2013-10-13 14:21:59 - New Business market report from Business Monitor International: "Japan Real Estate Report Q4 2013"
We continue to believe that although the housing sector is still outperforming, commercial real estate is also set to experience strong growth in the long term. Evidence of this can be found in the large volume of investment into the commercial real estate sectors. We believe this is because until a large number of new developments are completed, little change is expected in the supply and demand ratios with regards to available rental space. Over the long term, we anticipate higher leasing income, lower vacancy rates, higher sales and the opening of new office properties.
Japan's commercial real estate investment saw a sharp rise of 78% y-o-y in Q213 as the government's radical reflating policies gained traction. Off of the back
of this, US-based real estate services company Jones Lang LaSalle identified Japan as the most thriving commercial property market in Asia as demand for offices, warehouses, retailers and apartment blocks have reached US$10.2bn of investment in Q213. We believe investor confidence has been boosted by improving macroeconomic indicators in Japan following the government's stimulatory measures.
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Moreover, the Japanese real estate investment trust (REIT) market is becoming increasingly lucrative and has attracted a large number of investors in recent months. Indeed the REITs have enjoyed unprecedented level of investor interest and activity during the first half of the year. During the first four months of 2013, the Tokyo Stock Exchange (TSE) REIT index gained 43.5%, outpacing a 35.5% rise in the broader index.
The Bank of Japan (BoJ) was among those buying into the listed property investments. BMI cautions, however, that with the REITs continuing to significantly outperform the broader real estate sector, this joy is unlikely to last over the medium to long-term. It is our view that this trend may well strengthen throughout the remainder of 2013. Risks in European real estate remain, while Tokyo's market is slowly rebalancing. Furthermore, the government is carrying out an aggressive monetary easing policy, allowing the Japanese yen to depreciate significantly. This makes it cheaper for foreign investors to purchase Japanese real estate assets. Lastly, Japanese banks are relatively liquid and could show an increasing appetite towards real estate lending. Domestic capital is also being mobilised by Goldman Sachs which in September 2012, launched a JPY30bn real estate investment trust (REIT) backed by Japanese pension funds.
The latest Japanese REIT deal to hit the headlines came on June 3, when Nippon Prologis REIT priced a US $731mn follow-on deal via a consortium of six bookrunners. Not only did the deal become the second largest Japan REIT secondary market deal on record, but it also posted the shortest time period from an IPO to an initial follow-on deal in record in Japan - irrelevant of industry sector. Indeed, it took Nippon Prologis just 119 days to tap existing investors for more capital after going public on the TSE. The previous record was held by Internet Initiative Japan which took 190 days from first time share sale to initial follow-on.
Although it has outperformed, the Japanese REITs have been supported by a tentative recovery in the broader Japanese real estate sector. Indeed, it is our view that improving environment in Japan's real estate market is being driven by an uptick in investment in residential and commercial assets, and in a new trend, we are seeing interest from foreign funds on the rise. As the market stabilises, firms are beginning to view Tokyo as a relative 'safe-haven' in East Asia. A prime example of this overseas interest came in mid-2012 when bankrupt residential developer Joint Corporation was snapped up by a venture consisting of private equity group TPG and property consultancy Savills. UK-based Storm Harbour Partners has also announced an US$127mn Japan fund and Sparx Group Company gained agreement to begin operations in a deal backed by Gulf sovereign wealth. Domestic capital is also being mobilised by Goldman Sachs which in September 2012, launched a JPY30bn REIT backed by a group of Japanese pension funds.
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.
* Kajima Corporation is selling its US subsidiary to Brookfield Property Partners for US$1.1bn - this will allow it to refocus its attentions elsewhere, including Japan itself.
* Daiwa House Industry's US$1.4bn follow on deal will allow the company to direct its large proceeds towards financing real estate development.
* The trustees of the Loke Wan Yat estate have sold a plot of land near the Petronas Twin Towers as well as properties collectively known as the Asian Heritage Row.
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