Despite some signs of a lacklustre recovery in Japan’s economic conditions as well as a recent downgrade by Standard & Poor’s to Japan’s long-term credit rating – there remains strength and growth in Japan.
Prime Minister Shinzo Abe, who was recently formally re-elected head of the ruling party, put fresh emphasis on his economic agenda by setting out three new goals for “Abenomics 2.0” (terminology referring to economic policies set out by Abe) that will target a 20% increase in GDP to ¥600 trillion by focusing on combating the demographic challenges facing Japan with its ageing population. Mr Abe came into office in December 2012 touting a three-pronged economic revival plan – unprecedented monetary easing, flexible fiscal policy and broad regulatory changes to counteract the deflation that has dogged Japan for more than a decade.
A tale of two cities
While Japan has been experiencing economic volatility broadly; there are pockets of great strength in the real estate markets – particularly in the cities. The nationwide survey of land prices conducted by the Ministry of Land, Infrastructure, Transport and Tourism illustrates the differences between the growth rates of Japan overall versus the growth rates in its key cities. While nationwide land prices are still in decline, falling for the 24th consecutive year, prices for residential land in Tokyo’s 23 wards rose by 2.1% year on year, up from a 1.9% increase in 2014. Commercial land prices climbed 4.0%, compared with a 3.2% rise in 2014. Land prices also advanced quickly in key regional cities; in Osaka, commercial land prices rose 6.1% year on year, compared with a 3.9% increase last year, while in Nagoya there was a 4.7% increase, up from the 3.1% rise seen in 2014. Land prices also advanced at a faster pace in other major cities, including Sapporo, Kyoto and Fukuoka.
Tokyo values booming
According to JLL’s latest Asia Pacific Property Digest report, real estate capital values in Tokyo jumped 20.6% in the second quarter of 2015, compared with the year earlier period. Capital values have generally accelerated strongly in Japan across all real estate sectors since the introduction of Abenomics. Tokyo office values are up about 41% for Grade A and 51% for Grade B from the end of 2012 to June 2015.
Tokyo office market performing strongly
The Tokyo office market is enjoying an overall upward trajectory in rents during the 3rd Quarter 2015, according to the major real estate services firms such as JLL and CBRE. The latest data point in August saw the office vacancy rate in Tokyo’s five central business districts at 4.72%, down 0.17 points from the previous month and down 1.30 points from last year. This is the lowest vacancy rate seen since December 2008. With vacancy rates below the 5% level, rent hikes could see further acceleration. The average monthly office rent was 17,490 Yen per Tsubo (5,300 Yen/sqm), up 4.5% from last year. This was the 20th month in a row to see a month-on-month increase.
What’s driving the office demand?
With corporate profits registering a record high for two consecutive quarters, unemployment rates declining and with the general economic conditions improving, demand for office space has been brisk. Active sectors driving office demand include information and communication, manufacturing and professional services according to JLL. The Grade A market will only see a few significant new construction completions in Tokyo’s CBD and a healthy amount of pre-leasing has already been reported. Therefore we expect that the market is unlikely to weaken. Together with the current strengthened occupancy, the Grade A office market is forecast to accelerate its recovery. With the June Tankan survey (a key survey of business sentiment) indicating that a growing number of large manufacturers expect business conditions to continue to be favourable, we anticipate robust office demand to persist.
In our portfolio, we have been adding to our positions in companies that are exposed to the Tokyo office market such as Premier Investments, Tokyu REIT and Japan Excellent, and we expect to retain this bias over the coming months.
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