Research briefing paper
February 2015
Five reasons to buy Tokyo offices in 2015
A snap election strengthening Shinzo Abe’s mandate for aggressive economic policies, a more aggressive quantitative easing
programme by the Bank of Japan and positive tailwinds through lower oil prices set the scene for Japan’s real estate investment
market in 2015. In our view, the fundamentals supporting investment in Tokyo office market have strengthened further in 2015. In
this paper, we highlight five reasons to buy Tokyo offices in 2015.
1. Abenomics 2.0: the re-elected government remains focused on growth
·
Japan’s re-elected coalition government led by Shinzo Abe remains focused on economic growth. The government was quick to
defer the second round of consumption tax after the first round resulted in a decline in consumption. Instead the government
announced a 3.5 trillion yen (USD 30 billion) fiscal stimulus package to boost the economy. The measures include shopping
vouchers, subsidised heating fuel for the poor and low interest loans for small businesses. According to various estimates, the
stimulus package will boost Japan’s GDP by 0.7%.
·
A ‘Fourth Arrow’ of Shinzo Abe’s second term is seen as the 2020 Olympics. According to the Tokyo Metropolitan Government,
Olympics-related investment spending will result in a JPY 3 trillion (USD 25 billion) economic stimulus over the next 8 years and
will create 150,000 new jobs.
·
We view the government’s pro-business stance and the spending towards the 2020 Olympics as positive for Japan’s real estate
market. In our view, the proposed measures and the measures already announced are improving corporate profitability, which in
turn is supporting real estate occupier demand. With limited new supply in the market, office vacancy rates continue to trend
lower in all major cities in Japan, including Tokyo, Osaka, Nagoya, Fukuoka, Sendai, and Sapporo. Average office rents (all grades)
are expected to recover further in Tokyo in 2015, supporting our view of a strong leasing market.
2. Larger, more liquid market driven by overseas investors and developers
·
The volume of real estate transactions in Japan continues to rise and remained at a buoyant level in Q3 2014, indicating an 8%
year-on-year increase on a 12-month rolling period (figure 2). This has led to a further compression of real estate cap rates in the
second half of 2014. However, what has been more interesting is that the J-REIT’s market share in commercial real estate
transactions decreased from 60% in 2013 to 40% in 2014, whereas global investors and local developers gained momentum.
The latter types of investors are attracted towards the favourable market backdrop and the timing of the real estate market cycle.
·
The noticeably improved transaction volume and broad domestic investor participation is indicative of the momentum gathering
in the Japan real estate market. The core and core-plus sector is particularly attractive given the current favourable position in the
real estate cycle compared with other major global gateways favoured by core investors. The challenge to investment in the
Japanese market remains access to stock, which is frequently traded off-market and the relatively high barriers to entry.
Figure 2: Investment volumes (US dollars)
Billions
Figure 1: ‘Fourth Arrow’ of growth – the 2020 Olympics
70
8% y/y increase on a 12month rolling period
60
50
40
30
20
10
New York City
London
Tokyo
Los Angeles
San Francisco
Paris
Hong Kong
Chicago
Berlin
Sydney
Shanghai
Frankfurt
Munich
Seoul
Singapore
Osaka
Madrid
Barcelona
Milan
Rome
0
2010
Source: Mitsubishi UFJ
2011
2012
2013
Note: 2014 is 12-months to September 2014
Source: RC Analytics, Cordea Savills
2014
3. Tokyo offices: cycle continues to gain momentum supported by steady income return
·
The office real estate investment sector is a cyclical play and a true testament to a time-honoured strategy of ‘buy low, sell high.’
The Japanese office market is no different. In our view, the cycle has turned towards positive and is gaining momentum.
Furthermore, Japan’s office market is supported by steady income return, enhancing the total returns (figure 3).
4. Investment sentiment is strong and real estate lending is on the rise
·
Over the last 12 months, the J-REIT index remains on a recovery track. The performance is in-line with improving sentiment seen
across the direct real estate market. In our view, the index serves as a leading indicator for the direct real estate market,
supporting an argument for further momentum in the Tokyo office market (figure 4). Moreover, credit conditions remain very
favourable in Japan. The Bank of Japan’s survey of lending attitudes of banks to the real estate industry has increased sharply in
Q3 2014 to an index value of 23 from 17 in Q2. In our view, both the positive sentiment and relaxed credit conditions will
provide tailwinds to already improving market in 2015.
Figure 3: Tokyo offices five wards* income return and capital
growth
Figure 4: EPRA JREIT Index and IPD Japan Tokyo offices five
wards* capital growth
20
4,500
20
15
4,000
15
3,500
10
3,000
5
2,500
0
2,000
-5
1,500
-10
-10
1,000
-15
-15
500
-20
10
5
0
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
-5
Income return (%)
EPRA JREIT Index (LHS)
IPD Japan Tokyo offices 5 wards capital growth (y/y %; RHS)
Capital growth (%)
Source: IPD, Cordea Savills
Source: IPD, Bloomberg, Cordea Savills
Note: Tokyo’s five central wards consist of Chiyoda, Chuo, Minato, Shinjuku and Shibuya)
5. Valuations are more attractive
·
The Bank of Japan’s asset purchase program has pushed Japanese Government Bond (JGB) yields close to historic lows, where the
yields on a 3-year JGB have turned negative and on a 10-year JGB declined by 40 bps to 0.24% in the second half of 2014. This
has increased the spread of Tokyo office yields over 10-year JGB yields. With the exception of a number of European cities, the
property risk premium offered to the investors investing in Tokyo offices has increased to amongst the highest levels offered in
the major global cities (figure 5).
Figure 5: Office yield spread over 10-year government bonds
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
Frankfurt
Madrid
Tokyo
Paris
New York
City
Shanghai
London
Hong
Kong
Singapore
0.0%
__________________________________________________________________________________________________________________________________________________
Source: JLL, Knight Frank, Bloomberg, Cordea Savills
Conclusion: Supported by a favourable leasing market, improving liquidity, cap rates and valuation metrics, Tokyo’s office market
remains our top pick in Asia. We believe the demand fundamentals are well supported by Japan’s pro-business government, which is
further backed by the Bank of Japan’s aggressive monetary policy. In our view, the Tokyo office investment cycle has turned the corner
towards the positive and will continue to gain momentum.
Cordea Savills LLP
33 Margaret Street
London W1G 0JD
Tel: +44 (0)20 7877 4700
Fax: +44 (0)20 7877 4777
Email: [email protected]
Web: www.cordeasavills.com
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