October 2011 Japan Real Estate Third Quarter 2011

Transcription

1 October 2011 Japan Real Estate Third Quarter 2011 Executive Summary Japan s large companies have shown resilience in the difficult period after the Great Tohoku Earthquake shook the country in March this year. Supply-chain disruptions were resolved quickly and economic forecasts for 2011 have been revised upward a couple of times already, although the strong yen and the deepening sovereign crisis in Europe cast a shadow over further recovery. In Japan s capital markets, conditions are still favourable for refinancing existing debts. This has limited the number of properties for sale, especially sales of distressed assets. On the other hand, a number of foreign domiciled managers and investors, who had been on the sideline for new investment after the earthquake, were attracted back to the market by Japan s wide yield spreads. These foreign investors have closed a number of deals in recent months. Among the property sectors, vacancy rates are improving in the office and industrial sectors while recovery has not yet been seen in rents in these sectors. High street rents picked up in some submarkets in Tokyo and Osaka while residential capital value held strong due to government tax cut initiatives. 1 P a g e

2 October 2011 Table of Contents: Prepared by: Koichiro (Ko) Obu Director Head of Research, Japan +81 (0) koichiro.obu@rreef.com Orie Endo Assistant Vice President +81 (0) orie.endo@rreef.com 1. Macro Economy Capital Market and Pricing Market Fundamentals... 9 Office... 9 Page Retail Residential Industrial P a g e

3 F 12F 13F 14F Third Quarter 2011 Market Outlook 1. Macro Economy Japan s macro economy experienced a short contraction in the aftermath of the Great Tohoku Earthquake in March, but the initial impact of the event on domestic growth turned out to be limited in duration. GDP growth in 2011 is now expected to contract by 0.5 percent, according to the most recent forecasts by Deutsche Bank economists. This is an improvement from the negative 1.5 percent growth expected for 2011 in the previous forecast. The upgraded outlook is fuelled by resilient corporate activities and reconstruction initiatives by the government. The overall economic contraction in 2011 is expected to be followed by a relatively healthy recovery in 2012 and 2013, although concern is currently mounting about potential external threats to the global economy. 2% 0% -2% -4% -6% -8% -10% -12% Chart 1 GDP Growth Outlook for Japan annual growth (Annualised growth) 4% DB Forecast previous financial crisis in Japan (1998) dot.com bubble burst global recession Great Tohoku Earthquake aftermath Source: Deutsche Bank Japan Economics Weekly Data as of October 2011 Note: F = forecast The Tankan Survey conducted by the Bank of Japan reveals the resilience of corporate activity in Japan. The diffusion index (DI) of all large companies, the most important DI, recovered to show a positive score, although the strong yen (as well as the deepening sovereign crisis in Europe) cast a shadow over further recovery. Chart 2 Diffusion Index of Business Conditions All industries Manufacturing Non-manufacturing All large companies 20 0 Diffusion Index of Business Conditions: ('favourable' minus 'unfavourable', % points) outlook financial crisis dot.com bubble burst global recession Sources: The Bank of Japan, Japan s Cabinet Office Data as of October P a g e

4 F 2013F 2014F Japan s consumer price index (CPI) moved upward amidst supply constraints after the earthquake, but a moderate deflation is expected in 2012 again because of lack of gross demand. Deutsche Bank s economists expect the Bank of Japan to keep the interest rate close to zero through Chart 3 Forecast of Short-Term Interest Rate and CPI (%) 2 Call Rate (overnight) CPI DB Forecast Source: Deutsche Bank Japan Economics Weekly Data as of October 2011 Note: F = forecast 4 P a g e

5 2. Capital Market & Pricing With little risk of inflation, we expect interest rates remain stable which would support favourable credit conditions for borrowers. The Bank of Japan s DI for the lending attitudes of banks (grey line in Chart 4) has improved for the past nine consecutive quarters through the second quarter in The only exception was lending to new developments. The amount of lending by banks for new real estate projects decreased for the second consecutive quarter in the period. Chart 4 Real Estate Lending by Japanese Banks growth of lending to new real estate projects (yoy, LHS) lending attitude DI of banks to all industries (RHS) Outlook 20% 0% -20% Diffusion Index (DI) -40% Source: based on Bank of Japan Data as of October 2011 The average yield spread the difference between the average cap rate of all reported commercial real estate transactions and government bond yields remained consistently above 400 basis points in Japan, reflecting the weak leasing market, and is still one of the widest among the major global markets. However, cap rate recovery has become evident in high quality assets, and favourable lending attitudes have narrowed the scope for opportunistic deals involving distressed assets, especially in Tokyo. Chart 5 Average Yield Spread for All Transactions in Selected Countries United Kingdom Hong Kong Australia United States Japan Tokyo Grade A (bps) Source:, Real Capital Analytics Data as of October 2011 Notes: Past performance is not indicative of future results 5 P a g e

