2013-12-02 14:07:14 - New Business market report from Business Monitor International: "Japan Real Estate Report Q1 2014"
Japan's commercial real estate sector continues to outperform, bolstered by substantial foreign capital inflows and ultra-loose monetary policy. Nonetheless, the combination of low interest rates, non-resident capital inflows and growing demand for higher risk properties is leaving the market looking increasingly frothy.
Japan's commercial real estate sector continues to benefit from Japanese Prime Minister Shinzo Abe's economic stimulus plans, dubbed 'Abenomics', begin to show signs of reversing the stubborn deflation that has gripped land prices for 22 years. We emphasize that price rises are unlikely to be evenly distributed across the country, with the most aggressive rises expected to be focused in prime areas such as Tokyo, Osaka and Nagoya. Nonetheless, smaller cities such as Fukuoka have begun to increasingly attract
investor interest, causing office properties to increase by 5.6% y-o-y in 2013.
Full Report Details at
Macro conditions remain overwhelmingly favourable for the real estate sector. Aggressive monetary easing by the Bank of Japan has driven a 20-25% devaluation in the value of the yen against the dollar, making real estate investments particularly attractive for foreign investors with a suitably long-term investment horizon. Bank lending continues to improve, with the average balance of lending increasing by 1.9% y-o-y in Q313, driven primarily by large lot loans for property, indicating a continued desire to increase their real-estate lending portfolio.
While inflation expectations are beginning to rise on the back of Abe's economic policies, 35 year flat mortgages rates remain low, standing at 1.93% in October 2013. While rising inflation expectations are likely to push mortgage rates higher, we emphasize that they are currently almost two standard deviations below their 10 year average.
Sales of offices, warehouse and retail space rose 85% to JPY2tn in the first half of 2013, with prices in Investment into commercial real estate portfolios is also supported by the growing real- estate investment trust market, which enjoyed unprecedented investor interest in 2013. While we see scope for this trend to continue in 2014, REITs remain highly sensitive to interest rates. In the unlikely event that the Bank of Japan were to tighten monetary policy, REIT share prices would face substantial downside risk, resulting in declining capital flows into the sector, and ultimately lower real estate prices.
Looking ahead, we expect growth in Japan's residential and non-residential sector to be supported over 2013 by a minor intensification of reconstruction efforts and a slight uptick in property development. Within this, we believe that progress will be made on residential reconstruction in Miyagi, Iwate and Fukushima prefectures - albeit slowly due to the extremely tight fiscal position of the Japanese government and the bottlenecks restricting the flow disaster relief funds into necessary projects. Such headwinds, together with the relatively low margins offered in the sector dictate that we remain cautious on the sector's long-term prospects. BMI is forecasting that once the initial reconstruction funds are depleted, the industry will return to its pre-2010 status of contraction, with the cash-strapped government - which is suffering from a dip in exports, and uptick in import spending - signifying that no further stimulus measures will be taken. Investor confidence in the REIT sector is likely to dwindle in line with this.
* Singapore-based Global Logistics Properties (GLP) has sold a portfolio of Japanese properties to local affiliate company GLP J-REIT. A total of seven logistics properties, located in Greater Tokyo and Greater Osaka, have been involved in the transaction, with an overall value of US$277mn. Each property is currently leased on a long-term basis by single tenants.
* Masayoshi Son, the founder of Japanese telecoms company SoftBank, has purchased the Tiffany Building in Tokyo for a reported JPY32bn (US$326mn). The 10-storey glass building, designed by architect Kengo Kuma, is located in the Ginza luxury shopping district. The deal is the latest in a series of high profile acquisitions in Japan's real estate market, with many investors gambling on the success of Prime Minister Shinzo Abe's economic recovery initiatives.
* Mitsubishi Estate purchased a office building called Hakata Gion Center Place through its private real estate trust for about 10 billion yen ($101.09 million)
Key BMI Forecasts:
* We expect office rents to range between JPY2765 and JPY17380 per metre squared per month in Tokyo, at the high end of the market, and JPY1586 to JPY4542 at the lower end of the market in Yokohama, over 2013.
* A similar pattern can be seen in retail rents, ranging from a forecast maximum of JPY61225 in Tokyo to a maximum of 13035 in Yokohama.
* Meanwhile, industrial rents are lowest in Osaka, ranging from JPY306 top JPY770 per metre squared per month in that city.
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