TOKYO—Japan’s capital city is a far cry from the bubbly 1980s when, as legend has it, the land under the Imperial Palace was worth more than California. But for Chinese investors dealing with their own hangover at home, Tokyo’s more sober real-estate market is looking like good medicine.
Already a force in places like New York and London, Chinese real-estate money is finding in Tokyo steady returns, a still-vibrant demand for top-grade buildings and a flood of visitors who need lodging.
Niu Zhifang, a 30-year-old who runs a construction and finance business in China, said he bought a Tokyo property in July previously used for corporate housing. He is turning it into student accommodation and investing ¥200 million ($1.7 million) in the project.
Mr. Niu said he chose Japan because the yen has gotten cheaper, it is close to his home province of Shandong and he believes property values will rise. “You don’t want to put your eggs in one basket,” he said. “And when you use different baskets, you also have to choose good baskets.”
Bigger fish are swimming too. Sovereign-wealth fund China Investment Corp. bought a Tokyo office-and-commercial complex called Meguro Gajoen for around $1.2 billion in January in a joint venture with U.S.-based LaSalle Investment Management Inc.
Office space in the complex is fully rented, said Kunihiko Okumura, head of acquisitions in Japan for LaSalle. “Rents are also gradually trending higher,” he said. “We bought it because we believed this would generate very stable cash flows over the long run.”
Shanghai conglomerate Fosun Group bought two office buildings in Tokyo last year and is now looking at hotels because of the tourist demand, said Mikihisa Hirai, chairman of the group’s Japan unit.
China’s outbound real-estate investment has climbed 50% to $15.6 billion year-to-date in 2015, compared with the same period last year, according to brokerage Jones Lang LaSalle Inc. That statistic, which includes some residential real estate, may understate the actual number because some transactions aren’t disclosed.
Chinese investors are trying to safeguard their wealth against volatility at home, where the wild swings of the stock market this summer shook the globe. The weakening of the Chinese currency, the yuan, against the dollar and overbuilding in parts of China also bolster the case for real-estate investment abroad.
“Because of the slowing growth in the Chinese economy, they are increasingly interested to diversify out of China and look at other markets. Japan is one of the closest large markets for them to come into,” said Andy Hurfurt, executive director for investment consulting at CBRE Group Inc.’s Japan unit.
Chinese investment in Tokyo property still represents a small fraction of the money going to New York, London or Sydney, according to Jones Lang LaSalle. But that may change in the next few years.
Anbang Insurance Group Co., which bought the Waldorf Astoria New York for $1.95 billion in February, has been in the hunt for trophy assets in Tokyo, people familiar with the company’s activities say. Anbang didn’t respond to a request for comment.
And Greenland Group, one of China’s biggest developers, said in September that it made a deal with Mizuho Financial Group Inc., one of Japan’s largest banks, under which Mizuho will give advice and possible financing for Japanese real-estate acquisitions.
A Greenland spokesman said the company is in the early stages of looking at Japan. “So long as we feel prospects are good, profit margins are big and there’s value in the project, we will consider it,” the company said in a statement.
One risk for Chinese investors is a flare-up of political tensions with Japan, which occupied parts of China before and during World War II. In 2012, a territorial dispute over islands in the East China Sea that are held by Japan and claimed by China led to riots that damaged Japanese stores in China and chilled investment.
While political leaders remain on cool terms, average Chinese who can afford to travel abroad are more attracted to Japan than ever. Nearly four million Chinese tourists visited Japan in the first nine months of this year, more than double the year-earlier figure. The streets of premier shopping areas such as Ginza and Akihabara are packed with visitors engaging in what is known here as “baku-gai”—“explosive buying” of rice cookers, electronics and cosmetics to bring back home.
Property prices have been falling continuously for a quarter-century in much of Japan, but prices in Tokyo, especially top locations, are on the rise again. Average rents have increased 4.7% over the year in central Tokyo offices, according to data from a brokerage Miki Shoji Co. as an economic recovery under Prime Minister Shinzo Abe prompts businesses to expand floor space.
Investment yield on high-quality office space in Tokyo—a common valuation measure that is computed by dividing net operating income by price—was 3.1% at the end of September, according to Jones Lang LaSalle. That’s the lowest level since comparable data became available in 2003. The so-called cap rate was 3.4% at the end of September 2014. Cap rates decline as values rise.
Central Tokyo has seen a rush of new developments from last year’s opening of the 52-story $1.2 billion Toranomon Hills to a new $8 billion project by Mitsubishi EstateCo.next to Tokyo Station, announced in August, that is set to include Japan’s tallest building.
One problem for Chinese investors scouting in Tokyo is the competition from other asset managers around the globe. In September, the State Oil Fund of Azerbaijan said it paid more than $400 million for a retail building in the Ginza shopping district that houses a Samsonite luggage store and fashion shops, its first real-estate investment in Japan.
Norges Bank Investment Management, manager of Norway’s sovereign wealth fund, is targeting Tokyo office properties with billions of dollars in its war chest. The asset manager selected Tokyo and Singapore over other cities to establish its property portfolio in Asia because of their size, future potential and predictability, said Karsten Kallevig, its chief investment officer for real estate.
