News, Events and Media
Kenzo Japan Real Estate Fund successfully launched
The Japanese investment adviser and asset manager focusing on German investors, Kenzo Capital Corporation Inc., Tokyo, successfully launched the Kenzo Japan Residential Fund on July 28, 2017, with an initial investment in four apartment buildings for approximately EUR 30 million equivalent. Capital commitments by two initial investors over EUR 45 million are the cornerstone: a large Frankfurt investment management and consulting firm and a professional pension fund.
The Kenzo Japan Residential Fund invests in the major metropolitan areas of Japan, mainly in Greater Tokyo and Greater Osaka, as well as in Nagoya and Fukuoka. Modern residential properties of the core risk class are supplemented by objects with an active management approach (Core Plus and Value Add). With this allocation of the fund plans an average annual distribution of 5% and a return on investment (IRR) of 8%, after sale in approximately 7 years. The total equity target volume of the fund is expected to reach around EUR 250 to 300 million, the investment volume is around EUR 480 to 550 million. The fund is denominated in yen, and is directed to institutional investors in Germany, mainly capital collectors such as utilities and insurance companies.
Kenzo Capital Corporation Inc., Tokyo, is closely working with Haseko Real Estate Investment Management Inc., a member of Haseko Corporation, the largest Japanese residential construction company. In Germany, Kenzo is represented through “Kenzo Japan Real Estate GmbH” in Munich and was able to attract the leading real estate fund provider specialized in residential real estate, PATRIZIA Wohninvest Kapitalverwaltungsgesellschaft mbH, as the administrator of the fund.
“Building upon the know-how and experience of our team, this mandate strengthens PATRIZIA’s competitive position in a market that is increasingly attractive to investors due to strong Japanese economic growth and political stability,” reports Dr. Sven Olaf Eggers, Managing Director of PATRIZIA WohnInvest Kapitalverwaltungsgesellschaft mbH, Augsburg, “We are planning a further expansion of our fund administration with the experience of this collaboration of specialists, who in part already know each other through Japanese investment business for more than a decade.”
In the establishment of the Kenzo brand in the circle of German investors, Metzler Real Estate GmbH advises and assists Kenzo with regards to marketing strategy, set-up and management of the fund business. “Metzler’s good networking in both the German and Japanese capital and financial markets helps to do this,” says Bernd Sommer, Managing Director, Metzler Real Estate GmbH, Frankfurt.
The investment structure – an open special AIF – has been developed by Rödl & Partner from a tax perspective. Clifford Chance has examined investment law compliance and KPMG’s tax concept in Japan.
“The Japanese market offers a wide selection of excellent investment opportunities in residential real estate in its metropolises. In the case of core objects, we can, as a matter of experience, rely on stable earnings. Collaboration with Haseko gives us access to good opportunities to develop residential real estate in prime locations through active management back to core real estate. We are delighted to be able to provide such investment opportunities to German institutional investors with the Kenzo Japan Residential Fund,” says Dr. Leonard Meyer zu Brickwedde, President & CEO, Kenzo Capital Corporation, Tokyo. Since the end of the 1990’s, he has played an important role in the development of the institutional quality of the Japanese real estate market and today states: “The deal pipeline for possible further acquisitions is well filled”.
Tokyo advances to Top 3 among Global Cities
The latest revision of the Global Power City Index (GPCI) has ranked Tokyo in 3rd place in its evaluation of the world’s major cities. Tokyo overtook Paris to make it into the top 3 for the first time.
The GPCI first published in 2008 by The Mori Memorial Foundation’s Institute for Urban Strategies evaluates major cities in 6 categories, main functions representing city strength (Economy, Research and Development, Cultural Interaction, Livability, Environment, and Accessibility)
The GPCI is created by a international research team of two groups of individuals: 1. The Committee, chaired by Heizo Takenaka (Professor of Toyo University) supervises the ranking creation process. It is comprised of six members, with the late Sir Peter Hall (Professor, University College London) as Principal Advisor. 2. The Working Group with experts from London, Amsterdam and California, headed by Hiroo Ichikawa (Professor Meiji University) performs the data collection and analysis to create the rankings for the cities
London retains its top position, with New York in 2nd place.
The institute says Tokyo’s score was boosted by an increase in the number of foreign visitors and more direct flights connecting the city with overseas destinations.
Japan Real Estate rewards its investors
Analysis of IPD confirm a total return (income return and capital growth) by 86% over the 12 year period since January 2004 to December of 2015 in local JPY currency
1. Office and Residential Markets
The vacancy rate of Tokyo CBD 5 Wards reduced steadily since 2012 and reached to 4.0% at the end of 2015 despite of a large supply of new class A buildings in 2015.
The decrease paused in Q1 of 2016 while the rent continued to increase, mainly because of the relocation of some huge occupiers to better and larger spaces. The vacancy rate started decreasing again in Q2 of 2016.
New supply of Class A buildings in 2016 is expected to be almost the same level as in 2015 and many occupiers, such as trading companies and financial firms, are now planning to move to higher quality and larger spaces.
We believe, that the continuing solid demands of occupiers will keep the vacancy rate at low levels and rents will continue to grow.
Residential occupancy maintained at healthy levels above 95% and rent of each area in Greater Tokyo kept stable with some rent growth seen in some areas.
2. Investment Market
Asset under Management (AuM) of J-REITs and Private Funds continued to grow, reaching to JPY 28.8 trillion in December 2015 and increased by JPY 1.1 trillion (4%) for the year.
Real estate transaction volume in 2015 was JPY 4.3 trillion, remaining at a high level though decreasing by JPY 0.7 trillion from 2014 which saw the highest level since 2008. J-REITs’ acquisition power weakened in Q4 of 2015, however J-REITs became active again in Q1 of 2016, with a transaction volume of JPY 552 Billion compared to Q1 2015 with JPY 496 Billion
J-REITs dominated the market in Q1 of 2016, closing 23 deals priced at more than JPY 10 billion. In 2015 J-REITs closed 11 transactions priced over JPY 10 billion in the first Q, and 17 deals from Q2 to Q4.
