To adapt to the shift taking place in the global economy, triggered by the coronavirus pandemic, we need to identify and appropriately respond to today’s new risks, such as the ongoing depreciation of the yen against the dollar and soaring construction costs. We will assess the structural changes in rental demand and other factors caused by the pandemic and propose investment strategies with an eye on the potential impact on the value of real estate.
In the wake of the coronavirus pandemic, economic activity around the world stagnated. But the investment market — which was supported by monetary and fiscal stimulus measures in various countries — did not experience a significant drop in demand, as was the case during the financial crisis following the collapse of Lehman Brothers. On the contrary, central banks’ aggressive monetary easing policies led to lower long-term interest rates and expected returns for investors. This, in turn, boosted the prices of real estate and other assets.
Also, because of the rapid increase in fiscal spending by government departments in many countries, concerns about the deterioration of public finances are no longer unique to Japan. Long-term, stable institutional investors who had been hesitant to invest in Japan are now shifting their core funds — which they are willing to invest for the long term — into Japanese real estate and other investment markets. So, expected returns are declining even further.
However, coming into 2022, we have seen the prices of products rise because of supply chain disruptions, as well as increasing energy and food prices, which are taking place against the backdrop of Russia’s invasion of Ukraine. This has prompted the US and countries in Europe to start reducing monetary easing as a way to curb inflation. Uncertainty in the global economy has risen sharply due to soaring prices and warnings of excessive monetary tightening.
Nevertheless, the Bank of Japan has made it clear it will continue monetary easing, and Japanese real estate investment is seeing relatively more stable returns due to the high yield spread — the difference between real estate yields and borrowing rates — which is being maintained by low interest rates. In addition to these low financing costs, real estate in Tokyo and other major cities in Japan are enjoying a level of liquidity comparable to that of major cities in the US and Europe. Also, in the midst of increasing geopolitical risks worldwide, investors appreciate the sense of security and political stability in Japan.
Given these regional characteristics, we believe that both Japanese investors — who have long faced investment challenges as a result of low interest rates — and global institutional investors (especially those who are expanding their alternative investments) will continue to have an appetite for investing in Japanese real estate because of the need to diversify asset types and allocate a fixed amount of funds.
Since Touchstone was established in 2005, we have been providing services as an independent investment manager to investors in Japanese real estate. We have steadily built up a track record of managing separate accounts, particularly for foreign investors, and we are skilled at accurately understanding the changes that will occur in the real estate investment market. While looking ahead to the paradigm shift set to take place in the global economy, we will be able to continue meeting the needs of our customers — with high quality, transparent investment management services.
Representative Director, Chairman and CEO