The recovery is being driven by both improving business conditions and private consumption finally picking up, especially face to face services, since October 2021. Japanese firms are enjoying solid demand from advanced economies, mainly digital related goods, while supply chain disruptions due to COVID-related factory shutdowns in Southeast Asia have begun easing. In addition, a considerable amount of household savings has accumulated due to constrained consumption activity.

The extent of Omicron’s overhang remains uncertain, however, and globally, vigilance against COVID-19 is proving sticky. Japan is likely to see persistent risk aversion, given its high proportion of seniors. Given these concerns, the Bank of Japan announced in December 2021 that “it is unavoidable that monetary easing will be prolonged further”.

Total investment in Japanese real estate declined approximately 21% yoy as of Q3 2021 according to Real Capital Analytics (RCA), mostly as a result of a decline in cross-border investment, although domestic institutional and equity buyers picked up much of the slack. We are likely to see a significant recovery in cross-border institutional investment from 2022, with major players like GLP and Allianz all announcing multi-billion dollar funds in end 2021. Japan remains an extremely attractive investment destination with its transparency, accessibility, stability and attractive borrowing options, with ANREV and Urban Land Institute both ranking Tokyo as their #1 investor destination of choice in Asia Pacific for

Investment interest in Japan’s residential market continued growing in 2021 after 2020’s record performance, with new international players like Allianz entering the market and multiple big-ticket transactions by both J-REIT and international investors, including AXA’s investment in a portfolio estimated to be over USD 670 million and PGIM, Savills and La Salle all acquiring multi-million dollar portfolios. Japan’s multifamily sector is on the verge of becoming one of the top 5 living markets globally.

As a result of increased competition, investment yields continued to compress, falling to 3-3.5% in Tokyo’s 23 wards. This was despite rents declining across Tokyo, especially in the 5 central wards, with asking rents down an estimated 0.9% in 2021 (Savills), as suburban flight to Greater Tokyo (suburbs in Saitama, Chiba, Yokohama and Kanagawa) continued. We expect to see this trend continue in 2022, as we expect remote working arrangements to remain in place for some time, even as the economy recovers from the pandemic. Larger living spaces are considerably more affordable outside Tokyo, and we do not see this trend reversing in the short to medium term.

Investment volumes remained subdued in 2021 with inbound travel still heavily restricted, large swathes of the country under a State of Emergency for most of the year and banks remained conservative towards lending on hospitality assets. Recapitalisation/distressed opportunities have begun to appear on the market, however, with several large transactions either completed or in progress: Blackstone’s acquisition of Kintetsu Group’s eight hotels, Hoshino’s takeover of WBF Hotels & Resorts, and Seibu’s upcoming portfolio sale.

We expect hotel performance in 2022 to significantly improve from last year, although the Omicron variant has delayed Japan’s earlier plans to reopen the country to inbound tourism, which we now anticipate only in 2H 2022 at the earliest. Occupancy at hotels across Japan, including PCG-managed properties, began to pick up in 2H 2021, following the lifting of pandemic restrictions as Japan’s vaccination rate climbed above 80%, and we expect the recovery to continue into 2022.