In order to illustrate trends in the central Tokyo residential market, Savills has segmented Tokyo’s 23 wards into seven distinct geographical areas: Central (or “central five wards”), South, West, North (Inner and Outer) and East (Inner and Outer). 

Tokyo mid-market rental trends by survey area
Rents in the C5W area consistently show large premiums over the city average. Rents in the South and Inner North submarkets also show small premiums over the 23W average due to their convenience and popularity. All other submarkets tend to advertise rents at a discount to the 23W average.
These premiums and discounts of markets in Q2/2017 are generally in line with trends of the past five years. The highest premium was observed in the C5W at 16.9%, up 0.7ppts from 2016. The South and Inner North areas kept positive premiums of 3.3% and 3.5% respectively. The outer areas, meanwhile, showed discounts. The greatest discount was seen in the Outer East area at -21.2%, followed by the Outer North area at -14.2% and the West area at -8.0%. The Inner East area currently shows a discount of -4.3%.

The Inner North, Inner East, and Outer East areas have performed well in recent years. The Inner North’s premium has increased from 0.5% in 2013 to 3.5% in Q2/2017 while the Inner East and Outer East have shrank their discounts from -6.0% and -23.0% to -4.3% and -21.2% during the same period respectively.

The eastern areas have seen infrastructure and transportation development along Tokyo Bay, which has encouraged migration to these areas. The popularity of the Outer East area largely derives from its affordability, especially considering a majority of migrants are under 30 years old. Furthermore, the rental growth in the eastern area could be because the Tokyo’s waterfront area is recovering in popularity after the 2011 Tohoku earthquake raised concerns about the safety of the area. Our recent figures show that the average rent in the C5W is up 0.8% YoY as of Q2/2017, with strong growth in Shibuya (5.5%) and Minato (3.6%). The opening of Shibuya Cast, Axelis Shibuya Nanpeidai, and Prime Residence Shibuya appear to have contributed to the growth in Shibuya. Additionally, Tokyo’s Inner North and Outer East areas have shown sound growth of 2.1% and 1.6% YoY respectively. 

Tokyo mid-market apartment rents by unit size

Tokyo’s rental market is principally made up of compact single-occupier units, typically less than 45 sq m (13.6 tsubo) in size. Unlike other major global cities such as London  and New York, house or apartment sharing does not form a major segment of the rental market. As a result, there is a large, stable market for small- to mid-sized units.

Apartments of 15-30 sq m have particularly increased rents in recent years. This may be related to increasing demand for smaller units, as over 90% of recent migrants to Tokyo are relatively young and likely do not require large-sized units. 

Occupancy Rates
Average occupancy rates in Tokyo remain comfortably above 95% at a reading of 96.9%.

Upscale residential market
After years of steady growth, rental increases in the C5W appear to be taking a break. In Q1/2017, average rents of upscale residential properties1  were JPY4,723 per sq m, 0.3% down YoY, with rental corrections seen in Chiyoda, Chuo, and Shibuya. Meanwhile, Shinjuku continues to improve average 
rents, showing an impressive 12.5% sq m against averages. Additionally, Chuo’s upscale units fall in the low to medium range while Chiyoda, Minato, and Shibuya tend to be found in the medium to high range. Chuo’s low range is likely due to a glut of new supply in recent years in peripheral neighbourhoods of the ward near Koto, which is just across the river. In Minato and Shibuya, asking rents for some properties can exceed JPY8,000 per sq m. According to Ken Corporation, Minato and Shibuya have particularly high average new supply, which partially contributes to higher rent ranges in these wards as new buildings pull up rents. Three is a general correlation between asking rents and property ages. Going forward, continuing new supply of upscale units should support gradual rental increases in Tokyo. 

Reported occupancy rates of upscale units in Tokyo have been slightly lower than the J-REITs’ average but remain above 93%, according to Ken Corporation. In Q1/2017, occupancy rates in the major three wards and major nine wards3 , were 93.6% and 93.3% respectively. These represent slight corrections of 0.3ppts and 0.1ppts YoY.  

C5W residential rents are continuing to grow gradually. Shibuya and Minato in particular saw strong rental increases, partially due to openings of new residential properties in these wards. Although average rents in the 23W area have experienced some corrections from the previous quarter, they are still up on a YoY basis. Rents for small units have especially increased over the past years, driven by young migrants to Tokyo. Rental growth in the upscale residential segment appears to be pausing after years of steady recovery. However, rents in Shinjuku and Minato continue to increase, and occupancy rates for the C5W remain sound. High condo prices may be driving occupants to the rental market.

Outlook - The prospects for the market
Japan’s real GDP recorded a fifth consecutive quarter of growth in Q1/2017, marking the longest string of increases in a decade. As Japan’s economy continues to improve at a moderate pace, forces are in place for continuing, albeit slow, rental growth. The employment conditions in Japan have been very tight and the nation’s labour participation rates have been increasing to fill rising demand. Labour reform could function as an additional driver for wage increases, and eventually rental growth.