Tokyo Office Market Update – March 2010
Latest Economy Brief:
- The Q4 2009 GDP figures released on February 15, 2010 showed growth of 1.1% q-o-q or 4.6% on an annualized basis. This confirmed the recovery of the Japanese economy with a third consecutive quarter of real growth.
- The recovery trend is also confirmed by the January industrial production increase, which, after a Q4 2009 4.5% q-o-q growth, increased 2.5% m-o-m with estimates for Q1 2010 now at 5% q-o-q.
- The main reason for this robust recovery is the growth in Asian economies — the reason for Japan’s export growth which began with the 2nd Q of 2009. Exports to Asian countries grew by 18.9%. Real Exports in Q2 and Q3 grew by double digits and by 7.5% in Q4 2009.
- Unemployment fell to 4.9% in January 2010 and household spending has risen y-o-y for the sixth consecutive month. Real consumer spending grew 0.7% q-o-q in Q4 after a 0.6% increase in the previous quarter.
- The Japanese government has committed the equivalent of 4.2% of the country’s nominal GDP for stimulus measures, the largest of any G 20. The previously mentioned growth in consumer spending at a time when employee compensation fell by 0.4% suggests that such policies are paying off.
- On a gross basis, governmental debt has increased close to 200% of GDP. While the government will have to find ways to reduce this debt burden, Japan is still far from a financial crisis that other debt burden countries are presently facing.
- While most other debt-burdened countries rely heavily on external investors, Japan’s debt is refinanced mainly from domestic sources. Japanese private households have US$1.5 trillion financial assets, about 3 times the amount of the national GDP. Over 50% of this money is in bank deposits. Those deposits exceed the lending volume of the banking industry by over 150%. Insurance companies hold 27% of those financial assets. This provides both sectors with an abundance of capital to be invested in JGBs.
- State held financial assets add up to 50% of gross governmental debt. In other words, on a net basis the government debt is half the size.
- The cost of Japan’s debt with JGB yields far below 2% since the second half of the 1990s (presently 1.3%) in relation to the country’s GDP. That is well below that of Germany where the gross governmental debt is below 100% of GDP.
- The rents in Tokyo’s 5 Wards are still under pressure as a whole. The average rent in the 5 Wards is down almost 15% from the most recent peak in 2008. That approaches the lowest level during the last decade.
- The panic moves by companies closing their offices or relocating to smaller and cheaper office space calmed down in mid 2009. Thereafter, attractive asking rents have motivated companies to upgrade their spaces.
- The number of companies who decide to move is increasing throughout the Wards. This is a sign that the market is turning healthy.
- It will still take more time to bottom out as a result of weakened vacancy rates.
- After exceeding 7.0% in June 2009, the rising trend of the average vacancy rate for the Tokyo 5 Wards paused thanks to the previously mentioned fact that tenants switched from panic moves to rationality.
- It started rising again in September 2009 because of the vitality of positive moves and finally reached to 8.25% in Jan 2010. This broke the previous record set during the last decade.
- In terms of individual Wards, the vacancy rates have been fluctuating in late 2009, confirming increased competition within the Wards.
- New office supplies in 2010 are expected to be almost the same moderate level as 2009. Consequently, we expect that the state of the economy will be the major decisive factor for the future vacancy rate trend.
- Major J-REITs purchased large-scale Tokyo office properties in good locations at year-end supported by the liquidity recovery.
- Railway companies and real estate management subsidiaries of Japanese companies are still major players in the market. They typically don’t hestitate to invest at quite low cap rates especially when the property is prestigious. We can regard these long-term homebred investors as strong rivals.
- We can finally see a few deals coming to the market from risky private funds. These transactions include large-scale office space.
- Small J-REITs have begun to sell portions of their portfolios as part of a restructuring process. However, most of these products are small or less competitive.
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