Tokyo Real Estate Attracts Global Investment Due to Undervaluation

Why global investors see value in Tokyo real estate

Global money is pouring into Tokyo real estate as investors hunt for stable income and growth in a market many still view as undervalued compared with other world capitals. Benchmark land prices in the biggest Japanese cities rose in the first half of 2025, a move powered by record foreign buying. Tokyo office rents remain comparatively low on a global basis, the yen is weak against the dollar, and borrowing costs are still near the floor by international standards. That combination has drawn a wave of cross border capital into offices, multifamily housing, logistics parks, hotels, and high end condominiums.

The scale of activity is striking. International investors put roughly 1.14 trillion yen into Japanese property during the first half of 2025, lifting Tokyo deal flow to about 13.2 billion dollars in the same period. By several measures the gap between yields in Tokyo and those in New York or London now favors the Japanese capital. The city has tightened after a post pandemic rebound in leasing demand, which has helped keep valuations firm even as commercial property in the United States and parts of Europe wrestles with refinancing pressure.

Japan’s market backdrop has strengthened at the same time. Nationwide land prices climbed 2.7 percent as of January 2025, the fourth straight annual increase and the strongest since the early 1990s. In the Tokyo Metropolitan Area, the home price index rose 10.7 percent year on year in January. Occupancy in the rental sector stands in the mid to high nineties across prime neighborhoods, supported by urban migration and brisk hiring by global companies. Investors see a market with liquidity, dependable tenants, and room for catch up growth.

What is driving the buying spree?

Three pillars sit behind the rush into Tokyo. First, yield spreads look attractive. Capitalization rates on quality assets remain comfortably above domestic funding costs, and the Bank of Japan still guides short term rates at very low levels. Second, currency dynamics favor dollar and euro based investors. The weaker yen cuts the effective entry price and cushions returns when rents are collected in yen but reported in foreign currency terms. Third, Japan’s legal and regulatory environment is predictable, and foreign buyers can purchase freehold property without special restrictions, an uncommon feature in Asia.

Yu Kawamata, who leads Japan real estate at Morgan Stanley Real Estate Investing, framed the opportunity in macro terms.

“Japan has a positive macroeconomic outlook driven by inflation and wage growth, regulatory changes shifting corporate behavior toward efficiency, and attractive yield spreads with favorable financing terms.”

Demand is meeting solid fundamentals. Residential rents in Tokyo’s 23 wards rose around 6 percent year on year in late 2024, and occupancy sits near 97 percent in many central districts. Nationwide rental yields averaged about 4.2 percent in early 2025, with prime Tokyo assets typically offering 3 to 4 percent and very low vacancy. Foreign capital’s share of Japanese real estate transactions has climbed to roughly 27 percent from about 21 percent five years earlier. Logistics sites tied to e commerce take a large slice of inbound money, reflecting stable leases and expansion needs.

Office market recovery and corporate asset sales

Tokyo’s top tier office market has been healing. In the five central wards, Grade A vacancy hovered near 3.4 percent by late 2024, with demand outpacing new supply around major transport hubs such as Tokyo Station and Shinagawa. Average rents for prime space reached about 32,400 yen per square meter per month, up nearly 5 percent from a year earlier. Tenants are concentrating in newer buildings with green credentials and smart systems, while older stock in peripheral areas faces pressure to renovate, reduce rents, or reconfigure floors for flexible use.

Hybrid work has changed the shape of demand rather than erased it. Some firms have trimmed their headquarters footprint and invested in satellite offices and digital meeting spaces, but many are still locking in well located floors to attract staff back and to anchor client facing teams. That is supporting premium buildings and widening the gap with secondary venues.

Another catalyst is a steady stream of corporate asset sales. Large domestic companies have been pruning non core holdings, releasing big ticket properties that global funds are eager to buy. Disposals by well known names such as automakers and brewers have added sought after office and mixed use assets to the market. The result is a deeper pipeline of institutional grade deals at a time when Western markets are quieter.

Where capital is flowing

Multifamily housing sits at the center of the story. Foreign investment in Japanese residential assets rose about 18 percent in 2024 to roughly 740 billion yen. Central Tokyo rental buildings generally maintain occupancy in the mid nineties, and asking rents in popular one bedroom units, often 25 to 40 square meters in size, average around 150,000 yen per month. A new wave of managers is raising capital to scale in this segment. One example is a fund that recently acquired five apartment properties with about 700 units in central wards and is targeting more with help from global partners.

