Tokyo Office Market Update (May 2009)
Latest Economy Brief:
- Japan’s economy has been hard hit by global demand deterioration with a record 44% fall in exports in Q4 of 2008 and minus 71% in Q1 of 2009. This resulted in an annualized record GDP decline of 12.1% in Q4 of 2008 and 14.6% in Q1 of 2009.
- However, it is expected that the economy will rebound slightly as exports stabilize, inventory adjustments are complete and the benefits of economic stimulus programs both domestic and globally trigger an increase in demand.
- The government announced an additional stimulus package of JPY 56.8 trillion (Euro 435 billion) including JPY 15.4 trillion (Euro 120 billion) in fiscal measures added on April 27, 2009.
- Including measures unveiled in 2008, the Japanese government has committed in total the equivalent of 4.2% of the country’s nominal GDP in stimulus measures, the largest of any G 20 country and far beyond the average 2.6% of GDP of all G 20 countries.
- The impact on real growth from all 2008 and 2009 stimulus measures is expected to be around 1.0% for 2009 and 1.2% for 2010, an effect that can not be ignored as the potential growth rate of the economy is likely to be 1.0%. Various subsidies and tax concessions should stimulate consumer spending and capital investment.
- Although the economy contracted by 4% during Q1 2009, following a 3.8% contraction in Q4 2008, the Bank of Japan upgraded its outlook for the economy for the first time in nearly 3 years: “The deterioration in economic conditions is likely to moderate gradually, leading to a leveling off of the economy.”
- Despite the fact that all these governmental measures will trigger a new record in JGB issues, increasing surplus funds in the corporate and private sector will balance the supply and demand in capital markets. With no pressure on inflation to be expected, long-term interest rates will stay low for the foreseeable future.
- The “Traditional Area” rent still remains relatively stable, compared to “New Area” in Shibuya and Ebisu with same size buildings and “Prime S” class offices in Marunouchi and Roppongi, due to the area’s strong tenant base.
- Buildings priced over 30,000 yen/monthly tsubo have been struggling, while those priced below 20,000 yen located inside the traditional office area or nearby have benefited the most from recent leasing transactions.
- Vacancy has soared up to 6% on average for the Tokyo 5 Wards
- The “Traditional Area”, Chiyoda and Chuo, kept relatively low vacancy rates. By contrast, the “New Area”, Shinjuku and Shibuya, are approaching the 2003 level.
- According to market research, we expect that the vacancy rate in the two central wards Chiyoda and Chuo and parts of Minato Ward will not to exceed 7%.
- REITs have been the major players in the transaction market.
- Sponsor backed stronger REITs have been buying from sponsors at aggressive prices.
- Troubled REITs have become sellers in March disposing properties at near book value.
- Facing re-financing problems, REITs and private funds pressured by lenders shall be forced to sell at market price in the near future.
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