catching the rhythm of tokyo - colliers.com · 10/9/2018 · limited; the still-small area...

COLLIERS RADAR OFFICE | TOKYO | 9 OCTOBER 2018

Mari KumagaiSenior Director | Research| Japan

+(81) 3 4572 [email protected]

CATCHING THE RHYTHM OF TOKYOTokyo office market overview and outlook

mailto:[email protected]

2


Fig. 1: Market Cycle – Tokyo five central wards

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Feb. 2010

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Current

Low net supply has enabled a market recovery better than we expected over recent years. We no longer find much room left for occupancy gains; in our view, the current demand to supply dynamics remain tight enough to justify modest rental growth over several more quarters.

Since 2013, net absorption averaging 2.0% per annum has tracked above net new supply averaging 0.8%, reducing the vacancy to cyclical lows. We highlight the current market status has some room for upward price movements as the vacancy rate hits cyclical lows. Past weak price recovery since 2012 should also help extend the ongoing slow yet stable market recovery.

Source: Colliers International Japan Research

A continued dip in available space with still-strong corporate demand has led to a more competitive market outlook for most tenants this year.

> For occupiers, we advise early planning and lease reviews given the anticipated supply increase until 2021. Current demand to supply dynamics remain tight. Lower-grade buildings in popular locations have seen faster price increases than prime office buildings. This has prompted some landlords to reconsider their pricing strategy by fixing the lease term contracts at current levels ahead of peers.

> For most investors, the market outlook should stay positive since we expect the yield gap compared to other markets to remain wide. We are confident that the Tokyo office market provides enough depth, liquidity, and a sufficient track record to accommodate new money.

> In addition, more institutional investors are being pushed to replace their huge bond investments by property investments. This is due to the minimal term premium available on their investment horizon due to the likely extension of the near-zero interest rate environment over the next few years.

Summary & Recommendations

June 2012

3


TABLE OF CONTENTS

Summary & Recommendations 1

UPWARD TRAJECTORY CONTINUES 4

ALTERNATIVE TREND SURGING 5

Key demand drivers 5

Focus on net supply figures 6

Pricing trend 11

Capital Market Implications 15

Appendix 21

Page

4


Rent

We expect ongoing price growth to peak at around 5% within the next several quarters before tapering down to a more sustainable compound annual growth rate (CAGR) of 0.8%. We expect lower-grade buildings to maintain faster price increases above the current 5.2% until their average rents move closer to higher grades as the existing price gap in the same districts offers up to a 40% discount.

However, the overall price response remains weak especially on higher grades. For the next twelve months, we expect the CBD prime rent index to stay flattish with limited upside as more tenants are reaching out for lower grade buildings. We also do not expect the overall rent growth to outpace inflation averaging 1.1% over the next five years.

Capital Value and Yield

We anticipate capital values to inch up at least 3% per annum as more old buildings are being redeveloped in central locations, an increasingly prominent trend since 2003. Capital value appreciates in tandem with the better earning power investors expect on rising rents.

Real estate investors can prevail over bond investors under the Bank of Japan’s zero interest rate policy. Massive government debt will also need to stay affordable in the interest of the government over a longer investment horizon. Our baseline scenario thus does not assume a benchmark rate increase of more than 25 basis points over the next five years.

Looking ahead, a wider yield gap than in any other Asian market – reaching a record level of nearly 4% – is prompting more money inflows to real estate investment. We expect this trend to continue at least for the next few years.

UPWARD TRAJECTORY CONTINUESSolid demand and lower-than-expected supply boost rental growth and capital value appreciation

Demand

We expect office demand will maintain an upward trajectory, keeping the same trend with the total occupied area in the central five wards expanding by about 2% year over year since February 2011. Key demand drivers remain the trends for functional consolidation in more convenient locations within the Greater Tokyo Metropolitan Area. We expect net absorption to remain stable – tracking at around 2.7 % of existing supply or 150,000 tsubo (495,900 sq metres) on cyclical average – as more tenants are rushing to secure their future occupancy needs over the next eighteen months, leading to more immediate concerns about the lowest vacancy rates since 2007.