Industrial and logistics real estate is another magnet. By some tallies, about 40 percent of foreign inflows in recent years went into warehouses and related facilities, a reflection of Japan’s high e commerce adoption and the need for modern distribution hubs near major cities. Investors such as Blackstone, GIC, and ESR have deployed large sums into these assets. Hotels are also back in favor as inbound tourism rebounds, especially in Tokyo, Osaka, and resort areas.

Institutional interest is stacking up. Morgan Stanley Real Estate Investing closed a dedicated Japan fund at roughly 131 billion yen, overshooting its initial target and already deploying capital across residential buildings. A record transaction saw a foreign buyer agree to purchase Tokyo Garden Terrace Kioicho for about 2.6 billion dollars. Another global firm teamed with a regional operator to develop more than three thousand rental units across Japan. Major Asia strategies, including vehicles that raised more than 5 billion dollars, are making Japan a primary focus. Some managers expect corporate governance reforms to trigger as much as 3 trillion dollars of non core asset sales over time, expanding the deal universe.

Luxury and the central wards heat up

The sharpest gains are concentrated in central Tokyo. Condo prices in the 23 wards have jumped by roughly 64 percent since 2021, far outpacing the rise across the wider metropolitan area. The average price of a new condo in the core wards topped about 112 million yen in 2024. In March 2025, the greater Tokyo average briefly hit about 104.9 million yen before easing the next month as the mix of units shifted. Used apartments also climbed, with an average of roughly 44.5 million yen in April 2025, an increase of more than 28 percent from a year earlier.

Redevelopment zones are leading the charge. Land price surveys show double digit gains in places such as Nakano and Suginami, and the Sakura Stage district in Shibuya recorded an increase of roughly 33 percent. Demand for luxury units has surged as multinational executives and wealthy second home seekers return to the city. In neighborhoods like Daikanyama, large high floor apartments above 200 square meters are scarce, and seven figure dollar price tags are no longer unusual.

Rents mirror the sales boom. Mid market asking rents climbed by around 6 percent late last year in the 23 wards, while vacancy rates for well located buildings sit near 97 percent. New condo supply in central Tokyo was unusually thin in 2024, and although developers plan to bring more projects to market, the pipeline still trails demand. Many private buyers are looking beyond the Golden Triangle of Minato, Chiyoda, and Chuo to emerging hot spots in Koto, Sumida, Nakano, and Meguro.

Foreign buyers face an open legal door

Japan’s property rules are straightforward for non residents. Foreign nationals can purchase homes, land, and commercial buildings without citizenship, a visa, or special permits. The process resembles the steps domestic buyers follow. After property viewings and an offer, buyers typically sign a contract and pay a deposit, then complete settlement when financing is finalized and registration is completed. Licensed brokers and judicial scriveners handle much of the paperwork. Transactions usually close within 60 to 90 days.

Upfront costs often total 5 to 6 percent of the purchase price, covering brokerage, registration, taxes, and insurance. Most taxes are based on government assessed values, which can be lower than market prices. For loans, banks increasingly assess foreign borrowers on income and debt service capacity rather than only on collateral and residency status. Japan’s lending rates remain very low by global standards, a key piece of the investment math for both residents and cross border buyers.

Affordability concerns and policy debate

Rising prices have widened the gap between property values and local incomes in prime wards. The surge since 2021 has sparked political debate over the role of foreign buyers. Some opposition parties have floated measures such as a vacancy tax aimed at speculative purchases or targeted limits on acquisitions in overheated districts. Japan currently places virtually no restrictions on foreign ownership of residential property, unlike markets that require approvals or impose extra taxes on overseas buyers.

Reliable data on the precise scale of foreign buying is limited, but surveys suggest that in several central wards a share of new condos, sometimes 20 to 40 percent, are sold to non resident owners. Domestic investors are active as well, and ample local liquidity is still flowing into urban property. Tokyo’s population continues to grow, even as the national population declines, which concentrates demand in the capital. Policymakers face a balancing act between keeping the city attractive for investment and addressing affordability for residents.

At the same time, Japan has about 9 million vacant homes, known as akiya, many of them in rural or suburban areas far from jobs and services. National and local initiatives are trying to bring more of these properties back into use, but the economics often prove challenging because older homes can require substantial renovation. Urban markets like Tokyo operate on a separate track from many regional towns.