The largest J-REIT Transaction in Q1 2016 was a logistics facility in Greater Tokyo executed by LaSalle Logiport REIT at JPY 26.6 billion. All top ten transactions in Q1 2016 were either logistic and hotel properties.
The largest office transaction in Q1 2016 was made by Hulic REIT. Hulic REIT, sponsored by a Mizuho Group, acquired a additional 30 % share of Hulic Kamiyacho Building in Minato Ward at JPY 16.7 billion.
J-REITs acquired 12 apartment buildings all together amounting to JPY 42.3 billion in Q1 of 2016.
Private finds and companies were less active, with only 4 deals priced at more than JPY 10 billion in Q1 of 2016 reported by Japanese media. They closed 13 deals priced over JPY 10 billion in the same quarter 2015, and 31 large transactions during Q2 to Q4 last year. US firm, Lone Star, acquired a residential portfolio from Saizen Real Estate Investment Trust at JPY 44.7 billion in Q1 of 2016. With this transaction, Saizen, a Singapore stock exchange listed REIT, soled its total portfolio consisting of 136 apartment buildings all over Japan. This deal followed soon after US Blackstone’s similar deal in Q4 last year. Blackstone acquired Japan Residential Investment Company, listed on the AIM section of the London Stock Exchange, who invested in 57 properties worth JPY 47 billion in Japan.
Private Households and Corporate Investment bring Japan back on Growth Track
All figures in %, annualized
Japan is back on growth track. Following a weak Q2 2015 with negative growth, Japan returns to positive territory supported by a solid domestic demand.
All areas of private domestic demand have seen growth in Q3 2015. Also exports have recovered well. Only the reduced inventory put pressure on the GDP result.
The consumption and investments from private households was supported by overall growth in salary payments to employees which at the end of Q3 stood at an annualized JPY 262,6 trillion which was 0,7% more than in Q2 and 1,4% higher than one year before.
A further indication of the overall confidence in the domestic market is the growth in bank lending which at the end of November 2015 stood at a total of JPY 493 Trillion, an increase of 2.4% compared to November 2014.
According to a survey by the Bank of Japan among the 50 largest banks in Japans, lending demand from none-producing mid and small size companies is especially high. These firms serve to the domestic market.
The government expects a 1.5% growth for the fiscal year 2015 (April to March 2016). Following a slow first quarter (Q2 2015) this may look optimistic, though the strength of the domestic demand will enjoy further backing by wages benefitting from increased seasonal bonuses again in Nov/Dec.
New Tax Treaty between Japan and Germany to promote Investment Flow between both Countries
On July 16, 2015 Japan and Germany communicated an agreement in principle on a new Tax Agreement.
The Ministry of Finance Japan published on its homepage: “The new Agreement reduces taxes withheld at source on investment income (dividends, interest and royalties) to further promote the investment exchanges between the two countries.”
Strong Labor Market:
Success Ratio of Job Hunting by University Students hit Record High
On August 7, 2015, Japanese Ministry of Education and Science and Technology (MEXT) announced that the success ratio of job hunting by university students graduated in March 2015 hit 72.6%, highest in the past 10 years. The last peak was 69.9% for students graduated in March 2008. In terms of volume, 409,754 newly university graduates secured job by March 2015, compared to 375,957 newly university graduates by March 2013. This confirms the labor market improvements triggered by the policy of the Abe government in the last two years.
In fact, overall labor market in Japan has been improving considerably since Prime Minister Abe took office in December 2012. According to the labor market survey by the Government Statistics Bureau, employed persons (employees and self-employed) were 63.9 million in June 2015, compared to 62.5 million in December 2012. Thus, the number of employees has increased by 1.4 million in the past 2.5 years. The labor force (employed and job seekers) also increased significantly. The labor force in June 2015 was 66.1 million, compared to 65.3 million in December 2012. Unemployment rate declined to 3.4% in June 2015, compared with 4.3% in December 2012.
Japanese Female flock the Labor Market as the Government promotes female Carrier and Management Opportunities
Of particular note is the increasing role of female in the Japanese labor market. Of the 1.4 million increases in the employment above, female accounted for 1.2 million and male accounted for 0.2 million. Of the 0.8 million increases in the labor market participants, female accounted for 1 million and male accounted for minus 0.2 million. The increasing contribution of female in the recent labor market improvement is encouraging for the Japanese economy. It indicates the potential success of the government’s policy, motivating a significantly higher female contribution to the economy through improved carrier and management opportunities.
Real Estate Market:
Office demand remains strong with vacancies decreasing and rents improving
The vacancy rate of Tokyo CBD 5 Wards descended to 5.1% in June 2015, still having further room to decrease considering the previous low of 2.7% recorded in 2007. The rents have increased 7 % from the bottom in 2013, remaining at a level of 80% from the 2008 peak.
According to Japan Office Market View Q2 2015 by CBRE, rents rose in nearly all regional cites in Japan.
Central Tokyo Grade A rents continue to rise at an accelerated pace. In our view this trend will continue and spread to other markets in Tokyo and regional cites as well.
Residential Rents on the upswing
The rent of Greater Tokyo started to grow in 2013 and continuedgrowing through June 2015.
According to an apartment rent index prepared by Sumitomo MitsuiTrust Research Institute, rents in Greater Osaka, Nagoya, Fukuokaand Sapporo were stable and gradually increasing in Q1 2015.
Transaction Volumes continue to grow; foreign Investors increase activities; growing investment activities reach regional cities
In December 2014, J-REITs and Private Funds collectively held JPY 27.7 trillion in Assets under Management (AuM; a plus of JPY 300 billion since June 2014), While J-REITs grew by JPY 700 billion, Private Funds decreased AuM by JPY 400 billion. The outlook for Private Funds though is positive, according to Sumitomo Mitsui Trust Research Institute, there are a number of overseas investors looking to increase real estate investments in Japan.