Supply

We expect increasing supply for late 2019-2021, with annual expansion averaging 2.8% of stock. However, we highlight that the impact of our expected supply increase, after adjusting for withdrawal from demolition, is much less sanguine on a net basis averaging 2.1 % of stock. Our more bullish baseline forecast than market consensus has incorporated the demolition of older buildings that has already eliminated about 45% of new supply over the past four years. We expect the scale of net new supply to decline to a more sustainable 1.7% after 2022, providing an interesting market entry opportunity for long-term investors.

Vacancy

We expect the overall vacancy level to remain at the current record low and below 3.0%, as the net new supply level is recovering closer to the net absorption trend from mid-2019. With near-complete shutdown of available new supply due to larger pre-commitment prior to building completion, vacancy should stay low even with minimal growth in demand. Our base case thus does not assume rising vacancy at least until the end of 2019. More tenants are reaching out for lower grade buildings, adding to the race to secure available CBD space at the same price range below their typical budget ceiling up to JPY30,000 per tsubo (USD80.3 per sq metre).

For the year ahead, new buildings to be completed are almost being filled, which is likely to support a modest upward trajectory in the overall rent level; the latest CBD prime office rent index has continued to increase for 17 consecutive quarters with the latest annual growth of 4.2%.

5


Fig. 2: Employment growth in Tokyo by industry (2008–2017)ALTERNATIVE TREND SURGINGGrowing employment as a hub of corporate headquarters in leasing sectors

The outlook for domestic demand is solid and should support growth in 2018 and 2019. Stable employment inflows into Central Tokyo continue to act as a key demand driver for office space requirements (Fig. 2). We expect Tokyo’s net employment growth to continue, averaging 0.7% over the next five years according to Oxford Economics.

Increasing labour participation from younger foreigners, seniors and women has also been a boon to a relatively inflexible labour market since the start of Abenomics in 2013. Additionally, more retiring baby boomers will likely need to work and supplement their diminishing income. We see a small upside to the Central Tokyo office worker trend, forecasting negative employment growth from 2022.

In our view, a secular shift toward digitalisation will require more centralisedspace requirements in each industry, a positive to Tokyo Office Markets. Over the past decade, Tokyo’s employment growth has remained high in Information &Technology (+35%) and Professional Services (+36%), followed by Banks, Insurance and Other Financial Services (+19%) and Real Estate (+18%). This contrasts with negative employment growth in Manufacturing (- 17%) and Construction (- 12%) as more processes are automated, reducing the need to maintain the same space requirements within CBDs.

More aging baby boomers have also pushed up labour-intensiveemployment in Medical and Welfare (+50%), a trend which we expect to continue for another few decades. Reflecting Tokyo’s status as capital city with many corporate headquarters, Trade, Transportation & Communication (38%), Business Services (23%), and Financial Services (10%) are also driving the city’s GDP trends.

Looking ahead, business services for productivity enhancement are likely to remain the most powerful source of future job creation, with the unemployment rate edging lower from the current 2.9% to 2.7% by 2022. Source: Colliers International Japan Research, Metropolitan Government of Tokyo

-30% -15% 0% 15% 30% 45% 60%

Manufacturing

Construction

Living & Enterntainment

Retail & Wholesale

Hotel & Hospitality

Transportation & Delivery Services

Real Estate

Insurance & Financial Serrvices

Education

Information & Technology

Professional Services

Medical & Welfare

6


-400,000

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0

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

New Supply Net Take Up

Fig. 3: Tokyo Central 5 Wards: Demand and Supply (sq metres)With a tight labour condition overall, it is not surprising to see more flexible work arrangements are lifting temporary office demand; almost 20% of major companies have started to offer alternative work-place arrangements according to the latest Nikkei market survey. New market players are tightening the market demand when available office area is increasingly limited; the still-small area occupied by WeWork has increased by 12,000 tsubo (39,675 sq metres) per year, equivalent to as much as 10% of available vacant stock as of August 2018.

