Japan’s all-property total returns in the past two years have stabilized following the strong acceleration of performance starting from 2009. The latest (through August 2018 as of December 2018) annualized all-property total return for Japan was 6.4% (unlevered, denominated in local currency terms) albeit down from the annual performance of 8.8% recorded in late 2015/early 2016, the post-GFC peak. While income returns have marginally decreased from around the 5% range to around mid-4% since late 2015/early 2016, capital returns decelerated more, from 3.8% to the latest 1.7%. Latest total returns for logistics, office, residential, retail and hotel were 6.7%, 6.6%, 6.4%, 5.8% and 5.7% respectively. Debt remains accretive in Japan and thus many investors are currently enjoying notably higher levered returns than these unlevered benchmark returns.
Data points through end of December 2018. Change represents month-over-month change.
Residential cap rates of major metro areas started compressing from the second half of 2009 and have compressed by roughly 200 bps since then. Cap rates are now at historically low levels across Japan, led by Tokyo at 3.8% as of mid-2018, followed by Osaka at 4.3%, Yokohama at 4.4%, Nagoya at 4.6%, Fukuoka at 4.7% and Sapporo at 5.1%. Newer residential towers in the inner wards of these cities which are close to transit, are lower still. Over the same period, the yield of the Japanese 10-year government bond was also on a declining trend and has broadly hovered around zero and even ran into negative territory in 2016. With the low government bond yield, wide spreads to the residential markets are still available.
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