TOKYO -- Young homebuyers in Japan face a stark choice: Purchase at high borrowing costs before prices rise further, or avoid the financial commitment of ownership by renting and investing savings elsewhere in search of inflation-beating returns.

The latter option has drawn interest as Tokyo stocks extend a bull run into a fourth year. Property companies and investment funds have responded by developing and financing more rentals that promise convenience in terms of proximity to train stations, high-quality shared amenities and affordability without ownership.

Cosmos Initia, an Daiwa House Industry affiliate, is among the companies expanding the supply of apartments of less than 20 square meters in central Tokyo for as little as 111,000 yen ($700) a month. Typical co-living features include well-equipped shared kitchens and other communal facilities such as a stylishly furnished lounge, coworking space and theater room. Nomura Real Estate Development and Mitsui Fudosan Residential are also making a presence in the co-living sector.

Not only in Japan, but across key Asia-Pacific markets, structural themes are supporting the case for rental housing.

Interest rates are rising globally amid inflation concerns fueled by oil supply disruptions from the Iran war. A surge in artificial intelligence investment has also added to price pressure while buoying stock markets and delivering windfalls to investors. Higher rates have even reached Japan, long associated with rock-bottom borrowing costs, lifting its yields to three-decade highs. Yet its property market remains strong, as those rates remain relatively low.

Housing demand has strengthened on factors such as urban concentration in Japan and immigration in Australia, says Antoine Mesnage, head of Asia-Pacific at BNP Paribas Asset Management Alts.

DWS Group, an asset management arm of Deutsche Bank, is planning its first investments in Australia's purpose-built rental apartments known as build-to-rent (BTR), by partnering with developers to build new properties. "The best spot would be in the mid-market, or what the middle-income earners can rent, which we think would be taken well also by our investors," said Koichiro Obu, head of real estate research for Asia-Pacific at DWS.

BNP's Mesnage is also looking at mid-market rental properties Down Under. While many BTRs are high-end -- some are equipped with bowling alleys and karaoke studios -- he sees the mid-market as "where the depth of the demand is and where the pressure of the demand is." Mesnage also likes Tokyo's rental apartment, or multifamily, sector. It is a "market that has scale, liquidity, very stable residential demand" with a dense population and low unemployment, he said, A furnished lounge in a six-story co-living property developed by Mitsui Fudosan Residential.

The centrally located property keeps rents moderate by offering smaller units alongside large shared spaces, including a theater, gym and kitchen.

Rental housing starts have grown at a double-digit pace in Tokyo since June, outstripping starts for owner-occupied homes, government data show.

Young singles increasingly place a premium on convenient access to public transportation after the COVID-19 pandemic, while dual-income couples also prioritize accessibility. And as many are priced out of buying, more are opting to rent. Higher construction and financing costs amid rising interest rates have exacerbated the shortage of supply, pushing up property prices and rents.

In August, average asking rents for apartments for single-person households in Tokyo's 23 wards reached their highest level since data became available in 2015, according to real estate information service provider At Home.

Rents rose 10% from a year earlier. Japanese investment company Hikari Tsushin, in partnership with private equity firm MBK Partners and an affiliate of NEC Capital Solutions, announced in September an acquisition worth up to 267.6 billion yen of Leopalace21, which manages more than 540,000 apartment units.

This followed Canadian investment group Brookfield's more than 100 billion yen acquisition of 50 rental apartment buildings across the major gateways of Greater Tokyo, Greater Osaka, Nagoya and Fukuoka. The assets are "underpinned by long-term urbanization, resilient housing demand and constrained new supply," said Ikushin Tsuchida, the firm's head of Japan real estate.

And in June, U.S. private equity firm Warburg Pincus announced the acquisition of Japanese student housing provider J.S.B. for about $1.2 billion. But headwinds affecting the Asia-Pacific in the form of rising prices and higher borrowing costs against the background of the Iran war are limited but worth noting, according to Ada Choi, head of research for Asia-Pacific at CBRE.

"So far, the extent of the impact of the Middle East conflict has been on rising inflation and interest rates, both of which could dampen some investors' appetite for real estate, including the living sector," Choi said.

Dimitrios Vavougyios, chief investment officer for real assets at the Japan office of Asia-focused investment management firm PAG, says the country is a haven amid ongoing geopolitical uncertainty, including U.S. tariff policies.

PAG draws much of its fund capital from major institutional investors in North America and Europe, including pension funds. "Japan is becoming a safer, more attractive place for capital," Vavougyios said, as large developers reliably deliver projects even as construction costs rise, while high-rise living is more widely embraced than in some other markets.

But some of the same factors supporting the rental growth outlook make it harder for investors to find viable projects for new development. For example, build-to-rent apartments are still an emerging category in Australia and generally need to be constructed from scratch.

While Melbourne and Sydney are the main destinations for investment, it has been difficult to find projects, especially in the latter, said BNP's Mesnage. "It is harder to make it work from an economic perspective when construction costs increase and the cost of land has not decreased," he said.

Alex Greaves, global head of living at M&G Real Estate, also mentioned cost challenges. He said that while student housing benefits from strong demand in markets including Sydney and Melbourne, "the Australian markets are tight, and so the returns are pretty tight." In Tokyo, investors have two sources of concern for international investors: rising interest rates and traditional lease contracts that constrain rent increases.

PAG's Vavougyios said rents are rising faster than wages, while higher interest rates are putting downward pressure on the housing market. "We already see that in some parts of the market, the [rent] increase is getting capped." Real estate listings can be seen on display in Sydney. Demand for rental housing is growing as property prices rise.

Some investors are turning to co-living or short-stay facilities, as well as furnished rental properties, where tenants are more transient, making it easier to increase rents.

"We try to look at assets where we can add value ... and this includes a lot of renovation of older assets ... so we can offer something better for the tenants and improve the value of the building," Vavougyios said. With renovation costs higher, investments can be uneconomical unless rents are relatively high, he added.

Tokyo's multifamily sector is one in which "you're able to pass through some of the inflation," Mesnage said, contrasting it with traditional office leases and the student housing and healthcare sectors, where rents tend to be fixed for longer periods.

Vavougyios sees interest rates as the biggest risk in the Japanese market. "We take that seriously into consideration, and we put a lot of margin for safety," he said.

Asia's residential sector still represents a small share of the overall commercial real estate market, at just 7%, far lower than Europe and the U.S. But DWS Group's Obu predicts it will grow over the next decade or so, with Australia and Japan remaining the main markets.

Still, DWS has yet to find the right opportunity in South Korea, where it is not easy to find properties that meet its investment criteria, especially as regulations are frequently revised, he added.

M&G's Greaves said he is willing to explore investment in Singapore. "Sectors such as serviced apartments in Singapore are attractive because they lend themselves to a more transient-based occupier," he said.

Brookfield's Tsuchida said it sees opportunities in institutional rental housing in India. Obu also sees promise and expects the market to grow, "but the regulatory environment is still evolving, and it will take time." M&G's Greaves emphasized the long-term benefits of investing in residential properties given inflation, rising construction costs and other macroeconomic headwinds. "While consumers may reduce discretionary spending in retail or in leisure during periods of economic uncertainty, housing demand tends to be far more resilient as people cannot easily change their living arrangements," he said. "Whilst [the residential sector] may not always deliver the highest returns, it offers stable and dependable income streams."