All in, stable demand has outstripped tight supply since 2013 (Fig. 3). Adjusting for demolition which has been larger than we expected since 2005, the net supply was negative enough to keep reducing the vacancy since 2012. Oxford Economics currently predicts real GDP to grow by 1.0% in 2018 and by 1.1% in 2019 before tapering off to a more sustainable 0.9% rate in later years.

A push to redevelop “vintage” office buildings in Central Tokyo

Low supply growth has been the defining positive attribute to the ongoing market recovery (Fig. 4).

We forecast that the overall net absorption trend will remain solid at least until mid-2020. Even though the previous cyclical peak in 2003 saw the addition of a record 5.4% new supply to existing stock, the scale of upcoming supply is more manageable, averaging 2.8% over the next three years (Fig. 4). The net supply - after adjusting for larger demolition planned during the same period - should further decline to 2.1%. New supply will likely then taper off to a more sustainable level of 1.7% before adjusting for possible demolition beyond 2022.

The latest office building survey by the Japan Real Estate Institute revealed that annual demolition within the 23 wards has amounted to 670,000 sqmetres, equivalent to as much as 80% of new supply. Even within the central five wards, the area eliminated due to demolition has averaged 45% of new supply over the twelve years from 2005. In relation to existing stock, assuming the average age of demolished buildings is 43.5 years/50 years/60 years, this will also reduce existing stock by about 2.2%/1.9%/1.6%.

Fig. 4: Tokyo Central 5 wards : Net Change in Leasable Area as % ofExisting Stock



7


Source: Colliers International Japan Research, MikishojiNote: The above data is limited to office buildings with a minimum total leasable area of 3,000 tsubo or 9,900 sq m

Limited land supply within Central Tokyo means that most developers will need to redeploy the same land, rather than adding a new building in outer districts, an important distinction to be made from the previous supply peak reached about fifteen years ago (Fig. 5).

We also think that the relative impact of our expected supply increase appears more manageable; Singapore, for example, on the back of better demand and supply fundamentals, should see new supply expanding to about 7% of stock in 2021. This is much larger than Tokyo’s past cyclical peak reaching a record 5.4% of stock.

Looking at the source of future supply, more older buildings in central locations are being redeployed as larger new buildings with premium facilities; the average building size in CBDs has expanded - at a CAGR of 1.3% over the past eight years - to 2,870 tsubo or about 9,500 sq metres per building (Fig. 6). This is much smaller than other global cities on average. That said, increasing economies of scale in office buildings should be positive for future tenants with more comprehensive office space requirements.

More new buildings are being built in central locations with the proportion of new buildings within the central three wards increasing to 67% from 51% during the previous market peak in the 1990s.

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Fig 6: Average size of office buildings of Tokyo central five wards (sq metres)

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Source: Colliers International Japan Research, MikishojiNote: The above data is limited to office buildings with a minimum total leasable area of 3,000 tsubo or 9,900 sq m

Fig 5: Net new building supply of Tokyo central five wards (sq metres)

8


Fig. 7: Tokyo central five wards office project pipeline

Source: Colliers International, Japan Real Estate Institute, Mikishoji

The following business districts designated as the national strategic special zone by the central government will likely see a notable net supply increase for the next five years:

> Marunouchi

> Nihonbashi/Yaesu

> Shinagawa/Osaki

> Toranomon

● 2018

1 Sumitomo Fudosan Onarimon Tower

2 Taiyo Seimei Nihonbashi Building

3 Tokyo Midtown Hibiya

4 G-Base Tamachi

5 Nippon Life Hamamatsucho Crea Tower

6 Sumitomo Fudosan Osaki Garden Tower

7 Tamachi Station Tower S

8 Shibuya Stream

9 Otemachi 2-chome Redevelopment: A Tower

10 Otemachi 2-chome Redevelopment: B Tower

11 JP Building

12 Marunouchi Nijubashi Building

13 Akihabara I-Mark

14 Kojimachi 4-chome Project

15 Shinbashi 4-chome Plan

16 Nihonbashi 2-chome Redevelopment C Area

● 2019

17 Kanda Neribeicho Project

18 Hato Bus Konan Building

19 Sumitomo Nishi Shinjuku 6-chome Plan

20 Seibu HQ Ikebukuro Building

21Dogenzaka 1-chome Redevelopment

(Tokyu Plaza)