Neighborhood flashpoints short term rentals and tourism

Tourism has added heat to select districts. In Asakusa’s Kaminarimon area, land values rose about 29 percent this year and now stand nearly double their pre pandemic level. Analysts link the jump to a rapid increase in short term rentals geared to visitors and an influx of overseas capital. Some buyers have paid aggressive prices for small buildings and apartments that can be relet to tourists, betting on high occupancy rather than current income multiples.

Short term rentals have been legal since 2018, and by May 2025 around 32,000 properties were registered nationwide, with more than a third inside Tokyo’s 23 wards. In Taito Ward, which includes Asakusa, listings are up about 80 percent compared with May 2019. In February and March this year, roughly 465,000 people stayed in short term rentals across Japan, up nearly half from a year earlier, with foreigners making up more than half of guests. Chinese travelers accounted for the largest share among nationalities.

The boom has lifted rents in tourist corridors and triggered complaints from local residents about noise and waste disposal. City officials are weighing targeted enforcement and rules that preserve quiet hours while allowing hosts to serve demand during peak travel periods. Investors who rely on short term income streams will need to watch any changes in municipal regulations.

Technology opens new routes into Tokyo property

Digital finance is reshaping access to Japanese real estate. A Tokyo based firm plans to tokenize about 75 million dollars worth of central city property on the Oasys blockchain, issuing digital tokens that represent economic interests in buildings. The company’s longer term ambition is to tokenize more than 200 billion dollars of assets, equal to about 1 percent of Japan’s property market, by working with licensed entities and overseas special purpose vehicles to meet compliance standards.

Yushi Sekino, the chief executive leading the tokenization effort, said the goal is to lower practical barriers for non resident buyers by digitizing ownership and streamlining fees and paperwork.

“We are building next generation investment infrastructure to make Japanese real estate globally accessible.”

Real estate tokenization is gaining traction worldwide, and Japan’s sophisticated, rules based market makes it a candidate for wider adoption. For smaller investors, fractional models could offer exposure to Tokyo income properties without the need to purchase an entire unit. For large institutions, token rails can speed settlement and broaden distribution. Execution quality and investor protections will determine how quickly these models scale.

Outlook for 2025 growth with more selectivity

Price growth looks set to continue at a gentler pace. Several private forecasts point to a 5 to 6 percent rise in Tokyo property prices in 2025 after an 8 percent gain last year. Developers intend to increase condominium launches, but supply is still unlikely to match demand in central wards. Residential occupancy should remain tight as urban migration persists and international hiring supports the luxury end of the market. In offices, high quality towers near transit should keep leasing momentum, while older buildings may need upgrades or repositioning to compete.

Construction trends hint at future scarcity. Authorized housing starts fell about 1 percent in 2024 and dropped 4.6 percent in January 2025, a sign that pipeline growth may not fully meet rising demand. That could add upward pressure to prices and rents, especially in the central city. At the same time, logistics developers continue to add capacity in key corridors around Tokyo and Yokohama to serve e commerce growth.

Risks remain. A faster rise in domestic interest rates would narrow the spread that foreign investors prize, even if levels stayed low in global comparison. Yen strength would reduce currency tailwinds. Sharper rules on short term rentals could alter cash flow for certain assets. Policymakers could also revisit measures that touch on foreign ownership in specific districts. For now, liquidity, stability, and rental growth still underpin the bid for Tokyo real estate.

Key Points

• Land prices in major Japanese cities rose in the first half of 2025, supported by heavy foreign investment, low rates, and a weak yen.
• Foreign investors deployed about 1.14 trillion yen in the first half, with Tokyo tallying roughly 13.2 billion dollars in deals.
• Yield spreads, legal openness to foreign freehold ownership, and steady rental demand are pulling capital into Tokyo.
• Grade A office vacancy sits near 3.4 percent, with prime rents rising and older buildings facing renovation pressure.
• Multifamily and logistics lead inflows, while large funds closed new Japan vehicles and executed record transactions.
• Central wards saw the fastest gains, with the average new condo in core Tokyo around 112 million yen in 2024 and prices still trending higher.
• Policy debate is intensifying as affordability worsens in prime areas, while short term rentals contribute to neighborhood friction in tourist zones.
• Tokenization projects are emerging to open access for overseas investors through compliant digital structures.
• Forecasts point to 5 to 6 percent price growth in 2025, with tight occupancy and limited new supply sustaining the market.
• Key risks include higher interest rates, currency swings, and potential rule changes that affect short term rentals or specific buyer groups.