6 Chart 6 shows major commercial real estate transactions either completed or announced since the beginning of the third quarter, During this time there were a number of acquisitions by foreign managers/investors, many of whom had been on the sideline for new investment in the previous quarter. Because of cap rate compression in the office sector in Tokyo, non-office sectors including retail, logistics, and residential were relatively active. Chart 6 Major Real Estate Transactions in Japan in the Third Quarter of 2011* Month Type Asset Price (JPY billion) Unit pice (JPY m /sqm) JPY1 billion = US$12 million Source: Real Capital Analytics, Nikkei Real Estate Market Report, Data as of October 2011 Note: est.: estimated, bk: book value * includes some transactions from earlier quarters that were not previously reported Acquisitions by foreign managers/investors are highlighted in yellow. This table is prepared solely for information purposes and not intended to recommend or endorse any specific company's shares or other products. Cap rates Prefecture Acquired by Investor origin Feb-11 office Shinaoyama Kyodo Bldg. n.a. - - Tokyo Mitsui Fudosan Japan Mar-11 logistics 3 data centers Tokyo, Chiba, Hokkaido Diamond Reality Mar-11 retail Round One Umeda est. 13 est Osaka Japan Commercial Establishment Japan May-11 retail Naias Jingumae n.a. - - Tokyo Morgan Stanley USA Jun-11 office, hotel,retail 5 bldgs inc. Fujiya ex. HQ n.a. - - Tokyo, Miyazaki Fortress Jul-11 office E Space Tower % Tokyo Daiwa Office (REIT) Japan Jul-11 office 4 office bldgs % Tokyo Kenedix Realty (REIT) Japan Jul-11 J-REIT AM Co. share of Invincible (REIT) stake Japan USA Fortress USA Jul-11 land Land at Nairiku Industrial Park Kanagawa 3 parties n.a. Jul-11 logistics 2 logistic centers n.a. - - Saitama SG Realty Japan Jul-11 land Redevelopmet site in Ginza Tokyo M&C (Hotel chain) UK Jul-11 office Roppongi Hills Gate Tower est. 4.1% Tokyo Mori Building Japan Jul-11 office Roppongi Hills Mori Tower (2.1%) % Tokyo Mori Hills REIT Japan Jul-11 office Ark Mori Bldg. (5.8%) % Tokyo Mori Hills REIT Japan Jul-11 residential Resi portfolio n.a. - - Greater Tokyo Composition Netherlands Jul-11 residential Advance Residence (REIT) 16 bldgs % Tokyo, Osaka Multiple buyers n.a. Jul-11 residential Veneo Minami Azabu est Tokyo anonymous Hong Kong Jul-11 office Nobui Bldg. n.a. - - Tokyo Lone Star USA Aug-11 logistics Lasalle Investment's 10 w arehouses (exclusive est. 140 n.a. GL Properties Singapore negotiation rights) Aug-11 hotel JAL City Matsuyama n.a. - - Matsuyama Individual investor Singapore Aug-11 J-REIT AM Co. share of FC Resi. (REIT) stake 100% Aug-11 retail 11 retail bldgs % Hold co. of Ichigo REIT Japan Tokyo, Osaka, Nagoya Japan Retail Fund (REIT) Aug-11 logistics 2 logistic centers n.a. - - Tokyo Lasalle Investment USA Aug-11 residential 4 resi bldgs % Tokyo, Fukuoka BLife Investment Co. (REIT) Sep-11 land Redevelopment site in Itabashi Tokyo Sumitomo Realty & Develop't Japan Sep-11 hotel Rihga Royal Hotel (90%) Osaka Mori Trust Japan Sep-11 hotel BEST WESTERN Hotel Fino Osaka Shinsaibashi * unit price calculated by estimate project costs for building completion Japan Japan est. 6.8% Osaka Keck Seng Malaysia 6 P a g e