22Nihonbashi Muromachi 3-chome Bekkan

Redevelopment

23 Hotel Okura Office Project

24 Shibuya Scramble Square

25 Shinjuku Minamiguchi Project

26 Sumitomo Fudosan Udagawacho Project

27 Toranomon Hills Business Tower

28 Udagawacho 15 Redevelopment (Parco)

29 Soto Kanda 1-chome A Tower

30 SS Project (Yodobashi Camera)

31 Nittetsu Nihonbashi Building Project

32 Shinbashi 1-chome Plan

33 Nagasaka Sangyo Kyobashi Building

34 Shibuya Nanpeidai Project (tentative)

# Project Name

● 2020

35 Yotsuya Ekimae Plan

36 Toranomon Trust Tower

37 Kita Shinagawa 5-chome (ex-SONY HQ site)

38 Kasuga Korakuen Ekimae Area S-A Tower

39 Takeshiba Area Redevelopment

40 Toranomon 1-chome Redevelopment Area B

41 Takeshiba Water Front Project

42 D Tower Nishi Shinjuku

43 Kita Aoyama 2-chome Project

44 OH-1 Plan B Tower

45 Marunouchi 1-3 Project (Ginko Kyokai)

46 Toshima Project A Tower

47 Toyosu Bayside Cross Tower A

48 Toyosu Bayside Cross Tower B

49 Sumitomo Kojimachi Garden Tower

50 Tamachi Station Tower N

51 Kanda Nishikicho 2-chome Plan

● 2021

52 Nishi Shinjuku 5-chome Kita Area - A

53 Sekai Boeki Center South Tower

54 Tokiwabashi Redevelopment A Tower

55 Shinbashi Tamuramachi Area Redevelopment

56 Toranomon 1-2 chome Project (B Area)

57 Kabutocho Project

58 Toyosu 4-2 Area

● 2022

59Shibuya Eki Sakuragaoka Exit Redevelopment

Area A

60 Yaesu 2-chome Project North Area

61 Yaesu 2-chome Project (Yanmar Building)

62 Tokiwabashi Redevelopment D Tower

63 Kudan Kaikan Plan

64 Hamamatsucho 2-chome Plan A-2

● 2023

65 Toranomon 2-chome (Hospital Redevelopment)

66 Shibaura 1-chome S Tower

67 Toranomon Hills Station Tower

68 Iidabashi Station Redevelopment

69 TTM Project (Tamachi Bldg Redevelopment)

70 Toranomon-Azabudai Redevelopment

# Project Name

Completion

● 2018

● 2019

● 2020

● 2021

● 2022

● 2020

9


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Fig. 8 Ranking of average rent growth – CAGR since 2010

Source: Colliers International, Japan Real Estate Institute, Mikishoj

Limited supply growth casts some mixed pricing impacts when tenants have more than enough capacity to pay with their corporate cash flows hitting cyclical highs.

Ranking the rent growth since 2010, the growth has been strong where growing IT industries tend to congregate. Tighter demand to supply dynamics are driving up rent in popular locations such as Shibuya (+3.0 % p.a. since 2010) and Ebisu (+2.4%) (Fig. 6) while we have also observed price discounts in outer districts such as Toyosu, Kiba and Toyocho(- 1,1%).

Prime office areas such as Marunouchi (+0.2%) have not seen much growth. The rent level in Marunouchi is nearly twice as expensive as the average for the five central five wards (+0.7%).

10


Fig. 9: Selected Area : Proportion of GFA by vintage (%)

Except in Shinagawa, where buildings average 18.5 years old, buildings in Tokyo’s five central wards tend to be older than in other global cities We estimate the average age of office buildings in Tokyo to be 26.1 years based on the latest available disclosure from the Tokyo Metropolitan Government.

