Tokyo Office Market Update – June 2010
Latest Economic Brief
- According to a Bank of Japan report issued July 1, 2010, the quarterly Tankan index of sentiment at large manufacturers climbed 15 points in June to plus 1. A positive number means optimists outnumber pessimists. Large companies plan to increase capital spending 4.4% in the year ending March 31, the first gain in three years.
- The Q1 2010 GDP preliminary figures show a growth of 5.0% q-o-q on an annualized basis. The Japanese economy thereby confirmed the recovery with a fourth consecutive quarter of real growth.
- While the recovery since Q2 of 2009 was supported by exports and policy measures, domestic demand is picking up and will need to continue to do so as policy measures expire.
- he main reason for this robust recovery has been the growth of Asian economies. Japan’s exports to Asian countries represent 55% of the country’s total exports (JETRO, Monthly Statistics, April 2010). While Japanese exports to Asia decreased 17.8% in 2009, well below the overall decrease of Japan’s exports which were down by 25.2%, exports to Asian countries during Q1, 2010 increased by 60.7% compared to a total export increase in Q1 of 42.3%.
- During this recent global economic crisis Asia has demonstrated that its economies are more self sustainable than believed.
- Unemployment rose to 5.2% in May from 5.14% in April. While the figures show a certain reluctance of companies to add new staff to their payrolls, the Internal Affairs and Communication Ministry confirmed that the number of job cuts due to restructuring has dropped over the past two months.
- On June 22 the new government detailed its mid-term fiscal plan, including targets for its long-term fiscal policy. The focus of the new Prime Minister on fiscal consolidation targets a FY 2011 new JGB issuance below the amount planned for 2010 and a reduction of the primary deficit by 50% by 2015 as necessary steps to reduce Japan’s debt burden.
- When reading that the governmental debt of Japan has increased to close to 200% of GDP, we have to remember the following additional facts in order not to be mislead:
- While most other debt burdened countries rely heavily on external investors, Japan’s debt is refinanced mainly from domestic sources. Private households command 1.5 trillion US$ in financial assets, about 3 times the amount of national GDP. Over 50% of this money is in bank deposits. Thereby, client deposits exceed the lending volume of the banking industry by over 150%. Insurance companies hold 27% of such financial assets. This is providing both sectors with plenty of money 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.
- Japanese government bonds yielded 1.09% as of June 30, 2010. Yields have been under 2% since the second half of the 1990s. Government debt in relation to the country’s GDP it is well below that of Germany where the gross government debt is below 100% of GDP.
- The market asking rents in the Tokyo 5 Wards are still under pressure. The average rent in the 5 Wards is down 18% from the most recent peak in 2008, approaching the lowest level reached during the decade ending in 2004.
- One-sided tenant movement for cutbacks and closure eased and reasonable asking rents are attracting new tenants. We can now see some major companies moving to larger space.
- The lingering decrease of asking rents hasn’t stopped due to the high market vacancy.
- The gradual increase of the vacancy rate in the Tokyo 5 Wards is lasting because of a certain gap between demand and supply, although the market has calmed down after the global financial crisis.
- The market shows some signs of bottoming-out. According to Q1 2010 office survey by CBRE, grade A office vacancy rates in the Tokyo 5 Wards must have turned around at the end of last year.
- The reason why the grade A office vacancy rate decreased is that some large companies moved to superior grade A offices, consolidating their space or leaving outer Tokyo 5 Wards. In addition to the current office market environment, where tenants can move under advantageous rental conditions, the outlook for the economy and business has become clearer, allowing companies to take a mid and long term point of view and make decisions.
- Individual ward vacancy rates in Shibuya and Chiyoda have recently stabilized.
- New office supply in 2010 is expected to be almost the same moderate level as 2009. Consequently, we expect that the state of the economy and business to be the major decisive factors for future vacancy trends.
Recent Transactions for Large Offices
- Major and middle J-REITs came back under the recovery of the financing environment. J-REITs acquired more than JPY 150 Bio as a whole in 1Q 2010 following 4Q 2009 when trading amount exceeded JPY 150 Bio for the first time since the global financial crisis.
- J-REITS are also about to take a dominant position in the large office market. They acquired properties in a good location at an aggressive price regardless of their ownership structure.
- Some foreign investors like LaSalle Investment have again started investing in Japan. Many foreign investors seem to be searching for good investment opportunities.
- Japanese companies such as life insurance, railway and real estate firms are still major players in the large office market.
- Some deals are coming to the market from failing private funds. The amount of such deals seems not to be rapidly increasing. Japanese banks seem to be in no hurry to call in their loans.
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