Faced with losing its marquee event, there might be stress on Japan’s capital.

Tokyo may not be an emigration destination, but when the International Olympic Committee announced Tokyo would be the host for the 2020 Summer Games, the city emerged as a prime destination for investors. The so-called Olympic bump came in lockstep with Prime Minister Shinzo Abe’s Abenomics programme, which emphasised quantitative easing, fiscal stimulus and reform, making Japan one of Asia Pacific’s most appealing investments for its relative value. The cheaper Yen also made property a lucrative asset. Following two decades of stagnation, it was a welcome change.

Admittedly Abenomics’ positive results started to moderate by 2018 due to an increased consumption tax and rising debt among other factors, and is currently under stress due to COVID-19. When Japan officially pushed the Olympics to July 2021, all the investors who were looking to cash in on investments from the post-Lehman Brothers banking crash that decimated Tokyo seemed out in the cold.

But it may be too soon to give up on Tokyo as an investment, and the Olympic bump may not be over just yet. “This is quite difficult to predict. However, I personally think the situation will be something different,” begins HidetakaYamaguchi, head of the Asia Pacific Japan Desk at Knight Frank. “Because of the postponement, the public sector and private companies may need to adjust many things, [resulting in] additional spending. There will probably be some distressed assets that … could be an attractive opportunity for some investors.” Tetsuya Kaneko, director and head of research and consultancy at Savills in Tokyo agrees, noting investors seeking new projects may not be so fortunate.

“Prices remain high, since many developers have strong balance sheets and there’s no reason to sell properties at a discount. On the other hand, there may be some price adjustments in the second-hand markets because some owners have COVID-19 related financial issues.”

Rental rates are a key factor for investors and Tokyo’s landscape appears to be relatively stable, at least for now. Rents across Tokyo’s 23 wards crept up 2.7% in the first quarter of 2020 according to Savills, with rents in the Chiyoda, Chuo, Minato, Shibuya and Shinjuku wards heading towards JPY5,000 per square metre per month (HK$34 per square foot). In addition, occupancy was up (to 97.9%), with northern Adachi showing close to no vacancy and prices rose 33% and 43.2% between 2012 and 2019 in the second-hand and primary sectors respectively according to the Land Institute of Japan. Despite that, investors can find value in Tokyo: one-bedroom apartments in new developments like Branz Atago in Minato-ku can be purchased (through Sotheby’s in Hong Kong) for approximately HK$5 million.

Investors considering Tokyo continue to gravitate towards the central five wards, home to landmarks such as Ginza, the Imperial Palace, Tokyo Station, the Diet, Roppongi, Kabukicho, dozens of embassies and universities and most of Japan’s major MNCs. Also, key to Tokyo’s appeal is its freehold status and gross rental yields that can reach up to 5.25%. After the central districts, Yamaguchi notes, “Fringe areas in Tokyo, such as Shinagawa and Osaka City, are also popular and well established for investment. Shinagawa has good accessibility to Haneda Airport as well as the Shinkansen station. We see a lot of redevelopment there.” Osaka is a location for the future, with Expo 2025 and the country’s first casino both scheduled for 2025.

The Olympic postponement undoubtedly muted market sentiment, and the ongoing uncertainty surrounding COVID-19 and the economic fallout are elements that will impact the remainder of 2020. Regardless of the defensive nature of the market, the October consumption tax increase (from 5% to 8%) and the guaranteed drop in tourist arrivals, the effects of the pandemic will be felt, and “Because of statistical time lag, it may be some time before we [see] negative effects on the market,” cautions Yamaguchi. Nonetheless, Savills’ COVID-19 and Japan Property report listed residential real estate as the sector with the most resilience in the face of the Coronavirus. At the macro level Japan is still among the world’s most stable economies, and while the recent boom in inbound tourism was a bonus, like China the country has robust domestic tourism: international arrivals account for less than 20% of Japan’s total hotel room nights and under 1% of its total GDP.

Looking farther ahead, the pandemic could impact what investors purchase rather than if they do. Resident demands could change in the wake of work-at-home orders, refocusing them on amenities over proximity to transit links, and COVID-19 could have a devastating impact on the emerging co-living sector. This however comes shortly after Japan amended its immigration policy with the aim of attracting nearly 350,000 new residents over five years—many of whom will rent homes.

Finally, a bigger issue for investors might be new short-term rental regulations. Previously, renting short term—like Airbnb properties—was illegal without a licence or outside specified zones. As of 2018, short-term rentals were legalised as long as owners notified local authorities, registered with the Japan Tourism Agency, prepared visitor lists, displayed a licence number on rental sites and complied with several regulations—and restrictions. There is a 180-day limit on annual rental time, and Kyoto rentals are seasonal (allowed between January and March only). Ironically, “Against our expectations, the negative effects of the restrictions on Airbnb was limited,” says Yamaguchi, pointing out larger hotels are often preferred. However, many investors “Had already given up the Airbnb business by the time the regulations,” were implemented says Kaneko. “And the few survivors appear to have been critically damaged by COVID-19.”

Stress aside, Tokyo is well positioned to rebound. It rode out the GFC in 2008, labour shortages will mitigate unemployment, and private businesses are cash-rich enough to fend off mass bankruptcies. “Rental growth, if any, is expected to be somewhat moderate, at least until the impact of COVID-19 becomes more visible,” finished Savills. Moderate sounds excellent right now.

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