The median age of demolished buildings in the 23 wards is about 43 years for the year ended. Assuming that the buildings built before the 1970s will need to be redeveloped, this will withdraw new supply equivalent to 4.5% of existing stock in Shibuya, of about 12% in the three most central wards

(Chuo-ku, Chiyoda-ku and Minato-ku), and of 22% in Marunouchi (Fig. 9).

Unsurprisingly, pricing implications will likely be different across various submarkets. Limited office withdrawal in Shibuya is likely to add more pricing power for landlords to this popular district where most IT ventures tend to congregate. Conversely, the greater supply ahead in Marunouchi may proportionally reduce the pricing power where most financial service tenants tend to congregate.

Source: Colliers International, the annual land survey - Metropolitan Government of Tokyo

Fig. 10:Tokyo 23 wards: All Grade Office GFA by vintage (,000m2)

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- 1959 - 1969 - 1979 - 1989 - 1994 - 1999 - 2004 - 2009 - 2015

- 1959 - 1969 - 1979 - 1989 - 1994 - 1999 - 2004 - 2009 - 2015

0% 20% 40% 60% 80% 100%

Marunouchi ＊

Central 3 Wards

Shinjuku

Shibuya

~1969 ~1979 ~1989 ~1999 ~2004 ~2009 2009~

Source: Colliers International, the annual land survey - Metropolitan Government of Tokyo

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Rental growth expected to peak but with a time lag for landlords’ sentiment to the actual market performance

We expect ongoing rent growth to peak at around 4.5% YOY within the next several quarters before tapering down to a more sustainable CAGR of 0.8%. We also expect lower-grade buildings to maintain faster price increases, averaging 5.2% YoY as they have several more quarters to go before reaching the ceiling of JPY30,000 per tsubo (USD80.3 per sq metre). However, the price response remains weak especially on higher grades. For the next twelve months, we expect the CBD prime rent index to stay flattish Most real estate business owners maintain a bearish sentiment compared to actual performance. Market fatigue still seems to be prevalent many years after the ending of the “bubble economy” in the early 1990s. The Bank of Japan’s latest real estate demand diffusion index, a diffusion index to measure the assessment of future business, continues to remain near static at around +20.

Indeed, long-term office rent increases are likely to remain subdued compared to the overall price index (Fig. 9). Our base case assumes a modest rent increase averaging 0.8% with inflation averaging 1.1% over the next five years.

We advise landlords to revisit their pricing strategy early to maintain an attractive tenant mix with more comprehensive service offerings ahead of their peers. Over the past thirty years, the rent level - excluding ancillary fees charged for building maintenance - has demonstrated a near-perfect correlation to a few headline corporate inflationary indicators. We also note steady price increases in warehousing (+ 6.5%) against a more cyclical price response in regional cities with higher financial leverage such as Osaka (-5.4%).

Fig. 11: Price Index of real estate leasing and corporate services (1985 – 2017, 2010=100）

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o/w Real Estate Leasing , Japan, All typesCorporate Service Price Index

Source: Colliers International Japan Research, Monthly Corporate Price Survey - Bank of Japan, Oxford Economics

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Fig. 12: Price index of real estate leasing and office leasing in Tokyo and Osaka (1985 – 2017, 2010=100)

Source: Colliers International Japan Research, Monthly Corporate Price Survey - Bank of Japan, Oxford Economics

We suspect some traditional landlords remain unwilling to revisit their outdated market views, keeping their same low-price strategy with limited service offerings.

12


Fig. 13: Corporate service price components (2010=100, as of July 2018)

Source: Colliers International Japan Research, Monthly Corporate Price Survey - Bank of JapanNote: The latest data as of July 2018, 2010 price level is indexed to 100

Historically, pricing power for real estate services overall remains weak despite improving economic fundamentals, with no price increase recorded for all real estate related services, and aggregate negative growth of 2.6% for Tokyo’s average office rent since 2010 (Fig. 13). This is disappointing given that the overall corporate service price index during the same period has risen 4.9%, indicating most tenants are willing to pay more for all other services along with better corporate earning fundamentals.

