While the Japan property market is catching the eye of many international investors, as well as a growing number of local buyers, the Japanese property market is also starting to turn a few heads.

“Currently, less than 5 per cent of quality invested assets in Japan are put into real estate investment trusts (Reits),” says Eng-Teck Tan, a senior investment manager and Asian property specialist at Credit Suisse Asset Management. “And that means there is a huge potential for growth. As more property is securitised and more Reits are formed, more and more investors will get involved because the yield on other assets is so incredibly low. A huge amount of savings are stuck in deposits that pay 0 to 0.1 per cent, while reits average somewhere between 3 to 3.5 per cent and that is hard to ignore.

He adds: “So far the Reits market has been supported by international money but reits are a good option for locals. Japan has an ageing population and people need to get make their money working harder for them in time for retirement.”

Indeed, according to IPD’s Japanese index, the country’s retail property sector returned 6.9 per cent in 2004, while the residential and office sector turned in 6.2 and 6.7 per cent, respectively.

Last year saw a turnaround in the performance of the Japanese property market, the index provider said in a report. “The total return on standing investment properties in the IPD Japan databank improved from 3.7 per cent in 2003 to 6.3 per cent in 2004. The key to the upturn was the stronger performance of the dominant office sector, as capital values finally stabilised. Total returns on offices virtually doubled between 2003 and 2004, as stable capital values left total returns equal to the rate of income return at 6.2 per cent.”

But Mr Tan notes that investors should be cautious over the longer term. “Property has to be supported by fairly strong demographics and Japan does not have that. Nevertheless, investors will take a look at what they have in the bank and will have to wake up to the fact that they will have to look at higher-yielding investments.”