Kenzo Capital Coporation

Tokyo Office Market Update – November 2009

  1. Latest Economy Brief:

    • The economy grew by 4.8% during Q3 2009, the second best performance since the 5.7% growth in Q1 2007. The Q on Q growth of 1.2% from the 2 Q to the 3 Q 2009 was larger than generally expected (0.8%). Following a 2.7% growth in Q2. Japans economy has now grown two Q in a row with a 2.7% growth in Q 2.
    • Growth was supported by domestic private consumption (+ 0.7%), corporate capital spending (+ 1.6%) and growth in exports (+ 6.4%).
    • The recovery was led by growth in global demand which benefitted the exports, private inventory and government stimulation programs.
    • 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 new DPJ let government will most likely shift governmental spending away from public work investment and regional development to a much stronger and long overdue emphasis on consumer spending.
    • Despite of only mild non-performing loan problems of Japanese banks and very limited exposure to toxic non-Japanese CMBS and other financial products, Mitsubishi UFJ Financial Group has announced a major new share issue of JPY 1 trillion (US$ 11.2 billion) in order to further strengthen its balance sheet. The market believes that SMBC and Mizuho group will follow. The move will enhance their creditability as well as their maneuvering power on the back of a client deposit based liquidity exceeding their lending by over 150% for the industry.
    • With no inflation on the horizon until 2011 and back by a strong JPY, interest rates will remain at their present low level.
  2. Vacancy Trend:

    • Average vacancy for the Tokyo 5 Wards exceeded 7% in Jun 2009. It is still continuing to rise but the rising trend seems to be mitigated because prime building owners have correspondingly discounted rents to market demands and succeeded in securing higher occupancy.
    • The “Traditional Area”, Chiyoda and Chuo, kept relatively low vacancy(Chiyoda: 6.5%, Chuo: 6.4%), and by contrast, the “New Area”, Shinjuku and Shibuya, and also the “Traditional Area” Minato which includes the volatile Roppongi, experienced higher vacancies over 8%, almost the same as the 2003 level.
    • Since prime buildings represent merely a small proportion, we should still carefully examine the market for the medium size buildings we target.
  3. Rent Trend:

    • S class sized office continue experiencing large rent fall and those in some submarkets see nearly 40% of decline from the peak.
    • However, the falling trend of medium sized buildings especially located in the “Traditional Area” is still relatively mild.
    • Some expect rent of prime buildings to bottom out in the near future judging from the recent severe fall of their original contractual rent, but we should carefully observe the rent trend taking economic trends into consideration.
  4. Recent Transactions:

    • Traditional real estate owners and domestic operational companies like rail way companies are getting into the limelight as major buyers.
    • Certain numbers of minor REITs seem to succeed in avoiding liquidation selling, thanks to the Real Estate Market Stabilization Fund supported among others prominently by DBJ.
    • Some leading REITs, like Japan Real Estate and Nippon Accommodations Fund sponsored by Mitsui Fudosan and Kenedix REIT, have just issued or decided to issue new shares and purchased some properties.
    • A series of actions to reform J-REIT supported by the Government seems to be going relatively well.
    • Recently announced mergers, like Advance Residence of Itochu and Nippon Residential of Pacific Holdings, Tokyo Growth REIT and LCP, New City Residence and Blife of Daiwa House, and Japan Retail Fund of Mitsubishi UBS and LaSalle, will provide these with a window to adjust their portfolio book value and sell some properties at market value realizing losses.
    • Facing re-financing problems, private funds pressured by lenders or CMBS investors will be forced to sell properties, but its impact on the market is unclear until the present economic trend will see a clear confirmation of sustainability.
    • Many players feel that the supply of investment grade properties is quite limited for the time being.

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