The only major service category with a larger price decline than real estate services is internet-related services, which simply reflects less capital deployment required through revolutionary technology advancements.

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Rent Index- Other area · Office leasing

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Source: Colliers International Japan Research, TO-REITNote:: sample is limited to the office buildings held by all listed REITs

Fig. 14: Vintage building rent per tsubo per month (JPY in thousands) in Tokyo

Vintage Building

Most tenants appear to give priority to popular locations over the age of buildings potentially due to higher switching costs for future office relocation within Tokyo’s central five wards. For our analytical purposes, we classify buildings built more than forty years ago as “vintage buildings” as we found little empirical evidence elsewhere to suggest age has diminished the earning power of a given building (Fig. 11).

Tokyo’s office buildings with good accessibility and professional management can command a high quality premium even though they were built more than twenty years ago.

14


Tight availability in the Central Tokyo office market should encourage landlords to test stronger pricing power

Lack of overbuilding in the past fifteen years has eliminated excess supply to cyclical lows as demand has continued to outstrip net supply (Fig. 15).

We expect the overall vacancy level will remain low or below about 3% at least until the end of 2019. Limited vacancy should encourage more landlords to demonstrate their better pricing power as vacant spaces are being filled more quickly compared to the previous market cycle.

According to Xymax Real Estate Institute, the latest vacancy turnover rate, a rate to measure the pace of take-up in available office lease space to let across all grades, has risen to 42.8% from the cyclical average of 30.0%.

Limited vacancy also means less adjustment to net effective rents, which tend to exhibit a more procyclical nature than gross rents. The level of overall rent concession appears stable with the average free rent granted to new lease contracts remaining unchanged at around three months over the past four quarters. We plan to continue carefully monitoring the level of the various concessions granted to new tenants given that in recent years more than half of new lease contracts have contained a free rent provision.

Fig. 15: Average vacancy rate of Grade A office in Central Tokyo

Source: Colliers International Japan Research, Mikishoji

Fig. 16: Comparing Average vacancy rate of Grade A office

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Au

g-0

5

Au

g-0

6

Au

g-0

7

Au

g-0

8

Au

g-0

9

Au

g-1

0

Au

g-1

1

Au

g-1

2

Au

g-1

3

Au

g-1

4

Au

g-1

5

Au

g-1

6

Au

g-1

7

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Shen

zhen

Shan

ghai

Seo

ul

Bei

jing

Sin

gap

ore

Ho

ng

Ko

ng

Syd

ney

Toky

o

Source: Colliers International Japan Research, Mikishoji, Data as of 2Q18

15


0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

’13Q4 ’14Q2 ’14Q4 ’15Q2 ’15Q4 ’16Q2 ’16Q4 ’17Q2 ’17Q4 ’18Q2

Grade A Buildings Grade B Buildings Grade C Buildings

Capital Markets Implications

The overall market conditions are generally priced to low risk taking with the latest average gross yield across all office building classes edging down to 5.7%. Our base case assumes average gross investment yields of about 5.9% with the capital value increase averaging 2% at least over the next two years.

Looking at historical trends, lower grade buildings have demonstrated more volatile yet stronger performance since 2013 (Fig. 17). High-grade buildings also continue to attract more conservative investors, with the unit price for Grade A buildings reverting to JPY2.7 million (USD 23,900) per sq metre after hitting a cyclical low of JPY1.2 million (USD 11,210) per sq metrearound Q3 2011.

We see relative strength in future income growth given past price recovery has been modest. Unfortunately, good income growth will likely face higher hurdles from higher purchase prices in higher grades. We expect that ongoing cap rate compression – with cap rates likely to dip below 3% for leading business districts such as Marunouchi - will prompt more investors to look for lower-priced assets in other districts at least over the next several quarters.

