For Tokyo in 2015, the property market review and prospects are as follows:
Rents increased in 2015, although not as much as originally expected. The house view is that rents will continue to rise in 2016, albeit at a slower pace than 2015. The slower pace of growth is forecast based on a degree of caution returning to the occupier market as tenants become more price conscious, given the uncertain economy.
Tokyo cap rates stand at the pre-global financial crisis levels of 2007, and are expected to compress further due to the large amount of capital seeking investment opportunities. Regional cities still offer a premium over pre-crisis levels and should continue to compress in 2016. Given the relatively sharp pricing in Tokyo there remains significant appetite from domestic and international investors for deals in regional cities.
Japan’s Macro Economy
The Japanese economy had a fair year in 2015. Although GDP growth was moderate, Abenomics developed and nurtured market fundamentals. As an extension, the new Abenomics, announced in September 2015, focuses on improving people’s lives and targets raising nominal GDP to JPY600 trillion by 2020 (from the current JPY500 trillion).
Summary of 2015
Whilst the original Abenomics has somewhat stalled, there was some recovery in economic activity in 2015. Japan’s GDP for 2015 was 0.4% higher than the previous year. A rise in corporate investment contributed to the growth, while private residential investment and
private consumption remained weak.On the back of the capital expenditure expansion, there has been an increase in corporate profits, predominantly due to lower energy prices and a cheaper Yen. After hitting JPY19.1 trillion in the second quarter 2015, corporate profits in the third quarter maintained high levels (JPY17.9 trillion). Moreover, the corporate profits of the real estate industry in Q3/2015 stood at JPY1.1 trillion, the highest figure since 1954.
Residential
The residential sector remains favourable to investors as a core asset class. Preliminary figures for transaction volumes in 2015 were US$4.3 billion, accounting for approximately 10% of Japan’s total transaction volumes. Over three quarters of the transacted residential properties were located in Tokyo.
Summary of 2015
As of Q4/2015, the occupancy rate in Tokyo’s 23 wards was 96.3%, an increase of 7 bps YoY, comfortably above the stable 95% threshold based on a basket of residential properties held by selected J-REITs. Similarly, occupancy in Tokyo’s C5W stood at 96.1% in the fourth quarter.
As the urbanization trend looks set to continue, demand for rental apartments is expected to remain stable in large cities with moderate potential for rental increases. The average mid-market rent in Tokyo’s 23 wards is JPY3,623 per sq m as of Q4/2015, an increase of 2.4% YoY.
While in Tokyo C5W, the average rent is JPY4,195 per sq m, an increase of 1.8% over the past 12 months.
Sales price
According to figures released by the Real Estate Economic Institute (REEI), the average price per sq m for residential properties in Tokyo’s 23 wards increased by 13.1% YoY in 2015 to stand at JPY987,000 per sq m. In Greater Osaka, prices increased by 10.2% YoY to stand at JPY582,000.
The private housing market attracted a lot of interest from both domestic and international buyers. Stable and positive macroeconomic fundamentals are viewed as the main factor. Strong demand is
coming from domestic high net worth individuals looking to real estate for the tax benefits against increased inheritance taxes.
International buyers, mostly from elsewhere in Asia, have also shown confidence in the upside potential of Japan’s residential market. The sector is viewed as still offering relatively high yields compared to their home countries, while the current relatively soft Yen is a good opportunity to acquire a quality asset in Japan.
Current positive market conditions have also incentivised developers to push the market to another level. A good example is Mitsui Fudosan who has announced a new development project named Park Court Akasaka-Hinokicho The Tower, a luxury condominium located in one of the most prime areas in Tokyo, with completion targeted for early 2018. The price of this project is rumoured to make it one of the most expensive condominiums on the market.
Prospects for 2016 and beyond
The ultra-low yields from Japanese government bonds have been favourable to real estate investors. The cap rate spread offered in the country is among the widest compared to other global cities, with an outlook of continued low interest rates over the foreseeable future. As of Q4/2015, the cap rate spread for residential assets in Tokyo was 4.0%, which is not achievable in most other markets. The residential sector is expected to remain in demand, as investors tend to buy and hold such assets as a core investment. In addition, there are currently limited opportunities and an abundance of potential buyers.
Large portfolio transactions
In 2015, some institutional investors acquired properties through corporate/portfolio acquisitions. Private equity behemoth Blackstone Group recently snapped up Japan Residential Investment Company, a UK investment fund specialising in rental apartments in Japan. The price paid was nearly JPY50 billion for a portfolio of 57 buildings composed of approximately 2,700 residential units, mainly located in Tokyo.
Another notable transaction was the acquisition of Singapore’s Saizen REIT by Lone Star in October 2015. The US fund acquired all of its properties, including 136 buildings with 5,421 residential units, primarily located in Japan’s regional cities. Lone Star’s acquisition price was reported to be approximately JPY45 billion.
View the full report here.
For more on Japan:
Japan's Hospitality Industry in the Spotlight
Japanese Investment Report 2H 2015
Foreign Investors Approach to Real Estate Investing Under $50K