According to CBRE, Q1 2015 total transaction volume rose by 8.6% y-o-y to JPY 1.1 trillion. The increase was driven by a jump in acquisitions by overseas investors who along with a rise in transactions in the Greater Tokyo Area invested in regional cities. Acquisitions by J-REITs continued to drive market activity, accounting for 45% of all transactions by value. Overseas investors transaction volumes doubled in Q1 2015 from Q1 2014 to JPY 158 billion.
A report named issued by CBRE shows J-REITs share of regional investments increased again to over 40% in 2014 (from 30%). Overseas investors increased their regional investment to 18% in 2014 (from only 8% in 2009).
Great Success for the first MIPIM Japan coincides with solid economic development news
The inaugural MIPIM Japan in Tokyo on May 20/21 attracted more than 2,500 attendees from 30 countries. 335 investors and delegates from financial institutions focused their attention on the real estate investment opportunities available in Japan. 596 companies were represented, including some 222 from outside Japan.
It was by far the largest real estate specific event devoted to the Japanese real estate market. The success will confirm the organizer (Reed Midem) in its strategy to establish MIPIM Japan as an annual event.
Prior to MIPIM Japan a Japan German Real Estate Investment Round Table Meeting, engaging representatives of the Japanese real estate elite and German real estate investors was hosted by the German Chamber of Commerce in Japan, initiated by the Ministry of Land, Infrastructure, Transport and Tourism was organized and moderated by Dr. Meyer zu Brickwedde, President and CEO of Kenzo Capital Corporation.
Link: Japan Journal & Japanmarkt
Transaction volume in FY 2014 close to 2007 record high with foreign investments sharing 23% of the transaction volume
According to Urban Research Institute, a Mizuho Group company, the real estate transaction volume during the fiscal year 2014 (April 2014 – March 2015), reached to JPY 5,289 Billion. It increased by 15 % compared to 2013 and thereby was almost at 2007 record volume (JPY 5,328 Billion) and the highest after 2007.
Foreign Investor’s acquisition volume went up from JPY 429 Billion to JPY 1,195 Billion in 2014, the share of foreign investments increased from 10 % to 23 %. Among those foreign investments Germans accounted for JPY 60 Billion, mainly from institutional investors. J-REITs purchased properties worth JPY 1,804 Billion, down by 4 %. Its share decreased from 42 % to 34 %.
Noteworthy transactions: GIC from Singapore bought Pacific Century Place Marunouchi, a Class S office building in the Tokyo CBD, at a price of JPY 170 Billion from a fund managed by PAG in Hong Kong, who acquired Commerzbank’s real estate finance subsidiary in Japan last year, that had originally financed the property. Blackstone Group from the US acquired a nationwide portfolio of residential properties from General Electric Group at JPY 200 Billion. Mori Trust, a Japanese developer, bought Meguro Gajoen, a complex consisting of offices and a hotel outside the Tokyo CBD, at JPY 130 Billion from Lone Star Group of the US. The US investment group Green Oak bought Aoyama Building, a Class B office building in the central Tokyo, at a price of JPY 46 Billion from a fund managed by Mitsubishi Estate Investment Advisor.
Interview: Vice Minister for Land, Infrastructure, Transport and Tourism Ishii Kisaburo about real estate investment in Japan, the government’s policies for urban development
Link: Interview Vice Minister Ishii
Q1 2015 real GDP (seasonally adjusted) was up by 3.9% on an annual rate, compared to +1.1% in Q4 2014.
Japan annualized GDP change compared to previous Quarter and annualized contribution by sector
Q1 GDP released on June 8, 2015: corporate investment contributed 2.4%, compared with -0.8% contributions in Q4. It seems the drag in investments, both in residential and non-residential, that followed the consumption tax hike in April 2014, is finally over and its contribution turned distinctly positive. Net export contribution is -0.7% due to strong import. The trend of economic activity is clearly positive. Even after deduction of inventory and net export, final demand of Japanese economy is up 2.3%. Large inventory pile-up in Q1 may not be a bad sign. It could be interpreted as positive mind-setting among corporate sector given strong corporate investment.
Japanese Exports increased 8.2% in April 2015 while trade balance in April 2015 was negative with JPY 53 billion, compared to the surplus of JPY 227 billion in March
Released in May 25, 2015: Exports were up 8.2% from the same month last year (JPY 6,551 Billion). Since September 2014 monthly exports have been up from the same month one year ago. Monthly imports have been lower compared to last year’s months since January due to weaker oil prices. From here on, we expect imports to increase due to stronger domestic demand and higher oil prices.
Japan’s tax revenues up in FY2014 by 12,5% hitting a 17-year high for fiscal 2014 (ending March 2015)
According to NHK News on June 1, 2015, Japan’s tax revenues rose to a record high in over 17 years, benefitting partially from a hike in consumption tax that has been raised in April 2014 from 5% to 8%. Consumption tax revenues were up by 30%, but also income tax revenues increased by 8.2% and corporate tax revenues were higher by 14.8%. Income and corporate tax together contribute over 50% to the tax income of the Japanese government. The positive development of tax income in both areas will support the government’s intention to postpone a further consumption tax hike.
Property Market Japan at the Global Stage – The successful Japanese presentation at Cannes is now being followed by MIPIM Japan
“Unrecognized by many or at least not noticed in its full dimension, Japan is experiencing a remarkable globalization wave. Perspectives, weight and priorities develop increasingly different from those of European companies. With high emphasis and speed Japanese companies expand their positions in target markets, especially in Asia.” from a paper of the delegate of the German business community, Mr Manfred Hoffmann, Managing Director German Chambers of Commerce in Japan
The same is true for the real estate industry of Japan. Following a strengthening of the business in Europe and the US by companies like Mitsui Fudosan and Mitsubishi Estate, further investment and development focus is put on Asia. Besides the landmark development ‘Shanghai World Financial Centre’ by Mori Building many further investments and developments have been made and many more are to come to Asian and Pacific markets. A few days ago, Sekisui House Ltd. won the ‘Best Innovative Green Building’ Award at MIPIM for its ‘One Central Park Building’ development in Sydney.
