A significant shift in global real estate investment is underway, with major investment funds divesting from China and redirecting capital towards Japan. This trend, characterized by the phrase “selling China, buying Japan,” signals a reassessment of risk and opportunity in the Asian property markets. Prominent firms like KKR and AEW, once aggressive buyers of Chinese commercial properties, are now listing their assets at steep discounts, while simultaneously increasing their investments in Japan.
Chinese Real Estate Market Woes
The downturn in China’s real estate sector has prompted several large U.S. private equity firms to sell off significant portions of their Chinese holdings. For instance, AEW, which invested $650 million in 2018 to acquire the Hungseng International Center in Beijing, a prime office building near Tiananmen Square and the Central Business District, is now reportedly selling the property for roughly half its original purchase price. This move comes after an 8-year holding period, reflecting the broader challenges facing China’s property market.
Bloomberg reported in late November that major players like KKR and AEW have put up key commercial and residential properties in China for sale, with prices slashed to about 50-60% of their acquisition costs. This strategy is largely driven by the prolonged slump in the Chinese real estate market following its previous boom. Factors such as declining population and weakening consumption are making recovery difficult, forcing investors to accept substantial losses to recoup at least enough to cover their initial bank loans.
The list of divested assets includes properties acquired around the peak of foreign investment in Chinese commercial real estate, shopping centers, and data centers, which collectively reached $140 billion over the past 15 years, peaking at $19.9 billion in 2019. KKR, for example, has listed nine properties in Beijing and Shanghai, including the Service Residences FunLife and the Crystal Orange Hotel. AEW has also put up for sale commercial buildings like the Jingyin International Center in Beijing and the Pudong Development Bank Building in Shanghai.
Even major players in the data center market, which had seen strong growth prospects in China, are pulling back. Bain Capital sold its Chinese data center business, ChinData Group, to a domestic firm for $4 billion in September, after acquiring it in 2019. Similarly, Warburg Pincus is in the process of selling its Chinese data center operations, which span six major cities.
Japan as the New Investment Frontier
In stark contrast to their retreat from China, global investors are significantly increasing their exposure to the Japanese real estate market. This pivot is driven by several compelling factors, including the perception of Japanese property as undervalued, a weaker yen making assets more attractive, and a more transparent transaction environment compared to China. Additionally, Japanese corporations are increasingly looking to monetize their substantial real estate holdings to improve capital efficiency.
KKR, in partnership with PAG, acquired the real estate business of S-Four Holdings for $3.1 billion in late December, which includes assets like the Ebisu Garden Place complex in Tokyo. KKR’s Japanese real estate arm, KJRM Holdings, also purchased the Nissan Motor headquarters in Yokohama for $630 million last November. Blackstone, another major player, has announced plans to invest $15 billion in Japanese real estate over the next three years, building on its acquisition of the Tokyo Garden Terrace Kioicho for $2.6 billion in December 2024.
Foreign investment in Japanese real estate surged by 128% last year to approximately $13.5 billion, up from $9.4 billion in 2023. This influx of capital is attributed to several key advantages of the Japanese market. Property prices in Tokyo, even for prime luxury apartments, are reportedly around 40% of those in Hong Kong and 50% of London’s, offering significant value. The market is also perceived as more stable, with less geopolitical risk compared to China or the United States.
Furthermore, Japanese companies hold a substantial amount of real estate relative to their total assets, with a ratio of 12.6% compared to Germany’s 4.3%. This presents a large pipeline of potential assets for sale. Naoki Suzuki, president of KKR’s subsidiary KJRM Holdings, noted in a Bloomberg interview that the potential market size from corporate real estate disposals could reach 450 trillion yen, indicating ample opportunities for further investment and development.
Expert Analysis of the Shift
The strategic reallocation of capital from China to Japan is seen by market observers as a significant indicator of changing global economic perceptions. Shigeharu Hori, chairman of the economic magazine Taishin Keizai Shimbun, commented on Facebook that the shift reflects a view that “foreign capital sees the Chinese economy as not as good as before.” This sentiment underscores the growing caution among international investors regarding China’s economic trajectory and the increasing appeal of Japan as a more stable and potentially lucrative investment destination.
The trend of selling undervalued Chinese assets at a loss to fund investments in a perceived undervalued Japanese market highlights the dynamic nature of global finance and real estate. As investors seek to mitigate risks and capitalize on emerging opportunities, the flow of capital is likely to continue reshaping property landscapes across Asia.
