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A rebound in Japan's real estate market over the past year is driving offshore investors and investment trusts to take on more risk by buying older office buildings built during the boom of the 1980s and properties far from Tokyo's prime commercial districts.
The result has been a marked increase in deals in markets like Fukuoka, Japan's seventh-largest city, where foreign investors have bought four office buildings and retail properties this year compared to only one deal in the previous two years.
Japan's publicly traded real estate trusts have also raised $4.9 billion by selling shares so far this year, almost three times more than the same period last year, according to Thomson Reuters data.
(Read more: Demand Up 50% on 'Abenomics,' Says Property Head)
"As the markets become active and investor expectations for Japan's property market increase, investors are becoming more willing to take risks," said Takashi Akagi, head of research at property consultants Jones Lang LaSalle Tokyo. "We are in that phase now. Their investment targets do not have to be prime offices in Tokyo."
But the developing boom in corners of the market like Fukuoka that had been previously neglected has some worrying that cheap money and high expectations for Prime Minister Shinzo Abe's economic policies may open the door to a speculative bubble.
Prices for Tokyo's prime office buildings have risen to levels that some investors worry are not justified by projections for future rental income. That has shifted interest to properties elsewhere that promise higher returns now, but are also widely considered to be at more risk in any downturn.
"Too much money has poured into Japan now," said Mitsunori Shirasuna, president of Kyshu Rep, a real estate broker in Fukuoka, who says he has been flooded with inquiries about investment opportunities in the city.
Recent deals in Fukuoka include Morgan Stanley buying a 12-story, 38-year-old building in July for the equivalent of about $50 million. Goldman Sachs bought an office building in Fukuoka through its private real estate trust for about $35 million, while MetLife Alico Insurance, the Japanese unit of MetLife, bought a mall on Tenjin-nishi-dori Avenue, Fukuoka's most fashionable street.
(Read more: Revival of 'Olympic' proportions coming for Japan?)
Metlife Alico is also negotiating to buy an office property in the city, while New York-based investment firm Elliott Management also bought an office building, sources with knowledge of the transactions say.
Officials with Metlife Alico, Goldman Sachs and Morgan Stanley declined to comment.
"Competition has heated up"
Fukuoka has attracted investors because, like Tokyo, it has avoided the demographic crunch of Japan's declining population. The city, which is the largest on the island of Kyushu, grew 9 percent to 1.46 million people over the decade to 2010. The region has also promoted itself to investors like Nissan Motor as Japan's gateway to Asia, closer to Seoul than Tokyo.
Fukuoka office properties provided investors a 5.6 percent over the past year, according to Investment Property Databank, a global real estate information services company. By comparison, Tokyo commercial property generated a 4.4 percent return at the start of this year, according to IPD.
(Read more: Japan growth revised up sharply for second quarter)
But prices on Fukuoka buildings are rising and locals have grown cautious.
Mitsubishi Estate purchased a office building called Hakata Gion Center Place through its private real estate trust for about 10 billion yen ($101.09 million), sources said. That price would give the developer a less than 5 percent return, local real estate brokers estimate.
"That shows how competition has heated up here," said Katsumi Tanimoto, general manager of the asset management division at Genkai Capital Management, a Fukuoka-based real estate investment firm.
Mitsubishi Estate declined to comment.
Core investors like Goldman Sachs's REIT and MetLife Alico tend to seek stable returns over the long term from renting newer properties. Tanimoto said his firm, which looks to book quicker gains from flipping properties, has been squeezed out.
"We cannot beat prices offered by players like Goldman Sachs and MetLife Alico. Even if we could outbid them, we would lose money in the future," he said.
Fukuoka Reit Corp, the public real estate trust based in Fukuoka, has not bought any properties since March even though it has the ability to borrow 25 billion yen for property acquisitions, said Hideya Kanno, head of the investment department at Fukuoka Realty Co, which operates the Fukuoka Reit.
"If the market heats up further, there is the risk of another bubble," said Takashi Ishizawa, chief real estate analyst at Mizuho Securities Co.
Property owners tend to target a return of at least 3.5 percent from rental income, but during the property investment surge that peaked in 2006, the rate fell to around 2 percent for some deals, said Ishizawa.
"The potential risk is that investors end up buying low-grade properties. Even if they could buy good quality assets, they may pay too much money," Ishizawa said.