This trend of foreign investments and developments is going to grow further. According to Naoki Umeda, Managing Director & CEO, Mitsubishi Estate London Ltd., Mitsubishi Estate plans to increase the share of foreign investments from 10% to 20% by 2020, as stated in a panel discussion during the ‘Focus on Japan’ conference at MIPIM.
At the same conference event, Mr Kisaburo Ishii, Vice Minister of Land, Infrastructure, Transportation and Tourism introduced over 20 large ‘landmark’ projects only for Tokyo alone, besides several mega infrastructure projects. “Each of these projects has its development position established and land the land bought but needs a lot of money from now on.” said Mr Ishii at the conference.
Prime Minister Abe successfully motivates pensions funds and insurance firms to increase their allocation to risk assets within their investment portfolio, part of such investments will benefit the real estate sector.
Nevertheless Japan is intensively approaching foreign investors to participate.
At MIPIM Japan informed about the real estate market during three conferences and various presentations at the Japan Pavilion, including one by Mr Yoshifumi Iitsuka, Director at Tokyo Metropolitan Government, on Tokyo’s plans as a world financial centre. Events like these and MIPIM Japan in May (20th to 21st) demonstrate the intention to promote the Japanese market for investments. The growth strategy of the Abe government is based on foreign investments as one major pillar. The ‘Buy Japan’ initiative of the Prime Minister is being followed up by the administration actively supporting measures that lead to increased interaction between Japan and foreign investors and professionals.
Vice Minister Ishii taking leadership of a 120-member delegation from Japan at MIPIM and Ministry for Land, Infrastructure, Transport and Tourism sponsoring the MIPIM Japan convention in May are concrete examples.
Shuji Tomikawa (Managing Officer, Mitsui Fudosan Co., Ltd.; President Mitsui Fudosan Investment Advisors, Inc. from April 1st, 2015) promoted MIPIM Japan during ‘Japan Breakfast’ at MIPIM: ” ‘Cross-Border Investments (Inbound and Outbound)’, will become one of 4 key subjects at MIPIM Japan.” In his presentation he explained that in the first 7 months of the fiscal year 2014 (Nov. 2014: FY 4/2014 to 3/2015) foreign investments had a share of close to 19% of the total transaction volume in Japan. In order to maintain and increase this share MIPIM Japan will provide the platform for an open dialogue about investment opportunities and product access.
On the Japanese Economy:
Jesper Koll, Managing Director, Head of Equity Research, JP Morgan Securities Japan Co., Ltd. sees the Japan age pyramid at a sweet spot. “The baby boomer ‘Mick Jagger’ generation that has been dragging the household income is no longer part of the countries labor force and the younger next generation with a large population share is approaching a stage of income growth.” He continued at the ‘Japan Breakfast’ at MIPIM that companies shift from part time employment to a stronger share of full time employees among their workforce. For the employees this results in very significant income rise. Considering the large share of part time workers among the Japanese working population this is another significant source of income growth likely to feed consumption growth.
Germany’s Bankhause Metzler summarises under the headline “The end of deflation in Japan”:
“For months bank lending volume has increased by 2% per month and wages have grown, the labour market is in a solid situation (unemployment in February 3,5% and ratio of open positions to job applications stands at 1.15%). Consequently inflation reached over 2%.”
(Edgar Walk, Chef Economist, Metzler Asset Management GmbH, Frankfurt am Main)
During MIPIM in Cannes the question “Why to invest now” has been answered with good arguments and facts.
At MIPIM Japan in May the focus will be on discussions about opportunities and ways to invest in Japan and on concrete measures of execution.
Kenzo Capital Corporation will proudly assist the shaping of MIPIM Japan in a same manner as at MIPIM in Cannes. We are looking forward to guiding the discussions on the market entry and to supporting the execution of resulting possible investments.
Detailed GDP Information suggests Japan’s Economy is now out of tax hike shock and of deflation
The flash Q4 real GDP released on February 16, 2015 shows an annualised growth rate of 2.2%. Of particular note is that nominal GDP growth rate is now annualized 4.5%, and GDP deflator is +0.5% compared with -0.3% in Q3 and +1.9% in Q2. While deflator may still be affected by consumption tax hike in last April, the trend of deflator and strong nominal GDP show that Japan is on track out of deflation.
Household spending (Consumption and Investment) contributed 1.0%, compared with 0.1% contribution in Q3. It seems the drag in household investment due to consumption tax hike is also finally over. Net export contribution is robust 0.8%, thanks to strong export (up 2.7% from previous quarter) and not so strong import (up 1.3% from previous quarter). Weaker yen and cheaper crude oil price finally bear fruit in Japan.
The drag in GDP growth is a result of a too early tax rate hike
As the above table clearly shows, the drag in GDP growth is the result of too early consumption tax hike. Prime Minister Abe understood this and called election on December 14 with Mr Abe and his party ‘asking for a mandate’ to postpone the second step of a consumption tax hike from October 2015 to April 2017 and the election result was overwhelmingly supportive to Prime Minister Abe and his economic policy. As uncertainty over consumption tax has cleared, Japanese economy is now on track to robust growth in 2015.
Japanese fiscal condition is improving due to higher tax revenue
Though many international observers of Japan argue that Japan should reduce its public debt, which stands at close to 2.5 times GDP (Japan’s net debt though stands at 140%), this issue cannot be the centre of economic attention at present. Japan’s debt is financed almost exclusively internally (by Japanese investors).
