Welcome to the third edition of the Savills Japan Opinion Letter.

As many of us return from the first wave of summer holidays, or prepare for a well-earned break, this is a timely ocassion to pause and reflect on the year’s trajectory. Japan’s recent national election has added a fresh political layer to the market outlook, while global macroeconomic uncertainty continues to influence investment decisions.

This mid-year review revisits our 2025 outlook in light of recent developments and shifting sentiment across key real estate sectors. Despite ongoing headwinds, including monetary tightening, inflation concerns, and geopolitical tensions, Japan continues to stand out as a stable and attractive investment destination.

Notably, Brookfield is reportedly planning to invest over USD10 billion in Japan over the next five years. Domestic players remain active, and new entrants continue to arrive. For example, Mitsubishi UFJ Financial Group recently acquired a mixed-use building in Osaka for over JPY100 billion, with plans to securitise and sell to retail and institutional investors.

Investor Sentiment and the Japan Advantage

Global uncertainty continues to weigh on sentiment. Nevertheless, Japan’s transaction market has proven resilient, underpinned by:

• Positive yield spreads
• A reputation for stability, liquidity, and institutional depth
• A stable policy environment even following the national election

While institutional investors are increasingly theme-driven and selective, value-add funds, family offices, and ultra-high-net-worth individuals remain active and are often attracted by the weaker yen and Japan’s steady income streams.

Sector Snapshots: Opportunities and Shifts

Logistics: Renewed Momentum

After a temporary oversupply, the logistics sector is steadily recovering. A slowdown in new development, particularly in Tokyo, has helped reduce vacancies. Meanwhile, demand for high-spec facilities remains firm. Investors are re-engaging selectively, with value-add plays (such as acquiring high-vacancy assets at discounts) remaining viable. Regional expansion is also gaining traction.

Residential: Solid but Selective

Rental growth is strong in central Tokyo and other core cities. However, higher interest rates and capital expenditures are prompting greater selectivity. Core residential strategies remain solid, while value-add investors are exploring operational models (such as co-living) and refurbishing older assets. Luxury residential remains undersupplied and continues to gain momentum.

High-Street Retail: Tourism Boost

Supported by strong inbound tourism, prime retail corridors are experiencing rising rents and full occupancies. We’re seeing cap rate compression, with the new Tiffany flagship store rumoured to be marketed at around a 2.0% yield. While global luxury demand may be softening, demand for everyday products appears more resilient to economic uncertainty.

Hospitality: Selective Investment at Premium Prices

Firm pricing, limited new supply, and elevated construction costs are making investors more selective. Key strategies include repositioning underutilised assets, reflagging to stronger brands, and targeting untapped regional markets. Several new hotel funds have been launched recently, with successful oversubscriptions, indicating continued appetite for the sector.

Office: Leasing Recovers, Investment Follows

Japan’s office market is steadily recovering, contrasting with more volatile global trends. Q2 saw strong leasing activity, especially in core areas now nearing full occupancy. In contrast, bayfront areas with weaker access still face some softness. Value-add approaches, especially with flexible or fitted-out configurations, may command rental premiums.

Data Centres: Emerging as a Core Asset Class

A few stabilised hyperscale data centres have recently traded hands, as early institutional investors begin to exit and recycle capital. Leasing activity remains robust, and cap rates are holding in the mid-3% range. These assets are increasingly viewed as core holdings by global investors.

Political Update: Japan’s Post-Election Landscape

On 20 July 2025, Japan's 2025 House of Councillors election marked a turning point. For the first time since 1955, the ruling LDP–Kōmeitō coalition lost its upper house majority, compounding its earlier loss of the lower house in late 2024. The coalition now lacks control of both chambers.

A key development was the rise of Sanseito, a nationalist-populist party that surged to 14–15 seats, running on a “Japan First” platform. Its unexpected performance reflects growing voter concern around cultural identity, immigration, and economic insecurity.

Implications for real estate include:

• Potential increased scrutiny on foreign residential ownership
• Stricter regulations on minpaku (short-term private accommodation), particularly in areas where local residents have voiced concerns
• A stable policy environment even following the national election

Given the potential for regulatory pushback, particularly concerning Osaka’s minpaku framework, residential investments premised on such demand may face some uncertainties or require more careful consideration going forward.

Meanwhile, with the national election concluding uneventfully and tariff discussions with the U.S. showing signs of stability, the Bank of Japan is now expected to raise its policy rate by 25 basis points later this year in response to persistent CPI pressure. Bond markets have also reacted to the perceived excesses in opposition policy proposals, prompting a modest rise in long-term yields.

That said, the estimated increase, within the 20–30 basis point range, remains manageable given robust rental growth, and the market appears well-positioned to absorb the shift without major disruption.

Despite these evolving dynamics, Japan’s real estate market retains its core strengths: macroeconomic stability, transparency, institutional depth, and structural demand. Vacancy trends, rental growth, and capital inflows remain healthy across sectors. We will continue to monitor political and policy developments and refine our outlook accordingly, particularly in advance of major legislative initiatives anticipated later in 2025.

Conclusion

As we enter the second half of 2025, Japan remains a compelling investment destination. Stable returns, structural demand drivers, and relative macro clarity continue to set the market apart.

For investors with a strategic and selective approach, opportunities remain across asset classes.

We hope this edition provides helpful perspective as you revisit your views. As always, the Savills Japan team is here to support your decision-making with tailored insights and data-driven advice.