7 07 1H 07 2H 08 1H 08 2H 09 1H 09 2H 10 1H 10 2H 11 1H 11 2H Chart 7 below shows a theoretical change in capital value since 2007 for a typical Japanese office building. In this example, the value is calculated by the direct cap approach 1 using market rents and cap rates for each year. If the value is below the lender s release price (red line in Chart 7) at loan maturity, then lenders try to keep the asset, rather than release it, especially when they believe the market will recover eventually. Currently the value is believed to be below this level, or under water, for most assets, and this primarily is why the volume of transactions in the office sector is not increasing. Chart 7 Theoretical Capital Value Index of an Office Building (Illustrative) (2007=100) Debt (LTV70%) value decline Equity Debt 0 Sources: Data as of October 2011 Note: The value is calculated by market rent and cap rate, therefore different from appraisal value or transacted value. Accordingly, as highlighted in Chart 8, Tokyo s volume of commercial real estate transactions in the first half of 2011 fell to third after London and New York, a relative drop from the second position ranking in 2010 according to Real Capital Analytics. Tokyo is, however, still well ahead of all the other major cities in the Asia Pacific region, including Hong Kong, Singapore, Shanghai, Seoul, and Sydney. Chart 8 Commercial Real Estate Transaction Volumes by City in 1H 2011 London New York City Tokyo Washington DC Paris Los Angeles Hong Kong SanFrancisco Singapore Berlin Chicago Toronto Stockholm Boston South Florida Shanghai Melbourne Dallas Seoul Sydney Office Retail Apartment Industrial Hotel ($bn) Source: Real Capital Analytics, Data as of October 2011 Note: Commercial real estate transactions exclude non-income producing assets, such as development site transactions 1 Valuation using the direct cap approach is calculated by dividing annual net operating income by the cap rate. 7 P a g e

8 Based on the monthly indicator tracked by Investment Property Databank (IPD), the average annual total return for direct real estate investment on an unlevered basis in Japan has continued to improve for almost two years since mid Returns rose to a positive 2.8 percent in the second quarter 2011 (preliminary). Office returns turned positive in the period for the first time in ten quarters. Chart 9 Return of Unlevered Direct Real Estate Investment in Japan 15% 10% Total Return Capital Growth Income Return (all asset classes) preliminary 15% 10% Office Retail Residential (total return) preliminary 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% Source: based on IPD Japan Monthly Indicator Data as of October 2011 Note: There is a time lag because of raw data being collected through semi-annual reports Past performance is not indicative of future results 8 P a g e

9 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q Vacancy rate for all buildings 3. Market Fundamentals Office In September 2011, the office vacancy rate in Central Tokyo 2 stood at 8.6 percent, marginally lower than the previous quarter. Some pent-up demand during the aftermath of the earthquake was realised in the period but overall demand is still weak, especially for older, lower quality and/or smaller spaces. Further continuous recovery in the vacancy rate is not expected in the near term because of a supply increase expected in Chart 10 Office Vacancy Rate in Central Tokyo (5 wards) Forecast 20 % 15 % 10 % 5 % 0 % Vacancy rate for newly developed buildings (RHS) Vacancy rate for all buildings (LHS) 40 % 30 % 20 % 10 % 0 % newly developed buildings Source:, Miki Shoji Data as of October 2011 Office rental growth rates correlate inversely to the vacancy rate. Historically in Tokyo, office rents start to increase when the vacancy rate falls below 5 percent as shown in Chart 11. With the vacancy rate still hovering well above the 5 percent threshold (8.6 percent), average asking rents for benchmark properties have declined accordingly for the past thirty-three consecutive months to September 2011, a 26 percent drop from their peak. Chart 11 Office Vacancy Rate and Asking Rents in Central Tokyo 15.0% 7.5% 0.0% vacancy (RHS) 5% threshold 9% 7% 5% -7.5% -15.0% benchmark's rent growth (yoy, LHS) 3% 1% -22.5% 33 months -1% Sources:, Miki Shoji Data as of October Central Tokyo is defined here as the central five wards of Chiyoda, Chuo, Minato, Shinjuku, and Shibuya. 9 P a g e

