Boston, MA -- (SBWIRE) -- 12/06/2013 -- Japan's commercial real estate sector continues to outperform, bolstered by substantial foreign capital inflows and ultra-loose monetary policy. Nonetheless, the combination of low interest rates, non-resident capital inflows and growing demand for higher risk properties is leaving the market looking increasingly frothy.

Japan's commercial real estate sector continues to benefit from Japanese Prime Minister Shinzo Abe's economic stimulus plans, dubbed 'Abenomics', begin to show signs of reversing the stubborn deflation that has gripped land prices for 22 years. We emphasize that price rises are unlikely to be evenly distributed across the country, with the most aggressive rises expected to be focused in prime areas such as Tokyo, Osaka and Nagoya. Nonetheless, smaller cities such as Fukuoka have begun to increasingly attract investor interest, causing office properties to increase by 5.6% y-o-y in 2013.

Macro conditions remain overwhelmingly favourable for the real estate sector. Aggressive monetary easing by the Bank of Japan has driven a 20-25% devaluation in the value of the yen against the dollar, making real estate investments particularly attractive for foreign investors with a suitably long-term investment horizon. Bank lending continues to improve, with the average balance of lending increasing by 1.9% y-o-y in Q313, driven primarily by large lot loans for property, indicating a continued desire to increase their real-estate lending portfolio.

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While inflation expectations are beginning to rise on the back of Abe's economic policies, 35 year flat mortgages rates remain low, standing at 1.93% in October 2013. While rising inflation expectations are likely to push mortgage rates higher, we emphasize that they are currently almost two standard deviations below their 10 year average.

Sales of offices, warehouse and retail space rose 85% to JPY2tn in the first half of 2013, with prices in Investment into commercial real estate portfolios is also supported by the growing real- estate investment trust market, which enjoyed unprecedented investor interest in 2013. While we see scope for this trend to continue in 2014, REITs remain highly sensitive to interest rates. In the unlikely event that the Bank of Japan were to tighten monetary policy, REIT share prices would face substantial downside risk, resulting in declining capital flows into the sector, and ultimately lower real estate prices.

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