How has the recent enthusiasm for private asset investment affected Japan’s real estate market? This and other questions are explored in “Real Estate Investment Market of Japan”, a report from NLI (Nissay) Research Institute and Value Management Institute (VMI), a subsidiary of Development Bank of Japan. Takeo Muro and Satoshi Kitagawa of VMI discuss their findings in this AL-IN Web interview from April 27, 2021.

Q.: What was the impetus for your research?

Until now, studies of the global real estate market, including Japan, have focused mostly on the volume of transactions resulting in a lack of information about the actual size of the market in a given country and how much investment is being made in relation to that.  We wondered if the paucity of data was impeding investors from making appropriate investment decisions about real estate management in Japan, and what additional information might attract foreign and domestic investors.  So we started a joint research project with Nissay Research Institute to find out.

The Japanese government currently uses estimates of market size for income properties, but the estimate is calculated using a top-down approach in which GDP is multiplied by a certain number.  This approach allows a comparison of real estate markets of different countries at the same scale, but it is difficult to analyze the market of any single country in detail.  We decided to adopt a bottom-up approach by accumulating individual properties in our research.

Our estimates are based on the capitalization (of income) method.  Specifically, we calculate an estimated floor area of domestic real estate based on statistical information, and multiply it by the rentable area ratio, average rent, average occupancy rate and average cost ratio (all of which are published by J-REITs) in order to derive NOI (Net Operating Income).  The NOI is then divided by the capitalization rate (cap rate) to derive the asset value.
Q.: You estimated the size of the market based on individual properties, making full use of publicly available information.  What is the current size of the domestic real estate market, and to what extent has securitization progressed?

We estimate the total value of income-producing real estate in Japan to be JPY 272 trillion.  Of this,

JPY 171 trillion is "investment-grade real estate" screened by location, building age, floor space, etc., which has been the main target of investment to date.  The J-REIT market represents about JPY 21.1 trillion, and the combined size of privately placed funds and privately placed REITs is about JPY 23.3 trillion, which means that 26% of investment-grade real estate has been securitized in some form. (Chart 1)


                                                                                                       SOURCE: VMI and Nissay Research Inst.


The advantage of this estimate is it can be subdivided and analyzed by use, location, building age, etc., as long as it is within the scope of statistical data.  For example, Chart 2 breaks down income-producing real estate into sectors and compares them with J-REITs.  In the pie chart on the right, the outer part shows the ratio of revenue-generating real estate by sector as a whole, and the inner part shows the ratio of J-REITs by sector.  The comparison between the two shows that securitization of offices, hotels, and logistics facilities is relatively advanced in the J-REIT market.


                                                                                                       SOURCE: VMI and Nissay Research Inst.

The left-hand side shows how securitization is progressing on an asset value basis.  The figures here are only for J-REITs.  But if we assume that private funds and private REITs hold properties in the same sector allocation as J-REITs, the share of income-producing real estate is about twice as large, which means that about 30% of logistics facilities and hotels may have been securitized.  On the other hand, securitization of residential and commercial properties has not advanced much as yet.

Chart 3 shows where and how much income-producing office real estate is located in Japan.  Fifty-nine percent of the total is concentrated in Tokyo, followed by 9% in Osaka and 5% in Kanagawa.  Narrowing the focus to "investment-grade real estate", the top 3 cities are the 23 wards of Tokyo (76%), Osaka (9%), and Nagoya (3%).  By visualizing the real estate market in ways that are easy to understand, we believe investors can get a better sense of the market and make investments based on rational decisions.


                                                                                                             SOURCE: VMI and Nissay Research Inst.

Q.: Your survey shows there is still room for expansion in the market, but what steps can be taken to attract more investors?

One is the expansion of investment targets.  In Japan, investment targets have expanded to include logistics facilities and senior homes.  If this trend continues, the market will expand naturally.

The second is to select properties within the existing sectors and drill down deeper.  Until now, even investment-grade cities and real estate have been discarded because of the emphasis on "ease of understanding”.  There is still room for market expansion if we analyze the market more closely and search for investment targets.

From this perspective, I believe our findings can be useful.  We intend to expand our research to include senior homes, data centers, the forestry sector, and public real estate so we can provide information that will contribute to future market making.

About Value Management Institute:

Takeo Muro

Principal Researcher
Public Consulting Division 3
Value Management Institute, Inc.

Takeo Muro has engaged in work related to real estate securitization since the early 2000s when J-REITs were launched.  He was in charge of supply and demand study of actual real estate, constructing market forecast models, and conducting surveys and consulting work for private companies at a financial think tank.  At VMI since 2017, he has conducted research and consulted on the real estate investment market, and worked on issues including revitalizing underutilized real estate, developing property around train stations, and the distribution of existing housing.


Satoshi Kitagawa

Public Consulting Division 3
Value Management Institute, Inc.

Satoshi Kitagawa began his career in sales and renovations at a real estate company and joined VMI in 2018, where he performs research and consulting on the real estate investment market.  He works with government ministries and agencies on measures to combat vacant housing, revitalize underutilized real estate, and support local real estate companies entering the investment business.