The past two years have been a bit of a no show for Japanese investors. Returns have been hoped for and long awaited, but absent.
In the past two years the Nikkei 225 index has barely moved, which might make long term investors in the country feel rather smug. Returns over the past few decades have been unimaginably awful. In 1989, the Nikkei index hit a peak of 38,916. Last Friday it closed at 15,107, a 60% fall over 27 years.
A decline of this magnitude is an expression of the problem rather than the source of it. In the late 1980s Japan experienced the mother of all asset bubbles and has never fully recovered. An ageing, declining population and long periods of low economic growth and deflation are hardly the stuff of investment fairytales. So why on earth does APN’s Asian REIT Fund invest 38.5% of its portfolio in Japanese assets?
In the same way that London is not a reflection of the economic performance of the United Kingdom, nor New York the United States, Tokyo is not Japan. These global mega-cities are part of a larger country but not really of them. In terms of their economic performance, outlook and investment potential, they are separate and distinct.
That’s a key point because the Asian REIT Fund’s Japan exposure is 65% invested in Tokyo-based assets. Table 1, which shows the city versus country comparisons for three of the world’s major global centres, illuminates this distinction. London’s average wages are 32% higher than the rest of the UK, New York a staggering 172% higher than the rest of the USA and Tokyo’s are 28% greater than the rest of Japan.
|Avg. Wage (A$)||$70,800||$53,900||$205,600||$75,700||$76,575||$60,000|
|Pop’ Growth (%)||10.2%||3.2%||4.6%||0.8%||2.5%||-0.1%|
Source: APN, Bloomberg
Such figures make the point: Tokyo is a more attractive investment location than it might first appear. Wages are a key driver of retail spending, which is important for retail and commercial property landlords, and by extension, APN’s Asian REIT Fund. The recent Tokyo tourism boom is also helping to push retail rents upwards.
Population growth is another factor. Japan’s ageing population is exploding whilst its overall population declines. But Tokyo’s population is actually growing. Its status as a global centre with the world’s largest office market and the highest GDP of any city on earth overwhelms what’s going on elsewhere in the country.
According to Cushman & Wakefield Research1, in 2014 Tokyo had the fifth most expensive commercial real estate in the world, behind London, Hong Kong, Moscow and Beijing. Last year, Jones Lang LaSalle placed Tokyo third on the list of global cities for direct commercial real estate investment. And Savills2 reports that while Sydney accounts for 13% of Australia’s GDP, the comparative figure for Tokyo and Japan is twice that. As Knight Frank noted in its 2015 Global Cities Report3,“the economy of Tokyo is bigger than that of Spain”.
|Grade A Office Effective Yield (Savills)||2.54%||2.67%||3.80%||3.30%|
|GDP (2014 est – USD $b)^||$836||$1,403||$223||$1,617|
For all these reasons, and despite negative interest rates, the effective yield on Tokyo office space is higher than the macroeconomic picture of Japan might indicate (see table 2). The city’s global stature, its commercial rents, global competitiveness and population growth is reflected in an office vacancy rate of 4.07% (Miki Shoji), lower than it is for Sydney’s CBD, which, according to JLL was 6.84. in the first quarter of this year.
The conclusion? Tokyo’s economic prospects are very different, and more attractive, than the country in which it is located.
That’s the case for Tokyo and the reason why APN’s Asian REIT Fund invests a significant proportion of its assets in the city. The strategy appears to be working. Since inception on 19 July 2011, the Fund has achieved a total return of 17.27% per annum5 and currently features a running yield of 6.08%6. It’s a mistake to think that the investment potential of a global city is tied to the countries in which they’re located. Tokyo proves that it’s not.