Source: Colliers International Japan Research, ARES, TO-REIT, J-REI

Investment sentiment is turning cautiously optimistic due to recovery in capital values and the near-zero interest rate policy.

Fig. 17: Capital value index by Grade (2013 – 2018, 2013=1.0)

Fig. 18: Income, capital and total returns in Tokyo Office central three wards (2007 – 2018)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

24

49

06

24

49

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07

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49

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10

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03

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04

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52

07

Income Return Capital Return Total Return

16


y = 1.6005x + 670.95R² = 0.7252

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

0 20,000 40,000 60,000 80,000 100,000 120,000

Cap

ital

Val

ue

(JP

Y m

illio

n)

Total Leasable Area (m2)

Historically, large building transactions, defined as total leasable area of 30,000 sq metres or greater, have tended to see some overpriced deals. As market competition for larger buildings has become intense, more sellers have been standing on the sidelines.

This has offset positive sentiment from increasing market participation of non-domestic investors and larger net investment inflows from J-REIT investors.

Source: Colliers International Japan Research, TO-REIT, J-REIT

For long-term investors, we recommend owning middle-sized buildings within the central three wards as we expect their stable NOI growth to remain intact –even in older buildings – during our forecast horizon.

Fig. 19: Measuring capital value against total leasable area – Central five wards (in JPY)

17


y = 0.3406x - 2.3357R² = 0.6995

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

- 10.0 20.0 30.0 40.0 50.0 60.0

(Cap

ital

Val

ue

per

Tsu

bo

, JP

Y M

illio

)

(Monthly Rental Income per Tsubo)

Generally speaking, in our view, changes in institutional property values are driven by changes in the outer-year forecast in earning fundamentals. With these regards, since 2013, there have been few surprises to our baseline forecast other than greater-than-expected demolition downsizing the net new supply, a positive to real estate investors.

Rental income growth since the start of Abenomics in 2013 remains solid, with the NOI yields averaging around 5.1% per annum. The majority of buildings with a net leasable area of 3,000 tsubo (9,920 sq metre) or greater, generate monthly rental income per tsubo of around JPY20,000-28,000 (USD53.5-75.0) per sqmetre.

Source: Colliers International Japan Research, TO-REIT, J-REI

Fig. 20: Measuring capital value against monthly rent – Central five wards

18


Fig. 21: Capital value and capitalisation rate in 2018 Fig. 22: Capital value and capitalisation rate (2002 – 2018)

Source: Colliers international Japan Research, TO-REIT, J-REITSource: Colliers international Japan Research, TO-REIT, J-REIT

0

100

200

300

400

500

600

0.0 5.0 10.0 15.0 20.0

Cap

ital

Val

ue

/ N

et

Leas

able

Are

a (

m2

)

Capitalisation rate (%)

Cap rates applied to transactions have stayed in a range of about 3.5% to 4.0% over the past year and are tracking slightly lower than historical means(Fig. 16 & 17). However, it is evident that the majority of investors remain very cautious in engaging in expensive deals so as not to repeat the same mistakes as in past market failures.

Investment sentiment is also turning cautiously optimistic with low real interest rates. Central bankers remain hawkish in Japan, providing ample ground to maintain a near-zero interest rate policy for at least several more years.

Rising trade tension and geopolitical risk are likely to keep Japanese interest rates very low due to the yen’s status as a safe-haven currency. With the consensus estimate calling for only a 25 basis point increase through 2020,, our base case assumes the nominal ten-year interest rate will only increase to 1.0% to 1.3% over the next five years with core inflation approaching 1% by end-2021.

0

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a (

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)

Capitalization %

19


According to the latest data from Real Capital Analytics, total transactions of completed properties worth over USD10 million declined 23% in Japan as a whole over H1 2018, to USD14.8 billion. Tokyo, however, saw a 9% increase to USD8.5 billion. About 25% of capital is attributed to offshore investors, which we expect to hit a cyclical high of around 32% over the next several quarters.

