Osaka’s Minami Makes the Leap into the Global Investment Market
The Minami area in Osaka has been the focus of growing attention in the global investment market in recent years. The trends in roadside land values and assessed land values tell us that investors from inside and outside Japan have their eyes on it.
On July 2, the Japanese National Tax Agency published the roadside land values for 2018. In this list, although the land in front of the Hankyu Department Store’s Umeda Main Store located in Osaka’s Kita area is marked as having the highest value at 12.56 million yen per square meter with a 6.8% increase year-on-year, the land in front of the Ebisubashi Building in Osaka’s Minami area came in second at 11.84 million yen per square meter with a 22.3% increase year-on-year. The rate of increase was the 5th highest in the country, and the land prices in Osaka’s Minami area have almost caught up with prices in Kita, which came in 1st.
Meanwhile, on March 27, the Japanese Ministry of Land, Infrastructure, Transport and Tourism (MLIT) published the assessed land values ahead of the roadside land values, and in the assessment was something totally unusual and unexpected—the land values in the Minami area was marked at a higher price than that of the Kita area for the first time. Roadside land values serve as a referential indicator in calculating inheritance and gift taxes, and are assessed as at January 1 of the year they are published. Assessed land values, too, are assessed as at January 1, but they are used as reference for acquisition prices, for example, in transactions of land.
The heart of Osaka’s Kita area is the Umeda district in the city’s Kita Ward, home to major stations serviced by JR and other private railways, as well as countless offices and commercial facilities. The Kita area had always marked the highest prices. This time, however, the Minami area, centered around the Shinsaibashi and Namba districts and mostly made up of commercial facilities, overtook the throne for the first time. This was thanks to investment money into real estate in the Minami area, from both inside and outside Japan. “Osaka is recognized as part of a global market that is targeted by international investors,” pints out Yuko Akiyama of the JLL Japan Kansai Office Capital Market Department, who is familiar with Osaka’s real estate investment market.
Land in the Minami area priced the highest,Three reasons for the come-from-behind win
According to the MLIT, the assessed land value as of 2013 was 28.00 million yen per tsubo in the Kita area, and 20.00 million yen per tsubo in the Minami area—that’s a huge gap. (A tsubo is a unit of area approximately 3.3 square meters.) However, around 2015, land values in the Minami area started to increase at an accelerated speed, and in 2018 scored 52.23 million yen per tsubo, compared to Kita’s 49.59 million yen per tsubo. Land values were investigated at Grand Front Osaka South Building—a complex building consisting of offices and a shopping center—in the Kita area, and CROESUS Shinsaibashi—a commercial building—in Minami.
As to why Minami raised its head, Akiyama says, “There were three contemporaneous contributing factors.” One factor is the fact that Osaka continues to maintain a high yield spread—in other words, high profitability—in real estate markets around the world. A yield spread is the difference between the yield of a real estate property and long-term interest rates. In terms of yield spreads of offices in the world’s major cities, Tokyo marks 285 bps, London marks 227 bps, and Hong Kong remains low at 93 bps, but Osaka overwhelms other cities at 335 bps (bps = 0.01%). This superior profitability is the reason why investors from all over the world have their eyes set on Osaka. Japan’s interest rate remains extremely low thanks to Abenomics. Although prices of real estate properties are increasing, the difference between long-term interest rates is still big. “International investors do not judge where to invest only on the basis of yields from real estate properties—they pay attention to the yield spread. That is why Osaka gets invested in from all over the world,” explains Akiyama.
The second factor is a rapid increase in the number of foreign visitors. According to a survey by the Osaka Prefecture, the number of foreign visitors to Osaka was 2.63 million people in 2013, and it increased to 11.11 million people in 2017. “Foreign visitors to Japan flock to the Minami district, and around the Shinsaibashi-Suji Shopping Street and Ebisubashi area, you’ll hear more foreign languages than Japanese. The large number of tourists from abroad flowing into Osaka shows that Osaka’s name is well-known among the global general public. This has made it easier for international investors to persuade stakeholders—and for international money to gather in Osaka,” notes Akiyama.
The third and final factor is the fact that Minami has a number of highly current properties up for investment. “The Minami area has plenty of properties suitable for investment whose value can amount 10 to 20 billion yen but which do not need complicated rights adjustment, and they are easy for institutional investors to invest in. These properties are highly current, so investors can earn a good amount of capital gain, whether they own them short-term or for the long run,” says Akiyama. She emphasizes that properties in the Minami area are highly adaptable to the various investment policies that funds may have.
Minami’s landmark owned by a foreign fund
JLL Japan’s Kansai Office surveyed investment shares in four categories by area—Kita, Minami, the Yodoyabashi/Honmachi area, and others. The survey result revealed that a number of large-scale properties along Midosuji Street were put on the market and bought, and investments in the Minami area rapidly increased in 2017. In the first half of 2017, the share of investment in Minami accounted for 64%, and 35% in the second half of the same year. Some specific examples of retail facilities traded in Minami are Nakaza Cui-daore Bldg., Prime Square Shinsaibashi, Shinsaibashi Plaza Building, and G-Bldg. Midosuji 02, to name a few. G-Bldg. Midosuji 02 was traded at 150 million yen per tsubo, which rivals the market price for properties in Tokyo’s Ginza. The cap rate declined to as low as 3.0%. Not only that, CROESUS Shinsaibashi, which was developed by a Japanese trading company in 2009, was later acquired by Croesus Retail Trust, a Singaporean listed real estate investment trust (REIT). Then, in 2017, American asset management company Blackstone bought up said REIT. “The fact a landmark of the Minami area is being bought and sold by international investors can be regarded as the proof that Osaka is known among investors as a global market,” states Akiyama.
Japanese funds join the game. Will the yield drop below 3%?
Now, what points should we pay attention to in Osaka’s real estate market in the future? Akiyama’s opinion is that “whether the market can overcome the wall of 3% yield, and what types of investors make an appearance are the points to watch”. In 2015, there were many large-scale transactions involving foreign funds in the Midosuji area, and in 2017, they started to search for an exit in full swing. It is expected that the investment properties that were put on the market and bought in 2015 will come back on the market in 2018. Many of the large-scale properties sold and bought in 2017 were acquired by Japanese funds in the end. Some large-scale projects that were signed in 2018 were also transferred from a foreign fund to a Japanese fund. It will be interesting to keep an eye on whether this trend continues when forecasting the trends in Osaka’s investment market.