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BUSINESS
BRIEFING
TOKYO: MOVING
UP
THE YIELD CURVE
ASIA
PACIFIC
A Cushman & Wakefield [SERVICE LINE] Publication
A Cushman & Wakefield Research Publication
MAY 2015
MAY 2015
A Cushman & Wakefield Research Publication
TWO YEARS ON...
Unveiled in late 2012, Abenomics’ potent mix of reflation, fiscal stimulus and structural
change has kick started a revival in Japanese real estate. Two years after, investment
volumes (excluding land) have increased by over 60% – the highest among the top-tier
core markets. Foreign investments have also more than doubled in the same period as
record low interest rates and a favorable exchange rate generate positive carry, throwing
up opportunities in one of the world’s largest commercial real estate market that is
backed by a mature and deep economy. The 2020 Olympics win is spurring investments
into infrastructure and urban renewal projects, which could gain further momentum
once Tokyo gives the green light on Integrated Resorts which will include casinos.
The Nikkei has surged to near-15 year highs on the weak yen, while equity capital raised
by J-REITs in the first three months of 2015 have surpassed those in the same period
last year, driven by rich stock valuations. Despite continued yield compression,
quantitative easing by the Central Bank ensures that yield spreads of Tokyo offices
against long-term bond yields remain higher than those in global gateway cities.
ALL GRADES OFFICE YIELD GAPS
500
400
300
Tokyo
420
New York
384
London
355
200
100
Note: spread between each country’s 10-year government bonds; in bps (basis points)
Source: Cushman & Wakefield
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Seoul
302
Singapore
200
Hong Kong
165
TOKYO:
MOVING UP
THE YIELD CURVE
The revival is not just confined to assets as the city’s office leasing sector – a bellwether
for the economy – continues to improve.Vacancy rates for Grade A offices have
tightened to below 5%, with strong corporate performance driving demand as companies
seek to relocate. Driven by a flight-to-quality trend, the office market is experiencing
strong pre-leasing commitments in new buildings with enhanced seismic capabilities.
Mitsubishi UFJ Morgan Stanley Securities, forced to move to a cheaper location due to
failed investments in 2011, will relocate back to the Otemachi area after Abenomics
stimulated investments into the city’s capital markets.
TOP INVESTMENT DESTINATIONS
New York
London
Tokyo
Los Angeles
San Fransisco
Paris
Washington DC
Chicago
Hong Kong
Dallas
Sydney
Boston
Vacancy rates
for Grade A
offices have
tightened to
below 5%,
with strong
corporate
performance
driving demand
as companies
seek to
relocate.
Atlanta
Miami
Houston
Melbourne
Shanghai
Seattle
Denver
Franfurt
0
13
26
2014
39
52
65
2013
Note: Excludes land
Source: Real Capital Analytics, Cushman & Wakefield
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MAY 2015
A Cushman & Wakefield Research Publication
Office demand is anticipated to keep pace with continual strong corporate performance,
led largely by the manufacturing sector against the backdrop of a weakening yen. With
corporate earnings having tripled since 2009, the prospect for positive rental revisions
are likely to kick in sometime this year. Given that new supply in 2015, while substantial,
is still lower than the average level in the past decade, the market is unlikely to weaken.
Manila
London, Singapore
Bangkok, San Francisco, Stockholm
Mumbai SBD
Shanghai
Beijing, Toronto, Houston
Munich, New York
Boston, Frankfurt, Gurgaon CBD
Amsterdam, Hong Kong, Madrid
Chicago, Dallas
Jakarta
Calgary, Rio de Jeneiro
Bengaluru, Kuala Lumpur
HCM City, Ottawa
Rome
Melbourne, Sydney
Brussels, Zurich
Paris
Los Angeles, Seoul
Washington, D.C.
Recovering
Rent still elevated but falling from top of market cycle
Falling rents promise future opportunity for tenants
Rent growth accelerating
Ideal for owners of property
Rent growth slowing
Still landlord favorable but growth is down from peak
Rent at or near bottom of market cycle
Ideal for tenants leasing or seeking to lease property
Note: Grade A office
Source: Cushman & Wakefield
4
TOKYO
Berlin, Copenhagen, Mexico City
Geneva
Moscow
Downturn
Accelerating
TENANT FAVORABLE
Slow Growth
LANDLORD FAVORABLE
TOKYO’S ACCELERATING RENT GROWTH
TOKYO:
MOVING UP
THE YIELD CURVE
NON-PRIME OFFICES
Core assets in Tokyo’s central wards that are available for sale are limited and demand
for such assets far outweighs the limited opportunities to buy – the weight of this capital
leading to rapidly compressing yields. As such, investors seeking exposure to the
Abenomics story would have to look to opportunities that reside further up the yield
curve. Despite the higher risks involved in terms of financing, property and economic
fundamentals in these segments remain sound.
