How much impact might Japan's earthquake, tsunami and ongoing nuclear crisis have on the global real estate investment market? In the short-term, more than you might think.
While Japan has long been outranked by the U.S., the U.K. and several other countries on the list of preferred markets for commercial real estate acquisitions, up until now, it still held some appeal. In the 19th annual foreign investor survey published this January by the Association of Foreign Investors in Real Estate (AFIRE), Japan ranked seventh on the list of countries earmarked for 2011 acquisition plans. The survey polls approximately 200 investors with more than $842 billion in global real estate holdings.
In 2010, Japan ranked fifth in the world in terms of commercial real estate investment transactions, with $25 billion in volume and 513 properties trading hands, according to Real Capital Analytics (RCA), a New York City-based research firm. What's more, Tokyo ranked second on the list of top 30 cities for commercial real estate investment, with $18.9 billion, placing it between London and New York.
Now, however, with the country still dealing with the destruction caused by the earthquake and tsunami and the uncertainty surrounding the fallout from the accident at the Fukushima Daiichi nuclear plant, many global investors have taken a wait-and-see approach on new investment in Japan. In the mean time, their investment dollars still need to be put to work. Most of that money will be redirected toward other Asian countries such as South Korea, China and Singapore.
Some of it might also find its way into the U.S., especially in markets with large Asian populations, such as California. For example, Gerry Mason, executive managing director with the New York City office of Savills, a global real estate services provider, mentions that in recent weeks he's been working with a new Korean investor and an investor from Singapore looking to acquire assets in New York City.
“Japan is one of the largest investment markets in the world and I think everybody has sort of turned away from the biggest Asian player,” Mason says. “This has redirected money from Japan, and from South Asia. We are seeing more Asian investors interested in the U.S. and I think it's going to keep prices high in major markets, particularly Los Angeles and New York.”
Waiting it out
For the past month, global investors have been postponing decisions on new acquisitions in Japan, says David J. Lynn, managing director and head of investment strategy in the New York office of ING Clarion Partners. The Japanese city most affected by the disaster has been Sendai, but Sendai never attracted a lot of interest from cross-border institutional investors anyway, Lynn notes. Tokyo, however, the primary market for global investors, might be affected by the fallout from the nuclear accident and that's why people feel skittish about buying properties there today.
On Apr. 17, executives with the Tokyo Electric Power Co. said it might take six to nine months to fix the problems at the Fukushima nuclear plant, which is located about 150 miles away from the capital.
Global investors' interest in Japan has been on the decline for over a decade because of the low rate of economic growth there, and this will only accelerate the trend, according to Lynn. In spite of offering yields north of 5.5 percent, Japanese commercial properties remained overlooked by cross-border investors last year, reports RCA.
“People might say ‘not only does Japan not show any growth anymore, it also has these issues,’” Lynn notes. “I don't think people will cash out [of existing investments], but in terms of new investments, they will probably be delayed for a few more months.”
East to West
The crisis in Japan has come at a time when the U.S. was already at the top of the list for global investors in commercial real estate, says Lynn. The market has bounced back strongly from the recent downturn and it also boasts transparency and easy-to-follow government regulations, unlike many Asian and European countries where codes governing real estate acquisitions are often byzantine.
In 2010, the U.S. ranked second in the world in commercial real estate transactions, with $112.5 billion involume and 4,459 properties trading hands, reports RCA. China came in first, with $197.1 billion in deals.
Most of the interest in U.S. properties has been coming from China, Malaysia, Singapore and South Korea, according to Russ Chen, senior managing director of sales and leasing with Charles Dunn Real Estate Services Inc., a Los Angeles-basedfirm.
Asian investors particularly prefer multi-tenant retail centers in communities with heavy Asian populations, says Rich Walter, president of Faris Lee Investments, an Irvine, Calif.-based retail investment brokerage firm. They seek out properties on the West and East coasts, and typically feel more comfortable with urban settings.
Walter notes that over the past year, he was already witnessing a 15 to 20 percent increase in inquiries from Asian clients looking to invest in U.S. assets. Most of these transactions have been under $15 million, but they are often all cash.