Kenzo Capital Coporation

Tokyo Office Market Update – October 2010

  1. Latest Economic Brief

    • The Q2 2010 GDP figures released showed a growth of 1.5% after an annualized 5% growth in Q1. The Japanese economy is stable as the export driven recovery spread to domestic demand.
    • The JPY has appreciated and overseas economies in Europe and the US still face an uncertain future which altogether may harm exports.
    • However the Asian economies support Japan’s exports. The demand and growth in Asia may slow down in line with industrialized countries but growth rate will still remain at a close to double digit level.
    • YTD August 2010 exports to Asia accounted for 56.2% and the export volume grew by 46.2%. In 2009 the Asian exports accounted for 54.1%, 2008: 49.3% and in 2007 48.1%. These figures demonstrate the rapid growth of the Asian trade and decreasing dependence on growth in Europe and the US.
    • On October 5, 2010 the Bank of Japan (BoJ) announced a comprehensive easing package that despite a number of easing steps by the BoJ in the past took many by surprise with regard to the willingness of the central bank to do so decisively. The move consists of 3 elements:
      • Lowering the policy interest rate from 0.1% to a range of 0.0% to 0.1%.
      • The bank clarified the time horizon of its policy. It defined its understanding of price stablility as a situation where on a y-o-y basis the CPI rate change fall in a range of 2% or lower also indication that the understanding of most Board members is a positive range of 1%. While there is no guaranty, this clarification indicates that the present zero interest rate policy will continue until mid 2013 or longer, give market consensus that CPI will not turn positive before 2012 end.
      • Main part of the BoJ move is an asset purchase program that will allow the BoJ to purchase additional JPY 5 trillion of various types of financial assets that include CP, ABCP,corporate bonds as well as ETF and J-Reits. Following the comments of the Governor of the BoJ at a press conference after the policy meeting, experts expect that the BoJ will further increase this program further in size and criteria of eligible financial assets in early 2011.
  2. Vacancy Trend

    • After breaking the record for the last decade at the beginning of this year, the average vacancy rate for the Tokyo 5 Wards still kept its rising trend which reached 9.17% in August.
    • We can see some signs that the vacancy rate will likely reach its peak soon:
      • The vacancy rates for Chiyoda Ward and Shibuya Ward seem to have become stable since the earlier part of this year.
      • CB Richard Ellis reported the vacancy rate for high-grade offices in the Tokyo 5 Wards (called class S and class A buildings) peaked out in 4Q of 2009.
      • Major leasing agencies say healthy demand for the offices is recovering. Number of tenants moving not for just relocating to smaller and cheaper offices but demands for expanding space or integrating their offices in higher-grade offices are increasing.
    • New office supply in 2011 is expected to be lower than the average for the last decade in all Tokyo 23 wards, following the last 3 years. Most of the supplies are planned to be out of major business areas in the Tokyo 5 Wards.
  3. Rent Trend

    • The rents in the Tokyo 5 Wards are still under pressure owing to the high vacant rates. The average rent of the 5 Wards is down almost 20% from the most recent peak in 2008, almost the same as the lowest level for the last decade.
    • CB Richard Ellis hinted that the closing rent for some high-grade offices in the Tokyo 5 Wards might have bottomed out.
    • It will still take some time to bottom out generally until the vacant rate improves.
  4. Recent Transactions

    • Major J-REITs and Japanese corporations are still the major players in the Tokyo large-scale office market. Warehousing deals of J-REITs by their sponsors seem to fully recover supported by sufficient financial liquidity.
    • Some foreign investors have started investing in the Tokyo large-scale office market again:
      • Some opportunistic funds have invested in standard assets. They might be able to draw fascinating investment plans again with current available debt finance and forecast of this market sector.
      • An European investor acquired a core asset successfully.
      • Asian investors like Singaporean and Chinese, who have focused attention mainly on Japanese residential, hotel and industrial assets recently, might try investing in this segment.
  5. Details:

    1. Office Vacancy Trend

      (Source: Miki Shoji)

    2. Office Rent Trend

      (Source: Miki Shoji)

    3. Recent Transactions (in excess of JPY 5 Bio)

      (Click to enlarge)

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