In March 2024, the Bank of Japan lifted its negative interest rate policy and raised interest rates for the first time in 17 years. Subsequently, in July, the Bank raised its policy rate to around 0.25%, marking a major shift in the financial markets to a "world with interest rates". This historic policy change has had a serious impact on the real estate investment market, forcing many investors to rethink their strategies.
However, the rising interest rate phase is not necessarily all headwinds for real estate investment. Rather, for ultra-high-net-worth individuals with the right strategy, this could be the perfect time to create new investment opportunities. While ordinary investors are pulling out of the market due to rising interest rates, the ultra-high-net-worth class, with their financial resources and expertise, is now in a better position to acquire prime properties on more favorable terms.
In this article, we introduce specific investment strategies to become a winner during the rising interest rate phase based on our experience as INA & Associates, Inc. in supporting numerous ultra-high-net-worth clients in their real estate investments. From accurate analysis of market trends to practical investment techniques, we will systematically explain what ultra-high-net-worth individuals need to know in order to achieve success in their future real estate investments.
The monetary policy shift in 2024 marks a pivotal turning point for the Japanese economy. At its monetary policy meeting on March 19, the Bank lifted its negative interest rate policy, which had been in place since 2016, and raised the policy rate to around 0.1%. On July 31, the Bank raised the policy rate to around 0.25% by implementing an additional interest rate hike.
Behind this policy shift is the realization of sustained price increases. The prospect of achieving the Bank's 2% inflation target on a sustained basis has initiated the process of normalization from the Bank's different-dimensional monetary easing policy. Some market participants are predicting that the policy rate will reach 1.0% by January 2026, and the upward trend in interest rates is likely to continue.
Rising interest rates will affect real estate investment in three main channels.
The first path is an increase in borrowing costs. Rising interest rates on real estate investment loans directly increase investors' financing costs. Investors with floating-rate loans may see an increase in their monthly repayments and a deterioration in their investment profitability.
The second path is downward pressure on real estate prices. As interest rates rise, the required level of investment yield increases, making properties that provide the same rental income less attractive as an investment unless they are priced lower. This exerts downward pressure on real estate prices.
The third path is a change in the demand structure. Rising mortgage rates may reduce individuals' willingness to purchase homes and increase the relative demand for rental properties. At the same time, liquidity in the trading market will tend to decline as more investors refrain from purchasing investment properties.
The impact of rising interest rates varies greatly by property type. Newer properties and properties in more convenient areas tend to be less affected by rising interest rates. This is due to the intrinsic value and stable rental demand of these properties, which maintain strong popularity among investors.
On the other hand, the impact of rising interest rates has been more pronounced for older properties and properties in suburban areas. These properties were originally appealing to investors because of their high yields, and their relative attractiveness is likely to decline as interest rates rise.
The investment behavior of the ultra-high-net-worth class is also changing. Those who used to make leveraged investments using loans are increasingly acquiring properties in cash. This is considered a strategic choice to avoid the risk of rising interest rates and to make flexible investment decisions during periods of market turmoil.
One of the most important strategies during a period of rising interest rates is the active use of fixed-rate loans. Floating-rate loans carry the risk of an increase in repayment burden due to rising interest rates, but by choosing a fixed-rate loan, the risk of future interest rate fluctuations can be avoided altogether.
We strongly recommend that ultra-high-net-worth borrowers obtain financing at long-term fixed interest rates. Current interest rate levels remain historically low and offer an excellent opportunity to lock in low interest rates for an extended period of time. In particular, by selecting a long-term fixed interest rate of 10 years or more, you can ensure stable investment returns even during future interest rate hikes.
However, the short-term profitability of a fixed-rate loan may be slightly lower than that of a variable-rate loan due to the higher initial interest rate level. However, from a long-term perspective, the benefits of avoiding the risk of rising interest rates will greatly outweigh this initial cost.
During periods of rising interest rates, the key to investment success is to optimize the equity capital ratio. In conventional real estate investment, the strategy has generally been to increase the borrowing ratio to maximize the leverage effect, but in an era of rising interest rates, this approach must be fundamentally revised.
The recommended equity ratio is 40% or more of the property value. By securing this level, you can enjoy the following benefits.