It is important to note that the public debt can also be reduced by nominal GDP growth and resulting tax revenue increase rather than tax rate hike. On February 10, the Japanese government (ministry of finance) announced that nominal government debt as of the end of 2014 is JPY 1,029 trillion, JPY 9 trillion decline from the previous quarter end (Sept. 2014). The consumption tax hike contributes at most JPY 2 trillion in 3 months. Thus decline in public debt is due mostly by tax revenue increase due to higher nominal growth rate.
Corporate Expansion Plans continue to stimulate Office Rents in Tokyo
Rent for new space in Class A buildings continued to grow since 2Q 2012. The average year on year growth rate from the same quarter the year before was 11 % for the time Q2 2012 to Q4 2014. With supply in the coming years a stable moderate levels and increase office space demand, we expect office rent to continue on its upwards trend.
Investment Market: J-REITs continue to be the domination investor group throughout 2014, regardless of stronger demand from foreign investors. Investment returns compressed to 3.4% for prime Tokyo office and 4.0 to 4.5% for top Tokyo residential property and we expect such compression to continue during 2015 due to steady strong demand for investment products from J-REITs, private REITs and an increasing investment interest from foreign investors.
Detailed GDP Information suggest Japan’s Economy still on Track to Recovery
While the Q3 real GDP growth result at an annualised minus 1.6% leads to the initial interpretation that Japan may be in recession, a look at the details suggests differently.
Household spending (Consumption and Investment) was up, though in aggregate only by a disappointing 0.1% and so was Government spending (contributing +0.7%) and Export (+0.3%).
The overall result has been triggered mainly by a reduction in corporate inventory. Corporate Japan reduced inventory to balance the reduced private consumption that was dragged down after the April 1, 2014 consumption tax hike from 5% to 8%. Since inventory overall has decreased during 2014 it is generally expected that such inventory will increase again in Q4.
On the other hand December salary bonus is expected to be the highest in 5 years. Japanese corporate pay salary bonuses of 1.5 to 4 month of salary equivalent twice a year (June and December) depending on corporate business developments.
Consequently we can expect a further stimulation of household consumption and investment as a result of the increased available income of private households.
The drag in GDP growth is a result of a too early tax rate hike
The government under Prime Minister Abe has understood the message and reacted. The parliament has been dissolved, elections will take place on December 14 with Mr Abe and his party ‘asking for a mandate’ to postpone the second step of a consumption tax hike from October 2015 to April 2017 and for the economic policy under Mr Abe called ‘Abenomics’.
Though many international observers of Japan argue that Japan should reduce its public debt, which stands at close to 2.5 times GDP (Japan’s net debt though stands at 140%), this issue cannot be the centre of economic attention at present. Japan’s debt is financed almost exclusively internally (by Japanese investors). Japan needs to focus on the denominator of such debt to GDP ratio. The economic policy therefore has to focus on growth and controlled inflation. With the private and the corporate sector trusting in the economic policy and the likelihood of the policy to achieve its target, private households will spend and corporate will invest.
Corporate Expansion Plans stimulate Office Space Search in Tokyo
The result of a annual survey on office needs in Tokyo, by Japanese developer Mori Building shows that for the first time in 5 years Expansion is the top reason for companies to search for new office space. In past years the dominating reasons were rent expenses (no. 1 reason in 2009 to 2011; now no. 4) seismic design.
We trust that Q4 2014 figures will confirm that the economic growth is on track.
First indicators are encouraging: The industrial output published on Friday November 29 showed an improvement by 0.2% over the previous month. This is the forth increase in a row. Experts expect a further increase by 2.3% in November. Consumption improved during October by 0.9% from the previous month. Also here figures confirmed an improvement over 3 month in a row, although consumption was still 4% below the previous year’s figure. We expect consumption to increase further, with December’s salary bonus expected at a 5 year high and the plan of the government to postpone the next hike of consumption tax by 18 months.
Land of rising Wages
As of May 2014 total wages (average wage per capita x number of employees) in Japan increased by 1.4%, while nominal wages increased by 0.8% compared to May 2013. Although this means that employees are losing out at an inflation rate of 2.3% (June core inflation rate) job data looks favorable for further wage improvements as corporate need to compete for employees. Job-to-applicant ratio further improved to 1.10 from 1.09, the highest in 22 years. Results released on July 29 show unemployment at 3.7% as of June 2014. The increase in unemployment by 0.2% (from 3.5%) is due to an increase in job applicants as they see the labor market conditions improving. Especially women starting to look for jobs, encouraged by the Abe administration to enter the job market and seek a carrier.
Robust growth lifts hopes for Japan’s economy
Real GDP for the first quarter of 2014 is estimated at plus 6.7% p.a., up from an initial reading of a 5.9 percent rise and above market expectations for a 5.6 percent rise.
However, economist’s consensus on the second quarter (Apr-Jun 14) is estimated at minus 4.9%. Consumption, industrial shipments, housing starts are weak due to consumption tax hike in April 2014. The Bank of Japan remains confident about the economic growth for the fiscal year March 2014 to March 2015 at 1.0 percent and a growth of 1.5% for 2015 and 1.3% for 2016. At the same time it forecasts an inflation (excluding the effect of the tax hike) of 1.3 percent this year, 1.9 percent in 2015 and 2.1 percent in 2016.
Japanese life insurers recommenced real estate investment in serious manner
Nikkei Newspaper posted an article stating that Japanese life insurers are seriously looking for opportunities for developing and investing real estate properties as an investment alternative.
According to the article, Daiichi Life acquired six rental apartment properties in Tokyo for JPY 12 billion, jointly with Goldman Sachs. The price tag of each property ranges from several hundred million to JPY 3 billion. They envisage investment yield of high 3% handle. They believe that, although investment yield of rental apartment properties is relatively low compared with office property, they are relatively stable and easy to diversify because of each size being relatively small. They envisage in enlarging the rental apartment investment to JPY 100 billion in 2 to 3 years.
On the other hand, Nippon Life, together with Obayashi, a major constructor, acquired a land parcel in Tokyo for developing office property for JPY 80 billion. They also acquired a logistic property in suburban Tokyo.