10 F Relatively strong and resilient demand for high quality, large-sized spaces is evident in Chart 12 where the vacancy rate is already close to 5 percent for larger-sized assets, while the recovery is lagging in smaller-sized buildings. 12% Chart 12 Office Vacancy Rate in Central Tokyo by Building Floor Plate Size floor plate : 165 sqm - 330sqm floor plate : 330 sqm sqm floor plate > 660 sqm 8% 4% 0% Sources: Sanko Estate, Data as of October 2011 The speed of rental decline is slowing down in all sizes of buildings, but it is expected to be a while before rents start to recover. We believe that rents are already close to the bottom in prime buildings while a further marginal declining trend is expected to persist in average quality buildings in Tokyo through Chart 13 Office Asking Rent in Central Tokyo by Building Floor Plate Size (yen/tsubo/mon) ($US/sqf/year) 50,000 Buildings in CBD floor plate > 660 sqm RREEF Forecast ,000 Newly built buildings floor plate > 330 sqm ,000 Benchmark floor plate > 330 sqm , floor plate > 165 sqm 10,000 floor plate < 165 sqm Sources: Sanko Estate, Data as of October P a g e

11 Office vacancy rates peaked in most major cities in Japan in late 2010 or in early 2011, but this is mainly due to limited new supply rather than strong demand; therefore, the recovery has been marginal to date. In Fukuoka and Sapporo, the vacancy rates were almost flat in the last quarter. In Tokyo and Osaka, the recovery is expected to be short due to a series of supply of large new office buildings. Chart 14 Office Vacancy Rates in Major Cities in Japan (all grades) (%) 16 Sapporo Fukuoka Nagoya Osaka Tokyo Source:, Miki Shoji Data as of October P a g e

12 Retail The average asking retail rents for major high streets in Tokyo and Osaka showed mixed momentum in the most recent quarterly data. Rents rose in Ginza (Tokyo), Shinjuku (Tokyo) and Shinsaibashi (Osaka) in the second quarter 2011 but declined in the Omotesando (Tokyo) and the Shibuya (Tokyo) submarkets. The number of shoppers in these high street districts has bottomed out since the trough after the earthquake, but the recovery in the number of foreign tourists is not significant due to the current strong yen. Therefore, we believe the mixed momentum to persist in the near term before we see a substantial recovery. Chart 15 Average High Street Retail Asking Rents in Tokyo (JPY/tsubo/mon) 50,000 Ginza Shinjuku Shinsaibashi Omotesando Shibuya Office (Central Tokyo) 40,000 30,000 20,000 10,000 Source: based on data from Attractors Lab and Miki Shoji Data as of October 2011 Retail sales in the properties with large-scale formats softened again, although the immediate impacts from the earthquake seem to be over. Sales at shopping centres and department stores in the third quarter 2011 (on an existing store basis) declined by 0.7 percent and 1.4 percent respectively over the same period in the previous year. Sales are expected to remain relatively weak in department stores and large scale shopping centres in the short to medium term compared to speciality stores in high streets. Chart 16 Retail Sales Growth in Japan (year on year ) and CFI 4% Shopping Centre Department Store Chain Store (for existing stores for all categories) credit crisis 0% -4% -8% -12% The Earthquake Source:, JCSC, JDSA, JCSA Data as of October 2011 Notes: The latest figures are as of September 2011, except chain stores which are as of August P a g e

13 Residential The new built-for-sale condominium (condo) contract rate 3 (red line in Chart 17) was around 75 percent in the third quarter 2011, the lowest level in seven quarters, reflecting the hesitation among house buyers after the earthquake, but still above 70 percent, the threshold level associated with healthy market conditions. The average sales price per unit was JPY 46 million, also the lowest level in eight quarters, but still higher than the last 15-year average of JPY 45 million. This is because the price has been inflated by government initiatives, such as mortgage tax cuts for house buyers. Chart 17 Newly-built Condominium Unit Price and Contract Rate in Greater Tokyo price (JPYm/unit) % contract rate % (RHS) Avg. unit price (LHS) Source: based on REEI Data as of October 2011 The indices in the sales and rental residential markets still show contrasting patterns. The capital value index of existing condos (i.e., the re-sale price index) still hovered at around 130 in August 2011 near the peak level of the last decade even as residential rents continued to soften marginally. This is again believed to be because the sales market is stimulated by the government tax cut initiatives for house buyers while the rental market is not. Chart 18 Residential Capital Value and Rent Index in Tokyo Capital Value Index (Residential, Tokyo) 110 (Jan 2000 =100) Rent Index (Residential, Tokyo) Source: IPD-RECRUIT Residential Index, Data as of October The contract rate is the ratio of units contracted (sold) to the number of units delivered for sale. 13 P a g e