First, by controlling the amount of borrowing, the impact of rising interest rates can be minimized. If the amount borrowed is small, the increase in repayment burden will be limited even if interest rates rise.
Second, financing conditions from financial institutions will be greatly improved. Investors with a high equity ratio are considered by financial institutions to be good customers with low risk and can obtain loans with more favorable interest rates.
In addition, they will be more agile in the face of market fluctuations. By having sufficient funds on hand, investors will be able to respond flexibly to changes in market conditions, such as making additional investments or repaying loans early.
Property selection in an era of rising interest rates requires a shift from the traditional emphasis on yield to a comprehensive evaluation of investment value. We propose the following new selection criteria
The primary focus should be on the superiority of the location. Properties in locations with convenient transportation and potential for future development can maintain stable rental demand even during periods of rising interest rates. In particular, we recommend giving priority to properties in areas that are within a 10-minute walk from major stations and have access to multiple train lines.
Building quality and future prospects are also important evaluation factors. Not only the age of the building, but also the structure of the building, the quality of the facilities, and the management status should be comprehensively evaluated to select a property that can maintain its competitiveness over the long term.
Stability of rental demand must also be carefully analyzed. It is important to understand the characteristics of the target demographic, such as singles or families, and verify the sustainability of demand in the area.
Portfolio diversification becomes even more important during periods of rising interest rates. Rather than concentrating investments in a single property type or geographic area, it is necessary to develop an investment strategy that diversifies risk.
The table below provides an example of a recommended portfolio composition.
| Property Type | Recommended Percentage | Key Characteristics | Resistance to rising interest rates |
|---|---|---|---|
| Urban Condominiums | 40% (of total) | High liquidity, stable demand | High |
| Suburban Family | 25% (in the suburbs) | Relatively high yield | Medium |
| Retail | 20% (in the case of a commercial property) | Inflation hedge effect | Medium |
| Office buildings | 15% (in millions of yen) | Stability due to long-term contracts | Low |
This diversification allows for a balance between properties that are less susceptible to rising interest rates and those with high profitability.
In ultra-high-net-worth real estate investments, coordination with tax strategies can greatly affect investment results. During periods of rising interest rates, the following tax considerations are particularly important
Maximize depreciation expense to reduce the initial tax burden of the investment. In particular, setting an appropriate depreciation period for the equipment portion of the investment will result in more effective tax savings.
The effect of deducting interest on borrowings will also increase as interest rates rise. Tax benefits can be maximized by establishing an appropriate financing structure.
Utilization as an inheritance tax measure is another important perspective. The strategy of securing stable income while reducing inheritance tax assessed value through real estate investment is an extremely effective method for the ultra-wealthy.
In the rising interest rate environment, location selection requires even stricter criteria than before. It is necessary to comprehensively evaluate not only simple convenience, but also future development and economic sustainability.
The first criterion is the quality of the transportation infrastructure. Priority will be given to areas with multiple rail lines and good access to major terminal stations. In particular, areas where future infrastructure improvements are planned, such as the Linear Central Shinkansen Line and various redevelopment projects, can be expected to increase long-term asset value.
The second criterion is an analysis of demographic trends and economic activity. In Japan, where the population is declining, emphasis is placed on areas with a continuing population inflow and a high percentage of young people. In addition, areas with a high concentration of large corporate headquarters and R&D centers are expected to generate stable rental demand.
The third criterion is a comprehensive evaluation of living convenience. Areas with a good living infrastructure, such as commercial facilities, medical facilities, and educational institutions, have a high resident retention rate and can reduce vacancy risk.
In the era of rising interest rates, conventional surface and real yields alone are not sufficient for profitability analysis. We propose the following new analytical frameworks.
Interest rate sensitivity analysis quantitatively evaluates the impact of a 1% increase in interest rates on investment returns. It examines profitability under multiple scenarios while changing conditions such as borrowing ratio, interest rate type, and repayment period.
The cash flow stability indicator evaluates the risk of fluctuations in rental income. It predicts the stability of future cash flow through comparisons with past rent trends, vacancy rate fluctuations, and surrounding market prices.