Tightening labor market shows effects, First Retailing converts 16,000 part time workers to full-time employees
Nikkei Newspaper posted an article stating that First Retailing, Japan’s largest casual wear retailer running Uni Qlo stores, will start converting their 16,000 part time workers to full-time employees in the coming 2 to 3 years commencing this April. First Retailing currently employs approximately 30,000 part time workers in 850 Uni Qlo stores in Japan. Thus, the plan is to secure about half of their part time workers by providing better compensation in view of forthcoming labor shortage.
The rationale behind such a move is the current tightening of labor market in Japan due to improving business sentiment. According to a survey by Recruit Jobs, an employment agency, average hourly wage of part-time workers increased by 0.4% in January to JPY 948 per hour, highest in record. This is 7th consecutive increase on a month-over-month basis.
Other retailers such as Starbucks Coffee follow such a move. They decided to convert 800 contracted workers to full time employees.
Sovereign Wealth Funds have been aggressively investing in equities of Japanese Companies; Norwegian fund doubled its holdings
Nikkei Newspaper posted an article stating that sovereign wealth funds have been expanding the holdings of equities of Japanese companies in the past one year. According to the article, their investment scope is mostly long-term and they view Abenomics as positive for the restructuring of Japanese companies and for enhancing potential growth rate of Japan.
Of particular note is the Norwegian Wealth Fund. It is one of the largest sovereign wealth funds in the world with total AUM equivalent to over JPY 80 trillion. According to the disclosure by Norwegian Central Bank, their holdings of equities of Japanese companies amounted to JPY 3.77 trillion as of the end of 2013, almost doubled compared to JPY 1.94 trillion one year ago. Their holdings include Toyota (JPY 161.3 billion) and Softbank (JPY 120 billion)
Other sovereign wealth funds such as SAMA (Saudi Arabian Monetary Authority) and GIC (Government Investment Corporation of Singapore) are also aggressive in Japanese equities. SAMA held JPY 230 billion of Japanese equities as of September 2013, the amount doubled within 6 months. GIC held JPY 100 billion as of September 2013.
Mobile telecom entrepreneur Mr. Son acquires Tiffany Ginza for JPY 32 Billion
Reuters and Nikkei newspaper reported that Mr. Masayoshi Son, the founder and CEO of Softbank, a major telecom carrier, bought “Tiffany Ginza Building” in Ginza, CBD Tokyo for JPY 32 Billion. It is the landmark property that Tiffany, US based upscale jeweler, operates their flagship store in Tokyo. Judging from the purchase price, cap rate is estimated to be approximately 2.6%. Thus, this acquisition is believed to be the most expensive investment since the recovery of real estate price commenced early this year. The last time cap rate dropped below 3% was 2006-2007. Market observers believe that only none institutional investors can afford to pay such high price.
Back in 2007, a fund arranged by Goldman Sachs acquired the subject property for JPY 38 billion. Due to the bank loan default, ownership moved to creditor banks. Thereafter in 2010, Asia Pacific Land (APL) acquired it from creditor banks. In June of this year, APL announced the sale of the property, and several investor groups, including some sovereign wealth fund, participated in the auction.
Tokyo chosen to host the Olympic Games 2020
Charm and a convincing Concept win the 2020 Summer Olympic Games at the 125th IOC Session for Tokyo.
Tokyo will become the first Asian city to host the Olympic games for a second time, after the first successful games were held in Tokyo in 1964.
The plan, to hold over 85% of the competitions and build the Olympic village within a radius of 8 km in the heart of Tokyo, together with the already committed US$ 4.5 billion in funding from the Tokyo Metropolitan and corporate Japan convinced the voting IOC members.
In his final appeal Prime Minister Abe stated: “One of the safest cities in the world now and in 2020. Some may have been concerned about Fukushima. Let me assure you, the situation is under control. It has never done and will never do any damage to Tokyo.”
At Kenzo Capital Corporation we are very happy about this decision. The greatest sporting event will is going to come to one of the world’s major centres of technology, finance, and trade. In our November ‘Market Outlook Japan’ we shall address the potential stimulation of the economy and real estate market through the effects of a further improvements of an already leading public infrastructure and attractive new facilities. Further we shall provide access to information platforms on ‘Tokyo 2020’ from our homepage.
European public pension funds allocate funds for Investments in Japan
Nikkei newspaper reported that, in June, FRR, one of the French public pension funds, announced to allocate EUR 400 million (JPY 52 billion) exclusively for Japanese equity and to publicly look for retaining asset managers. In July, a Dutch pension fund also decided to allocate funds exclusively for Japanese small cap stocks. A Swedish pension fund invested in the Japanese equity fund managed by Sumitomo Mitsui Trust in March. According to Sumitomo Mitsui Trust, it is quite remarkable that several foreign pension funds publicly look for Japanese equity asset managers in such a short period. On top of European pension funds, Middle East funds are also increasing their asset allocation to Japanese equity.
Data on Tokyo Stock Exchange shows that net acquisition by foreign investors, i.e. acquisition minus disposal, reached JPY 9 trillion in January-July of this year, three times as large as that of the whole last year. Although there is periodical sell-off such as first two weeks of August, sellers are mostly hedge funds. It is noteworthy that long-term investors such as foreign public pension funds get bullish in Japanese equity.
Jones Lang LaSalle says real estate investment in Japan up 85% in 1st half 2013
According to the research report prepared by Jones Lang LaSalle, the real estate investment in Japan increased by 85% in local currency terms (or 50% in JPY terms) year over year in the first half of 2013. Global real estate investment in the same period grew by 11% YOY. Thus, the increase in real estate investment in Japan is quite remarkable compared with other markets, closely followed only by Germany (plus 43%). Other markets: Australia (plus 10%), USA (plus 9%), France (plus 6%) and UK (plus 4%).
Of the major markets, the only country that experienced negative growth in real estate investment in 1H 2013 is China, down 20%.