14 Industrial We cover the Japanese Industrial sector in this edition of Japan Real Estate Quarterly for the first time. This coverage reflects the growing interest of property investors in this sector of the Japanese real estate market. The industrial property sector in Japan has gone through an evolutionary change in many different ways in the last decade, including changes in: Asset format from an inventory of small, owner-occupied properties toward a stock of large-scale leasable and investible properties; Asset function from a stock of mostly traditional warehouses towards one that also includes modern, technologically advanced logistics centres; and Asset players including the emergence of third party logistics companies as important tenants and the emergence of new types of asset owners, such as logistic real estate managers and REITs. Chart 19 below shows the volume of the annual completion of new large-scale logistics stock in Greater Tokyo. The chart reflects the rapid structural change in this sector and the rise of the new format for industrial assets in Greater Tokyo in the last decade. The volume of new supply was very limited in 2010 due to credit crisis and financial difficulties between 2008 and 2009 and is still expected to be limited in 2011, while average supply amount is expected in 2012 and ahead. Chart 19 Completion of Large-Scale Logistics Space in Greater Tokyo (million sqm) owner-occupied 1.5 leased (single/multi-tenant) Source: NRE, Data as of October 2011 Vacancy rates are heavily influenced by the volume of new supply. They jumped up when supply surged in 2007 and 2008, but because of the limited supply in the last two and half years, vacancy rates have been in a recovering trend. They were at a healthy level at around 7 percent in both Greater Tokyo and Greater Osaka in the second quarter of 2011, a marginal increase from the previous quarter respectively, in spite of the economic slowdown observed after the earthquake. 14 P a g e

15 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Chart 20 Vacancy Rate of Multi-tenant Logistics Properties in Greater Tokyo and Greater Osaka 30% 20% Greater Osaka Greater Tokyo 10% 0% Source: CBRE, Data as of October 2011 Contrary to the improving trend in vacancy rates, rents for logistics assets are still soft in both Greater Tokyo and Greater Osaka. Because the multi-tenant logistics stock is limited (accounting for only 1 percent of space in Japan according to RREEF s estimate), recovery in the multi-tenant vacancy rate does not necessarily boost overall logistics rents. Logistics rents, therefore, remained flat in the second quarter in Greater Tokyo while they declined by 2.4 percent in Greater Osaka, and similar trends are expected in the near term in both markets respectively. Chart 21 Logistics Rent in Greater Tokyo and Greater Osaka (JPY/month/tsubo*) 5,000 4,000 3,000 2,000 1,000 0 Greater Tokyo Greater Osaka 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Source: Ichigo Real Estate Service, Data as of October 2011 * The tsubo is a traditional measure of floor area in Japan. It is equivalent to 3.3 square metres (35.6 square feet) 15 P a g e

16 Past Issues Vol Year Publication Research Topic 1 Second Quarter Jun 08 Making sense of the rental market in Japan Third Quarter Sep 08 Impact of the credit crunch 3 Fourth Quarter Dec 08 Revitalisation of ailing J-REITs 4 First Quarter Mar 09 Tokyo office market in its global context 5 Second Quarter Jul 09 Japan residential market Third Quarter Oct 09 History repeats itself? A comparison of the Year 2003 Problem with Fourth Quarter Jan 10 Introducing unit pricing analysis in Japan 8 First Quarter Apr 10 Portfolio optimisation analysis in Japan 9 Second Quarter Jul 10 Japan s capital market in a global context Third Quarter Oct Fourth Quarter Jan 11 Cross-border investment into and out of Japan 12 First Quarter Apr 11 The Great Tohoku Earthquake and its impact on the Japanese real estate market Second Quarter July 11 Adapting Japan s land price index for real estate analysis 14 Third Quarter Oct P a g e

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