Liquidity indicators evaluate the possibility of selling the property. It evaluates the possibility of selling the property at an appropriate price when necessary by analyzing the sales cases of similar properties, the frequency of transactions in the market, and the level of interest of investors.
The table below shows an example of property evaluation using these indicators.
| Evaluation Item | Property A (urban center apartment) | Property B (suburban apartment) | Valuation Criteria |
|---|---|---|---|
| Surface Yield | 4.2% 6.8 | 6.8 | The higher the better |
| Interest Rate Sensitivity | -0.3% (at 1% increase) | -0.8% (at 1% increase) | The lower the better |
| Cash Flow Stability | 85 points | 65 points | The higher the better |
| Liquidity Rating | 90 points | 55 points | The higher the better |
| Overall Rating | A | B | 4 levels from A to D |
A multi-layered risk hedging strategy is essential in a rising interest rate environment. Comprehensive risk management can be achieved by combining the following techniques.
For interest rate risk hedging, in addition to the use of fixed interest rates, consider the use of derivative instruments such as interest rate swaps. For ultra-high-net-worth individuals with large investments, more precise interest rate risk management can be achieved through the use of these instruments.
In hedging vacancy risk, in addition to diversified investments in multiple properties, we will consider the use of sublease contracts and rent guarantee services. However, since these services incur a certain cost, the cost-effectiveness should be carefully evaluated.
In hedging liquidity risk, a portion of the investment portfolio will consist of highly liquid properties, and a system will be established to enable flexible sales in response to changes in market conditions.
Successful real estate investment requires a systematic investment process. We recommend that investment decisions be made according to the following steps
Step 1: Market Environment Analysis involves a comprehensive analysis of macroeconomic indicators, interest rate trends, and real estate market trends. Particular attention will be paid to the direction of the Bank of Japan's monetary policy and trends in government real estate-related policies.
Step 2: Investment Strategy Formulation involves the formulation of a specific investment strategy based on the individual's asset situation, investment objectives, and risk tolerance. The investment period, target yield, and investment size are clearly established.
Step 3: In the property screening process, candidate properties are narrowed down based on the established investment criteria. We evaluate properties based on a combination of quantitative criteria such as location, age, price, and yield, as well as qualitative criteria such as future potential and management status.
Step 4: Detailed Due Diligence involves a detailed investigation of the candidate properties. Investment risk is minimized through an investigation of the building's condition, confirmation of legal issues, and a close examination of income and expenditures.
Step 5: Investment Execution and Management involves establishing a post-acquisition management system to maximize ongoing income. We analyze income and expenditures on a regular basis, evaluate market values, and revise strategies as necessary.
In modern real estate investment, the use of technology is a source of competitive advantage, and INA&Associates offers investment support services that utilize the latest technology.
Our AI-based property valuation system analyzes large amounts of market data to predict the appropriate price of a property and future price fluctuations. The system can also capture minute changes in the market that are often overlooked in conventional human analysis.
Demand forecasting based on big data analysis integrates and analyzes a variety of data, including demographics, economic activity, and traffic patterns, to forecast rental demand by area with high accuracy.
IoT-based property management utilizes sensors and smart devices to monitor property conditions in real time for preventive maintenance and efficient management.
We will summarize key points regarding real estate investment strategies for ultra-high-net-worth individuals during a period of rising interest rates.
First, proper management of interest rate risk is a prerequisite for success. It is important to manage risk through a multifaceted approach, including the use of fixed-rate loans, optimization of the equity capital ratio, and conducting interest rate sensitivity analysis.
Second, a fundamental review of property selection criteria is needed. A shift from the traditional emphasis on yield to new criteria that comprehensively evaluate the superiority of the location, the quality of the building, and the stability of rental demand is required.
Third, the impact of market fluctuations can be minimized by maximizing the diversification effect of the portfolio. Stable investment results can be achieved through diversification of property types, geographic regions, and investment periods.
Fourth, the use of technology can improve the accuracy of investment decisions: AI and big data analysis can provide sophisticated market analysis that has been difficult to achieve in the past.
The real estate market after 2025 is expected to undergo significant changes due to the progress of the interest rate normalization process. This change creates new opportunities for investors with the right strategy.
