Data centres and Japan likely to remain Asia’s real estate darlings

A cursory glance at the performance of Asia’s commercial property investment market in 2024 reveals that investors’ love affair with Japan has never been more intense. Transaction volumes reached US$51.6 billion, the highest level among Asia’s leading markets, accounting for 30 per cent of commercial property investment activity in the region, according to data from MSCI.

Whether it is the boom in overseas tourism, the resilience and appeal of rental housing, the strong fundamentals of the office market or the wave of merger and acquisition activity triggered by pressure on companies to unlock value in their property portfolios, Japan ticks all the right boxes.

Last year, international tourist arrivals to Japan reached 36.9 million, exceeding the previous record in 2019 by 5 million. Moreover, while Japanese travellers usually accounted for the majority of hotel guests, overseas visitors comprised 51 per cent of guests in the first 10 months of 2024. JLL says Japan is “the most in-demand hotel market” in the Asia-Pacific.

This is mainly attributable to the plunge in the yen since the beginning of 2022, a function of the gap in interest rates between Japan and the United States. However, the weakness of the yen has helped the Bank of Japan (BOJ) pull the economy out of its deflationary doldrums. A wave of inflation has given the BOJ the confidence to normalise monetary policy.

In a sign of how much the economic landscape has changed, Japan now has the highest inflation rate among the Group of 7 advanced economies. Last week, the Japanese Trade Union Confederation demanded an average wage increase of 6 per cent this year, the highest since 1993. Bank of America expects Japanese interest rates, which currently stand at 0.5 per cent, to eventually reach 1.5 per cent.

Bond markets believe in the reflation story. On March 6, Japan’s 10-year bond yield breached 1.5 per cent for the first time since 2008. While higher interest rates are a clear sign that the “lost decades” are over, they present challenges for real estate investors.