Inflation is a driving factor for Japan’s multifamily sector

Japan's long-standing deflation has come to an end, and the country is experiencing price increases. Consumer price inflation has exceeded 2% for two consecutive years, and in 2023, the rate of increase surpassed 3% for the first time in 32 years (since 1991). The price increases in Japan were previously due to factors such as supply chain disruptions during the COVID-19 pandemic and the depreciation of the yen, which led to increased import prices. However, the combination of a strong global economy and the relaxation of COVID-19 restrictions has improved the performance of many companies and contributed to a positive cycle of price increases. Price increases, along with the labour market shortages, are also pushing up wages for workers. This has led to increased attention to the multifamily sector in the real estate investment market, which is benefiting from these price and wage increases.

The multifamily sector in Japan has long been considered a traditional investment destination. Similar to office properties, it is less volatile and offers stable occupancy rates and rental income. Continued population inflows from surrounding areas to major cities like Tokyo and Osaka have also resulted in consistently high occupancy rates for multifamily properties. Even during the COVID-19 pandemic from 2020 to 2022, multifamily properties maintained highly occupancy levels as people sought quality housing.

However, despite the high occupancy rates, rents of multifamily property are heavily influenced by tenant affordability. Therefore, rents have generally remained stable in the context of a deflationary economy and stagnant wages.

Nevertheless, stable rents for multifamily properties are expected to shift towards a significant upward trend due to wage increases. Prior to the pandemic, Japan already had low unemployment and some labour recruitment challenges, but wage increases were limited in the deflationary economy. However, the impact of price increases has prompted companies to raise wages. According to the Survey on Wage Increases by the Ministry of Health, Labour and Welfare, the average wage increase in 2023 reached 3.2%, marking the first time it has been in the 3% range since 1994. This trend of wage increase is accelerating, with Japan's largest labour union aiming for a more-than-5% wage increase by 2024. These wage increases are increasing tenants’ rent affordability, leading to rent increases in the multifamily sector.

Figure 1: Japan Multifamily Rent Index

Source: Nominal Wage Index: Created by JLL based on data from the Ministry of Health, Labour and Welfare, the Monthly Labour Survey
Multifamily Rent Index: Created by JLL based on data from ARES

The survey by the Ministry of Health, Labour and Welfare shows that wage growth rates for large corporations significantly exceed the average. Therefore, areas with a concentration of large corporate headquarters, such as Tokyo and Osaka, are expected to benefit from wage growth, resulting in rental increase significantly.

In the investment market, multifamily property investment yields have decreased since 2010. Concerns about rising interest rates accompanying price increases have also made it difficult to achieve further yield compression. However, rental increases driven by wage growth are expected to positively impact the multifamily sector.