BMI View: Interest in Japan's commercial real estate market remains strong, particularly for office property. While a significant portion of investor interest centres on the capital, Tokyo, investors are increasingly looking for opportunities elsewhere. Japan is seen as a safe haven for investment, and is attracting attention from international firms and institutional investors alike, as well as domestic operators. The country has a mature real estate investment trust market.
With a focus on the three principal cities of Tokyo, Yokohama and Osaka, the Q1 2015 Japan Real Estate report covers the property fundamentals of the commercial real estate market rental market and examines the office, retail, industrial and construction segments throughout the country.
Japan's economy continues to struggle, and we expect growth to be slow over the next few years, despite the government's stimulus plans. The raising of the country's sales tax, for the first time in years, in April 2014, had a negative impact on demand across the economy, and in particular hit the retail industry. While we expect the impact of the tax to lessen over coming months, and believe that a planned second raise in late 2015 may not happen, the economy will remain on shaky ground. We see GDP growth coming in at 0.9% in 2014, falling to 0.8% in 2015 and an annual average of 0.7% over the rest of our forecast period to 2018.
The office sub-sector is seeing a significant amount of transactional activity, particularly in Tokyo, driven by the perception of Japan as a safe haven for investors and the fact that the economy continues to be one of the world's largest, as well as Tokyo's status as a hub of global finance and business. Demand is particularly strong for grade A space, a trend that we see continuing. We also see rising interest in Japanese office property from institutional investors from within Japan and internationally.
The retail sub-sector is one of the best performing in terms of Japanese commercial real estate, driven by traditionally high spending by locals as well as, particularly in Tokyo, tourists. There is significant interest in Japan from international retailers, and retail rents, notably in Tokyo, are very high even by global standards.
The industrial sub-sector is affected by struggling industrial production and a poor export showing. However, one bright spot in the industry is that demand for warehouse and logistics space is increasingly driven by the rise of online retail.
We cover commercial real estate in Tokyo, Yokohama and Osaka. Tokyo is a global centre of finance and business, and the focal point of a significant quantity of investment into Japanese commercial real estate. However, the other two cities that we cover are also major business centres in their own rights, and are seeing increasing investment as interest spreads outwards from Tokyo.
Japan is in ninth place out of 14 in our Asia Pacific Real Estate Risk/Reward Index, with a score of 63.7 out of 100. The score is boosted by high marks for country risks and rewards, but held back by relatively low scores for industry rewards and risks, given the highly developed nature of the Japanese commercial real estate landscape, which allows little in the way of room for rental rate and yield rises.
AXA Real Estate Investment Managers, via the Tokyo Office Property Fund (TOP) and the Tokyo Office Real Estate Investment Fund, acquired the Nishi Shinjuku KF Building in central Tokyo
In October 2014 Singapore's sovereign wealth fund, GIC, bought an office building near Tokyo Station. The office component of Pacific Century Place Marunouchi has almost 39,000 square metres (sq m) of net rentable area.
According to the Urban Research Institute Corporation, real estate trades in Japan reached a value of JPY2.15trn in April-September 2014.
Key BMI Forecasts
According to our forecasts, rental rates in Japan's office sub-sector will not change in 2015 or 2016. The highest rates will continue to be in the capital, Tokyo, at USD32-95 per sq m per month, against USD31-83 in Osaka and USD18-44 in Yokohama.
We see no change in retail rental costs in 2015 or 2016. Rental rates in Tokyo remain the highest by a significant margin, at between USD185 and USD573 per sq m per month.
We see no rise in industrial rental rates in any of the three cities that we cover in 2015 or 2016. Tokyo industrial property will continue to command the highest rates, at between USD14 and USD30 per sq m per month.