INVESTMENT MARKET
Non-prime offices generally afford investors easier access into Tokyo’s office market, as
the city’s prime offices remain tightly held by developers and institutional investors, who
have investment mandates to adhere to. Unlike investment grade assets, non-prime
offices are owned by a wide variety of owners whose main interests might not be in real
estate, which makes them more likely to consider selling if the price is right.
In terms of targets, Class B and C offices form a larger proportion of Tokyo’s office
landscape and accord more choices to an investor. The market is also more liquid for
strategic sellers seeking an exit as there is a ready pool of buyers in REITs who are big
players in the Class B and C office market. Last year, one third of non-prime offices
transacted were by these trusts.
OFFICE INVENTORY
Prime
16%
Class B and C Offices
Dominates
Tokyo
Class B/C
58%
Class A
26%
Note: based on a sample of 9,800 buildings
Source: Cushman & Wakefield, Sanko Estate
LEASING FUNDAMENTALS
A feature of Class B and C offices is its relatively small floor plates, generally less than
100 tsubos (3,600 sf). Due to their smaller staff strengths, Class B and C offices are
usually occupied by small and medium sized enterprises (SMEs), as they do not require
exceptionally large floor plates.
5
MAY 2015
A Cushman & Wakefield Research Publication
SMEs are prevalent in Japan, forming the bulk of companies in most sectors but more
importantly, they are the backbone of the services sector and a crucial link in the supply
chain of the manufacturing and export-led sectors. Currently, there are at least 440,000
SMEs operating in Tokyo alone, employing almost half of the city’s workforce.
HEADCOUNT BY PROPORTION OF COMPANIES IN TOKYO
Companies
with less than
50 employees
form 97% of
corporates in
Tokyo
50-99
2.1%
100-299
1.2%
300-499
0.2%
>500
0.2%
<50
96.4%
Source: Tokyo Metro. Statistics
The huge tenant base to draw upon makes investment sense while demand fundamentals
have also improved. While closures involving SMEs escalated in the aftermath of the
financial crisis in 2008, leading to higher vacancies, it has recovered fairly well and is
expected to continue to improve. Rents are also more stable and just coming out of the
trough – which would also provide more rental upside. In light of the improved business
sentiment, rents are expected to remain on an upward trend.
VACANCY RATES
14.0
Class S
Class B
Vacancy rate (%)
12.0
Class A
Class C
10.0
8.0
6.0
4.0
2.0
Note: Central Five Wards; Class S denotes Super Grade A Buildings
Source: Cushman & Wakefield
6
Q115
Q314
Q114
Q313
Q113
Q312
Q112
Q311
Q111
Q310
Q110
Q309
Q109
Q308
Q108
Q307
Q107
Q306
Q106
0.0
TOKYO:
MOVING UP
THE YIELD CURVE
RENTS
30,000
Prime
JPY/tsubo/mth
25,000
All Grades
20,000
15,000
10,000
Q115
Q314
Q114
Q313
Q113
Q312
Q112
Q311
Q111
Q310
Q110
Q309
Q109
Q308
Q108
Q307
Q107
Q306
Q106
5,000
Source: Cushman & Wakefield
In particularly, the economic fundamentals faced by SMEs have also grown more
favourable. For a start, the weakened yen are making these companies more competitive.
Secondly, promoting the SME sector in Japan is a major aspect of Abenomics’ third arrow,
which broadly speaking is to regain Japan’s growth potential. The government has pledged
to provide assistance to SMEs to innovate and for companies in selected strategic
industries, in light of a slowing population base, support expansion overseas.