As rising interest rates reduce the number of ordinary investors entering the market, this may provide an opportunity for financially strong ultra-high-net-worth individuals to acquire properties. In the event of a price adjustment due to a rush to sell, there will be increased opportunities to acquire prime properties at favorable terms compared to market prices.
In addition, in an inflationary environment, the value of real estate as a real asset will be revalued. Properties in appropriate locations can be expected to generate real investment returns through higher rents.
The following actions are recommended to achieve successful real estate investing during a period of rising interest rates.
First, conduct a comprehensive review of your current investment portfolio. Check to see if any properties are susceptible to rising interest rates and if risk hedging is in place.
Next, review and optimize your investment strategy. We will establish investment criteria adapted to the new market environment, review financing methods, and optimize the portfolio composition.
And we will strengthen our partnerships with experts. The support of market-savvy professionals is essential for successful real estate investment. We build comprehensive investment strategies in collaboration with experts in the fields of tax, legal, and finance.
INA&Associates Inc. provides comprehensive support services for real estate investment for ultra-high-net-worth individuals. We provide one-stop support ranging from the formulation of investment strategies during periods of rising interest rates to property selection, financing, and tax optimization.
As a "human capital investment company," we place the highest priority on our clients' success and build partnerships with them from a long-term perspective. If you have any concerns about real estate investment in an era of rising interest rates, please contact us.
Our experienced and professional staff members at our Osaka Head Office, Tokyo Sales Office, and Tokyo Metropolitan Sales Office are waiting to consult with you. Let's work together to build an investment strategy that will survive the rising interest rate environment.
A1: Yes , with the right strategy, real estate investments can be effective even when interest rates are rising. The key is to properly manage the risk of rising interest rates and adopt an investment approach that responds to changes in the market environment. By utilizing fixed interest rates, increasing the equity ratio, and concentrating investments in properties in prime locations, it is possible to secure stable income while minimizing the impact of rising interest rates. In fact, as general investors withdraw from the market due to rising interest rates, opportunities for the financially strong ultra-high-net-worth class to acquire prime properties on favorable terms may increase.
A2: During a period of rising interest rates , we recommend properties with superior location and stable rental demand. Examples include condominiums near train stations in central Tokyo, new properties in redevelopment areas, and rental properties located near universities and large corporations. These properties are less susceptible to rising interest rates and can be expected to maintain or increase their asset value over the long term. Also worth considering are properties that provide an inflation hedge, such as retail and office buildings. The key is to build a portfolio with risk diversification rather than concentrating on a single property type.
A3: In the current rising interest rate environment, we strongly recommend a fixed-rate loan. Floating-rate loans offer a lower starting interest rate in the short term, but there is a risk of a significant increase in repayment burden due to future interest rate rises. Fixed-rate loans, on the other hand, have a higher initial interest rate level, but are completely immune to the risk of future interest rate fluctuations. In particular, choosing a long-term fixed interest rate of 10 years or longer offers the great advantage of securing the current relatively low interest rate level for a long period of time. For ultra-high-net-worth individuals, an investment strategy that emphasizes stability is suitable, and the certainty provided by fixed interest rates is important.
A4: To determine the right time to invest , it is important to comprehensively analyze both macroeconomic and real estate market indicators. In addition to macroeconomic indicators such as interest rate trends, price inflation, and GDP growth, we continuously monitor market indicators such as real estate price indexes, vacancy rates, and new supply. Particularly during periods of rising interest rates, opportunities may arise to acquire quality properties at a discount during market adjustments. However, since it is difficult to perfectly predict market timing, it is important to make investment decisions from a long-term perspective and manage risk through appropriate diversification.
A5: The most important aspect of risk management in a rising interest rate environment is to develop a multi-layered risk hedging strategy. It is necessary to take a comprehensive approach that manages multiple risks simultaneously, including interest rate risk, vacancy risk, liquidity risk, and market risk, in addition to measures against a single risk factor. Specifically, the strategy combines interest rate risk hedging through the use of fixed interest rates, vacancy risk hedging through diversified investments in multiple properties, and liquidity risk hedging through the inclusion of highly liquid properties. Another important element is to periodically review the portfolio and adjust the strategy in response to changes in market conditions.