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Real Estate acquisition volume almost doubled in 1st half 2013, surpassed volume before 2008 financial crisis
Nikkei Newspaper reported that, according to the research made by Urban Research Institute, the real estate acquisition volume by listed companies for 1H 2013 reached JPY 2.36 trillion, almost 100% YOY increase from the same period in 2012. The volume surpassed JPY 1.76 trillion in 1H 2008, the same period right before the 2008 financial crisis. It is the highest 1H transaction volume since 2005.
J-REITs and other foreign REITs accounted for almost half of the transaction volume. Notable transactions, for instance, include: a J-REIT sponsored by Nomura Real Estate invests JPY 220 billion for logistic and commercial facilities, and Croesus Retail Trust, a Singapore-based REIT supported by Daiwa House and Marubeni, acquired a large scale shopping mall in Moriya-city, suburban Tokyo for JPY 12 billion.
Corporations are also quite active in acquiring real estate. Notable transactions include: Ito-Yokado, the major supermarket chain operator, acquired a large land parcel, used to be a factory site, in Kawasaki-city, metropolitan Tokyo for JPY 17.8 billion. They plan to development the site. Daiwa House, a major housing constructor, acquired a large land parcel in metropolitan Osaka for JPY 4.4 billion. They plan to develop a logistic facility there. According to the article, main decision drivers are; expectation of the higher real estate price in the future and the very low nominal interest rate currently.
Abe cements Power with LDP’s sweeping Victory in Upper House Race, opening Gates to Reforms
As widely expected, the Liberal Democratic Party (LDP) achieved an overwhelming victory by winning 65 seats out of 121 at the upper house election conducted on Sunday, July 21, 2013. Together with 11 seats won by coalition partner New Komeito and their 59 incumbent seats not due at this time, LDP and New Komeito secured clear upper house majority (135 seats out of the total 242 seats). This election result is viewed as voters’ approval of Prime Minister Abe’s performance and a mandate for Abenomics, his economic policy initiative. Now holding the majority in the upper house as well as the lower house, the prime minister strengthened his grip on power enabling him to pursue his goal of economic recovery.
With this victory, Mr. Abe’s leadership in the LDP shall be strengthened. Regaining control of the upper chamber, which Abe lost in 2007 during his first stint as prime minister, is likely to accelerate his drive toward key policy goals. Focus will be shifted to the next initiatives Mr. Abe will present to the economic policy agenda. An immediate issue is raising the consumption tax next April to restore fiscal health while keeping economic recovery running. He has to decide how to orchestra this issue in August/early September.
Mr. Abe’s commitment to participate in negotiations on the Trans-Pacific Partnership (TPP) unifies Japan in its effort to counterbalance the increasing influence of China. Consequently the prime minister can use the TPP in his upcoming negotiations with his opponents on long necessary reforms in the agriculture and healthcare industry as well as the labor market. All will become important issues for the government’s “growth strategy”. The resistance against those reforms is strong, but the common goal to counterbalance the increasing influence from China and the clear mandate from the voters to execute Abenomics should overcome such resistance. With those reforms in sight we expect corporate Japan to invest in Japan and share the benefits with its labor force.
The Nikkei 225 has moved up 50.5% since Mr. Abe took office in mid December and closed a 14,785 today (Tuesday July 23, 2013), a gain of 1.31% from Friday’s closing. We think financial markets will continue favorably on this election results that signal a clear mandate for the present government and its fiscal and economic policy.
Real estate investment in Japan increased 33% to USD 10.6 billion in Q1 2013 compared to Q1 2012, Tokyo transaction volume up by 60%, according to Jones Lang LaSalle
Jones Lang LaSalle, a global real estate service company, issued its quarterly research report, stating that the 1Q 2013 global commercial real estate investment amounted to USD 105 billion, up 20% from Q1 of 2012. In Japan the transaction volume increase by 33% to US$ 10,6 billion. Transaction volume in Tokyo was up by 60% to US$ 6 billion.
Already fort the year 2012 transaction volume in Japan was 25% up from the total investment in 2011. Thereby the Japanese market clearly outperformed other markets the US (plus 11%) the UK (plus 0%) and Germany (minus 1%).
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A once and for all regime change as the Bank of Japan (BOJ) adopts “Quantitative and qualitative monetary ease.”
On April 4th 2013, Bank of Japan, led by the new governor Mr. Haruhiko Kuroda, announced a sweeping policy change adopting the so called “Quantitative and qualitative monetary ease.” Under the program, BOJ officially adopted monetary base instead of overnight rate as their monetary operation target. Specifically, in order to achieve a 2% inflation target by the end of 2014, BOJ will (1) increase monetary base JPY 60-70 trillion per year in 2013 and 2014 by purchasing JGB and other assets, (2) extend average remaining maturity of JGB for their purchase to 7 years from the current 3 years to help flattening yield curve, and (3) purchase ETF for JPY 1 trillion per year and J-REITs for JPY 30 billion per year in 2013 and 2014 thus helping reduce risk premium. This is quite a bold policy in the sense that monetary base will be doubled in two years from JPY 138 billion (year-end in 2012) to JPY 270 billion.
When policy statement was announced at around 1:40 PM on April 4th the stock market reacted quite positively. Nikkei 225 closed at 12,833 on Friday April 5th, which was up 3.8% when they closed at 12,362 two days earlier on Wednesday April 3rd. The J-REIT index closed at 1,662, which was up 5.23% from the previous day. The positive stands of the markets towards the new economic policy under Prime Minster Abe is reflected in 23.46% YTD gain for Nikkei 225 and 49.12% YTD gain for J-REIT.
Market observers are mostly surprised by the baldness of the new program. Wall Street Journal quoted Mr. Masaaki Kanno, Chief Economist of JP Morgan, Tokyo, stated, “On every aspect of the program, BOJ beats market expectation. This is way over Ben Bernanke’s Federal Reserve Bank.” Ambrose Evans-Pritchard of the Telegraph wrote, “The Kuroda policy is radically different from past episode of BOJ stimulus, mostly half hearted tinkering to fend off political pressure. It brings BOJ in line with US, UK and Swiss central banks.”
