institute.

But Japanese investors are now looking to grow internationally and a significant driver behind this next wave of capital is diversification into faster-growing markets. The country’s economic resilience during the pandemic should promote growth overseas as investors reinvigorate interest in Europe’s real estate markets. According to a report by CBRE, the European investment market closed 2021 at a record quarterly volume of $155bn (£116bn), while the full-year volume totalled $423bn, up 28% from 2020.

Furthermore, Preqin research suggests private equity firms were sitting on roughly $390bn worldwide to deploy into real estate at the start of 2022. The large volume of funds available should provide significant amounts of capital for the European real estate sector, which has remained an attractive destination for investment throughout the pandemic. Enormous volumes of unallocated capital and higher allocation targets for real estate should serve as a strong platform for the market this year, further enhancing investments into European real estate.

Japan has a growing appetite for investment into European markets

Covid-19 has delayed by a couple of years some of the planned Japanese investment but there is now renewed interest in European property. With an ageing and decreasing population putting further pressure on generating returns, its investors are looking to new markets overseas for growth opportunities. The European real estate markets are now perfectly poised for an influx of Japanese capital.

In Q4 2021, the office sector had the largest share of European investment volume, at 32% of the almost $50bn total – itself the highest quarterly total since 2019. Environmentally certified offices are becoming an integral element of the European market. While they accounted for just 20% in mid-2021, this was a significant improvement on 11% in 2016, and the speed of momentum is accelerating as investors and occupiers rightly become more laser-focused on ESG. Japanese investors are sitting up and taking notice, as these assets are harder to find at home.

In Europe, green offices will play an important role in future urban sustainability and are highly sought after because this is reflected in their value. There is already a significant premium for environmentally certified offices, with CBRE identifying a five-year average premium of between 13% and 29% depending on the market, and an average of 21%, based on the comparison of rents in uncertified and certified buildings.

In Tokyo, the share of offices that are green certified (to CASBEE) grew from 0.064% in 2009 to 9.7% in 2019. However, this increase is distinctly low compared with the top-performing markets in the US (Chicago at 71%) and Europe (Warsaw at 55%).

While strong demand for real estate in Japan’s major cities will drive growth in Asia’s second-largest economy over the next year, there is a growing appetite for investment into European markets. Japan offers an attractive gateway to capital from Asia with access to a vast group of institutional investors. The European real estate market, with a growing ODCE index to measure core fund performance, is well positioned to provide an opportunity for this growth.

Rob Sim is managing partner at Europa Capital