Foreign investors spot opportunity in Japan’s ‘living’ sector

International investors are targeting Japan’s ‘living’ sectors - new niches in the residential market which are being driven by demographics and changing lifestyles.

In June, Aberdeen Standard and Sumitomo Mitsui Trust Real Estate Investment Management announced a joint venture to invest in multifamily, senior housing, student housing and corporate housing in Japan, primarily in Tokyo and Osaka.

Multifamily is rapidly becoming an institutional real estate sector in Japan, with vehicles launched by groups such as UBS and Nuveen in recent months, however senior living, student accommodation and co-living are establishing their credentials.

“In terms of yields, these three sectors can offer investors a 50-100 bps premium over the multifamily sector, which ought to draw out more interest in these sectors over the longer term, says Koji Naito, director of JLL Capital Markets, Japan.

Japan is famously the world’s oldest nation, with 35 million people aged over 65, and its rapid ageing is driving demand for senior housing, primarily in the aged care sector - nursing homes rather than independent living accommodation for retired people.

As well as Aberdeen and Sumitomo’s new venture, Singapore’s Parkway Group sponsors a real estate investment trust which invests in nursing homes and Orion Partners - acquired by Aberdeen in February - also manages investments in the sector.

Aged care, especially that catering for the over-75s, is booming, says Nick Wilson, head of Asia Pacific capital markets research at JLL.

“The government is not rolling out many public sector facilities and instead is providing development incentives to encourage more private facilities. With long wait times in the public sector, demand is rising.”

For the young and the old

It might seem counter-intuitive to invest in student housing in a nation with an ageing and declining population, however Japan is targeting an increase in foreign students in order to promote itself as an international location. It is seeking at least 300,000 foreign students each year and fell only slightly short in 2019, with 298,980 registered.

Domestic investors Itochu Corporation and Mizuho Financial Group have launched student housing brands, as has international sector specialist GSA, in partnership with Star Asia Group.

“In Japan, the current stock of student housing is very old and outdated, which is normally unacceptable for overseas students. Due to the growing number of international students, investors can see a huge opportunity for the sector, to meet the need for high-quality properties,” says Naito.

Modern specialist student accommodation may also attract Japanese students, says Wilson.

“Domestic and overseas students may find it difficult to get leases with private landlords, who often require additional insurance or deposits. The upfront costs to get into private rentals is usually around three to five months of rent. Student housing concepts bypass this hefty upfront cost and provide furniture and utilities, making them a turnkey solution.”

Co-living, where landlords provide shared services and facilities for renters of small residential units, is at its early stages in Japan, which is “behind other global markets,” says Naito. However, a number of domestic co-living brands have been launched, including Sakura House and Bamboo House, both of which started out providing rental apartments to foreigners, but which have branched out into the new sector.

Shared housing is less common in Japan than in other developed nations, but the rise of the sharing economy is likely to encourage new modes of living. Co-living also bypasses the up-front expenses required by private residential landlords.

The investor attraction

A key differentiator for all three living sectors is their operational requirements.

Aged care facilities require specialist staff and management, as does student housing. The most successful co-living brands offer the same services over multiple locations. However the operational element of these businesses is not necessarily a negative for real estate investors, says Naito.

“Many properties in these sectors are owned by the operators, so a relationship with operators is potentially one of the best ways to source product.” 

 “Student housing and aged care are usually leased on long term agreements. For aged care leases can be more than 20 years, so there are additional benefits from a long-term investment standpoint,” says Wilson.