Japan No. 3 in‚ Best Countries for Business’ Ranking
Japan ranks no. 3 in this year’s Bloomberg survey of best countries for business, that sees Hong Kong in the lead, followed by the US. The new agency and publishing company ranked 161 nations on six broad criteria that included the cost of starting a business, the cost of labor and materials and the cost of moving goods.
Japan ranks no. 1 in ‘Cost of Labor and Material’ and in ‘Readiness of the local Consumer Base’ that includes size of middle class, household consumption, tariff on imports and GDP per capita. It ranks no 3 in ‘Degree of economic Integration’.
Nikkei 225 rallies as government’s actions convince investors
Nikkei 225 stock index reached over 10,800 COB Friday, January 11. The level is almost two-year high. The market strongly reacted on the announcement that the cabinet led by Prime Minister Abe decided the supplementary budget for the amount of JPY 10.3 trillion, corresponding to approximately 2% of GDP. Nikkei newspaper reported in the morning that the accord between the Government and Bank of Japan (BOJ) will stipulate the 2% inflation target, suggesting more aggressive monetary easing by the central bank coming soon. Current inflation “goal” set by BOJ early in 2012 was 1%.
Nikkei 225 has rallied 25 percent since elections were announced on Nov. 14 amid expectations Abe would win and pursue a more aggressive policy in terms of both fiscal stimulus and monetary easing.
Large scale logistic facilities doubled in 5 years in greater Tokyo
Nikkei Newspaper reported that the aggregate gross floor area of large scale logistic facilities in greater Tokyo doubled in the past five years and that in greater Osaka increased 80%. The article cites, as background of these developments, the pursuit of efficiency through logistic integration by drug stores, discount stores and internet retails.
Logistic management business has also grown rapidly because of outsourcing requirements. Hitachi Logistics, one of major logistic management companies in Japan, recorded 40% increase in sales in April-September of this year from the same period in last year. Clients include pharmaceuticals, drug stores, sports apparels and internet retails. Internet retails traditionally secured logistic facilities by themselves, but recently reverted to third party logistic managers due to their scalability.
Japanese companies complete record number of overseas M&As
Kyodo news agency reported that the number of M&As of foreign business by Japanese companies in the January-September period amounted to 364, a record high for the reporting period and 7.4 % higher than that of the same period last year. The news service agency quoted a survey prepared by Recof Corp., an M&A advisory firm. According to the survey, the previous record for the reporting period, i.e. January-September, was 359 deals in 1990, almost the end of bubble economy era.
The survey underscored the role played by the yen’s strength against US dollar and other major currencies in encouraging Japanese companies to pursue investment overseas. With Softbank announcing a deal to acquire a 70 percent stake in Sprint Nextel Corp., a major US cell phone company, for JPY 1.57 trillion, the current momentum shows no sign of slowing. Other notable deals include: Acquisition by Dentsu, a major advertising agency, of British peer Aegis Group for JPY 390 billion and acquisition by Daikin, an air conditioning equipment manufacturer, of their US rival Goodman Global for JPY 290 billion.
BOJ eases monetary condition, issues joint statement with the Ministry of Finance to tackle deflationary environment
Bank of Japan announced that they will enhance monetary easing further. Such easing moves by BOJ are in a row in two months. Specifically, they will increase the size of their fund for asset purchase, i.e. program for quantitative easing, from JPY 80 trillion to JPY 91 trillion. They have so far utilized JPY 63 trillion under the asset purchase program.
Of particular interest at this time is that the Governor of BOJ and the Japanese Government, particularly the Minister of Finance and the Minister in charge of Economic Policy, issued the joint statement, the resolution to tackle deflationary environment in Japan. This is an unprecedented move. As stated in our Market Outlook in September, the Japanese economy experienced a surprisingly sharp deceleration recently. Thus, such a move should be warranted.
Kenzo Capital Corporation has formed a partnership with renowned firms in Germany in order to provide access to the Japanese real estate market for German institutional investors:
- iii-investments, the Immobilien-Kapitalanlagegesellschaft of UniCredit Bank AG (HypoVereinsbank), Munich, as a real estate investment company furnishes the legal platform required under the German investment law.
- Metzler Real Estate GmbH, a company of the Metzler Group, Frankfurt/Main, provides the structuring support and acts as a fund manager.
- Kenzo Japan Real Estate GmbH, Munich, has taken the initiative and acts as the placement and contact agent.
With the combined expertise of this partnership, Kenzo offers high-quality investments through the Immobilien-Spezialfonds (special real estate fund) “Kenzo Japan Residential Fund”:
Bundesbank upgrade Tokyo office for reserve diversification
Nikkei newspaper reported that Bundesbank will upgrade its Tokyo office in September to start investing in foreign currencies for diversifying international reserve portfolio of Germany. It is an exceptional move for a central bank of a major country to conduct portfolio operation in their office in Asia. According to a source close to the talk between German and Japanese monetary authorities, Bundesbank will allocate a portion of EUR 19 billion German international reserve for investing in Japanese yen and Australian dollar initially.
Bundesbank has been conducting portfolio operation in their New York office because majority of their international reserves are denominated in US dollar. According to the Nikkei article, Bundesbank cites the rationale for upgrading Tokyo office as increasing economic and political importance of Asian countries. They regard Tokyo office as Asia’s central information hub and will set up trading and research function.
Japan as the winner of the global financial crisis
Panelists at the July 5 ULI Japan Summer Conference in Tokyo couldn’t help but be reminded of the deleveraging of Japan in the mid-1990s as they discussed the current E.U. economic crisis.
Dr. Meyer zu Brickwedde pointed out the financial strength of Japan thereby being the winner oft he global financial crisis, advising Japanese investors to also look outward
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