RESILIENCE WITH HIGHER RETURNS
Non-prime offices generally accord more stability in operating income as compared to
prime grade buildings, due to its more stable rental profile and a lower peak-to-trough
ratio. This can be attributed to the asset class’ lower upside potential during boom
periods, as the tenant base, being more conservative and with limited investment avenues
NET OPERATING INCOME
NOI Index (Q194 = 100)
140
130
120
110
Class S
Class A
Class B
Class C
100
90
80
70
60
50
Q115
Q314
Q114
Q313
Q113
Q312
Q112
Q311
Q111
Q310
Q110
Q309
Q109
Q308
Q108
Q307
Q107
Q306
Q106
40
Source: Cushman & Wakefield, Sanko Estate
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MAY 2015
A Cushman & Wakefield Research Publication
RECENT TRANSACTIONS
(B AND C OFFICES)
OFFICE YIELD GAPS
450
375
bps
300
225
150
75
0
2013
2014
2015 (F)
Class S
2016 (F)
2017 (F)
All Grades
Source: Cushman & Wakefield
restrains any huge expansion needs; it is also more resilient during recessionary periods.
Rental yield gaps between prime and Class B and C offices are also expected to be
sustained, maintaining relative returns in the short-to-medium term.
VALUE-ADD OPPORTUNITIES
Development: Shibakoen 3
Chome Building
Type: Office
Buyer: Nippon REIT
Price (million): JPY7,396/US$60.1
Price per sq ft NLA: JPY87,168/US$708
NOI Cap Rate (%): 5.2
Completed: 1981
Currently, over 79% of office space in Tokyo central wards are estimated to be over
20 years of age. This presents huge scope for value-add opportunities for investors. In
addition, due to escalating construction costs, refurbishment presents investors with a
better value proposition. While rental increases for refurbished assets generally varies
between submarkets, against a backdrop of a rising rental market, well located renovated
spaces will accord the investor with higher returns, allowing the asset to compete more
effectively for tenants. Since most office buildings in Tokyo are Class B and C,
refurbishment can enhance the attractiveness of an asset when potential tenants
compare it to others within the same location.
AGE PROFILE OF SMALL-SIZED BUILDINGS*
Total Stock:
5.1
million tsubo
*less than 5,000 tsubos (GFA)
Source: Xymax, Cushman & Wakefield
8
21%
79%
> 20 Years
< 20 Years
Development: Forecast Takatanobaba
Building
Type: Office
Buyer: Nippon REIT
Price (million): JPY5,550/US$45.1
Price per sq ft NLA: JPY89,947/US$731
NOI Cap Rate (%): 4.9
Completed: 1986
TOKYO:
MOVING UP
THE YIELD CURVE
THE CASE FOR RETAIL
Tokyo’s retail scene is an eclectic mix of high-end brands and quirky street fashion that has
made its mark on pop culture. From the streets of Ginza to the luxurious malls along
Omotesando as well as in suburban markets, retail malls enjoy high occupancy rates that
are backed by consumers with high spending power. While the hike in consumption tax did
impact retail sales last year, those negative effects will peter out.
Despite a falling birth rate, population in the city of Tokyo has increased as more people
are moving to the city. With Abenomics looking to raise incomes of the Japanese, the retail
sector will benefit from a more buoyant income stream derived from brisk sales. Due to
the weak yen, the city is enjoying record tourist arrivals and urban renewal projects are
creating markets in new residential areas with increased buying power.
Brian DeFoe, Director of Investment Sales,Tokyo at Cushman & Wakefield talks about the
merits and strategies in Tokyo’s retail sector.
WHAT IS HAPPENING TO TOKYO RETAIL CURRENTLY?
Tokyo’s retail assets are enjoying a resurgence, with rents returning to pre-crisis levels.
The Japanese consumption market has expanded over 20 years despite a shrinking
population and episodes of challenging domestic conditions. The economy is also shifting
towards being more consumption-driven, as seen by the upward trend of the
Consumption to GDP ratio. Japan will continue to remain a priority for most
international retailers looking to expand into the region as they know they are entering
a high income economy.
Main Streets are benefiting from record tourist arrivals. Spurred by the opening of
Toranomon Hills, adjacent areas including Shin Tora Dori, which are being developed by
Mori Building, will benefit from existing main streets. After the enforcement of
consumption tax exemption on October 1, 2014 on tourists’ personal consumption
items such as food, beverages, drugs and cosmetics, monthly consumption of tourists
skyrocketed for consecutive months – increasing year-on-year by 180.8% in January and
235.8% in February.
Japan will
continue to
remain a priority
for most
international
retailers looking
to expand into
the region as
they know they
are entering
a high income
economy.
We see significant growth potential in new residential areas – Tokyo Bay Area including
the Ariake and Aomi districts – which are being developed as the capital prepares for the
Summer Olympic Games in 2020. This would be a focal point of investment
opportunities. The population in the Ariake and Aomi districts is expected to increase
due to increased accessibility with new roads and railways being constructed.
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MAY 2015
A Cushman & Wakefield Research Publication
WHERE DO INVESTMENT OPPORTUNITIES LIE?
Similar to the office sector, core retail assets available for sale in the central wards are
limited. However, there are still opportunities in the regional submarkets for investors who
are willing to take on an asset with unrealized potential – which would require some
investment towards repositioning, through refurbishments and adjusting of the existing
tenant mix to raise footfalls and increase rental yields. Currently, regional malls in the
Tokyo Metropolitan Area offer yields that are on average at least 300 bps above what can
be found in the central wards, such as those in Saitama, Chiba or Yokohama. We note that
net migration to the area has been increasing. Last year, the number of people who moved
into the Tokyo Metropolitan Area – which includes the neighboring prefectures of Saitama,
Chiba and Kanagawa – exceeded that of people exiting by 109,408 in 2014, up from 96,524
in 2013; over 90% of the migrants were aged between 15 and 29.
ANNUAL HOUSEHOLD CONSUMPTION TO GDP (JAPAN)
Annoucement of
Abenomics
61.0%
60.0%
59.0%
58.0%
GFC
57.0%
Hike in
consumption tax
56.0%
55.0%
Q414
Q413
Q412
Q411
Q410
Q409
Q408
Q407
Q406
Q405
Q404
Q403
Q402
Q401
Q400
Q499
Q498
Q497
Q496
Q495
Q494
54.0%
Source: Cabinet Office (Government of Japan), Cushman & Wakefield
TOURIST SPENDING
18,000
2012
2014
16,000
JPY (million)
14,000
2013
2015
12,000
10,000
8,000
6,000
4,000
2,000
0
Jan.
Feb.
Mar.
Apr.
Note: tracked department stores only
Source: Japan Department Store Association, Cushman & Wakefield
10
May
Jun.
Jul.
Aug.
Sep.
Oct.
Nov.
Dec.
TOKYO:
MOVING UP
THE YIELD CURVE
PRIME RETAIL YIELDS
Suburban
Ginza/Omoetosando
10.0%
8.0%
6.0%
4.0%
2.0%
Q115
Q414
Q314
Q214
Q114
Q413
Q313
Q213
Q113
Q412
Q312
Q212
Q112
Q411
Q311
Q211
Q111
Q410
Q310
Q210
Q110
Q409
Q309
Q209
Q109
Q408
Q308
Q208
Q108
0.0%
Source: Cushman & Wakefield
WHAT SHOULD INVESTORS EXPECT?
Investors would have to approach the retail assets with more than just owning a building;
asset management expertise is critical to maximize returns. The complexities of owning a
retail asset is multi-faceted – successful retail assets shows the ability to tap into an area’s
demographics, complement the rise of e-commerce and sustain revenue for its tenant base.
VALUE-ADD RETAIL
For investors looking at such value-add opportunities, well connected malls with a sizable
residential catchment in the major cities of Chiba, Saitama and Kanagawa represent suitable
investment targets. To tap into the continued economic revival, landlords should opt for
variable leases or those based on turnover to reap the recovery in retail spending. With a
successful revamp, investors can negotiate higher rates on renewals.
Development: Mallage Shobu
Type: Retail
Location: Saitama Prefecture
Buyer: Croesus Retail
Trust
Price (million): JPY28,183/US$170
Price per sq ft NLA: JPY28,668/US$233
Initial Yield (%): 6.1%
Reversionary Yield (%): 6.8%
Completed: 2008
11
MAY 2015
A Cushman & Wakefield Research Publication
For more information about C&W Research, contact:
For more information about C&W Capital Markets
Asia Pacific/Japan, contact:
Sigrid Zialcita
Managing Director, Research, Asia Pacific
+(65) 6232 0875
[email protected]
Todd Olson
Executive Managing Director, Japan
+(81) 3 3596 7050
[email protected]
Keisuke Yanagimachi
Head of Research, Japan
+(81) 3 3596 7098
[email protected]
Yoshiyuki Tanaka
President, Asset Management, Japan
+(81) 3 3596 7060
[email protected]
Lai Wyai Kay
Associate Director, Research, Asia Pacific
+(65) 6232 0864
[email protected]
Brian DeFoe
Director, Investment Sales, Japan
+(81) 3 3596 7069
[email protected]
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