-100%

-50%

0%

50%

100%

150%

200%

Q1 '14 Q1 '15 Q1 '16 Q1 '17 Q1 '18

Sales Change

Fig. 23: Quarterly Transaction Volume – Tokyo C5W Office Markets

Fig. 24: Changes in Quarterly Transaction Volume – Tokyo C5W Office Markets

Source: Colliers international Japan Research, RCA

0

500

1,000

1,500

2,000

2,500

Q1 '14 Q1 '15 Q1 '16 Q1 '17 Q1 '18

(JP

Y B

illio

n)

Rolling 12-mo. Total Quarterly Vol

20


0 200 400 600 800

Hong Kong

South Korea

Australia

United States

Spain

Canada

France

United Kingdom

Japan

Germany

Fig. 25: Yield spreads over risk-free rates of office market in different countries (bps)

Source: Real Capital Analytics, Colliers International Japan Research

With stable NOI growth and predictable low real interest rates, the focus then turns to the growing risk premium relative to other markets. In our view, the current risk premium offers an attractive value relative to investments in other asset classes of similar credit quality. High-grade real estate investment has become a popular destination to replace massive bond investment with better market liquidity and depth and a longer track records of stable cash flows. Tokyo office building markets offer an unusually

high risk premium to solid earning fundamentals with the latest risk premium tracking around 450 bps (as indicated by the risk premium for Japan property market illustrated on Fig. 18). This compares to the average RMBS/CDS¹ spread around 30/45 bps and the same-issuer’s equity risk premium averaging 420 bps according to the latest NYU Stern Business School survey.

(100)

-

100

200

300

400

500

600

1Q

08

3Q

08

1Q

09

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1Q

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3Q

17

1Q

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18

Tokyo 5CBDs HK Major U.S. Metro

Fig. 26: Historical Yield Spreads for Office Markets (bps)

Source: Colliers International Japan Research, Real Capital Analytics

¹ Residential Mortgage-Backed Securities / Credit Default Swaps

21


APPENDIX (1) NEW SUPPLY COMMITMENT 2018

Source: Colliers International Japan Research, Nikkei

Sqm Tsubo Sqm Tsubo Tsubo % of Total

1 Sumitomo Fudosan Onarimon Tower 2018.4 1,025 310 18,175 5,498 5,498 100% Mitsui Sumitomo Trust AM, Fuji Kagaku

2 Taiyo Seimei Nihonbashi Building 2018.1 1,217 368 22,056 6,672 5,900 88% Japan Securities Dealers Association

3 Tokyo Midtown Hibiya 2018.3 3,207 970 86,248 26,090 20,000 77% E&Y, Asahi Kasei. GruNavi, LIXIL

4 G-Base Tamachi 2018.1 747 226 11,967 3,620 3,620 100% Mitsubishi Auto Lease

5 Nissay Crea Tower 2018.8 2,612 790 50,000 15,125 15,125 100% Shiseido, NRI, Shinoken, Asahi Hoso

6 Sumitomo Fudosan Osaki Garden 2018.1 5,445 1647 120,473 36,443 36,000 99% Sega Sammy, JR East

7 Tamachi Station Tower S 2018.5 2,975 900 77,355 23,400 23,400 100% Mitsubishi Motors, Familymart

8 Shibuya Stream (B-1 area) 2018.8 2,116 640 46,122 13,952 13,952 100% Google

9 Otemachi Place West Tower 2018.7 3,306 1,000 99,174 30,000 30,000 100% Japan Post, NTT group

10 Otemachi Place East Tower 2018.7 2,975 900 79,339 24,000 24,000 100% Sumitomo Corp, Azusa Audit

11 New JP Building 2018.6 1,488 450 8,595 2,600 2,300 88%

12 Marunouchi Nijybashi Building 2018.10 2,793 845 67,071 20,289 20,000 99% MHI, Delloite, Estee Lauder

13 Akihabara I-Mark Bldg 2018.3 992 300 11,339 3,430 3,430 100% Mitsubishi Materials

14 Shin Tora-Dori CORE 2018.9 860 260 9,388 2,840 2,840 100% Creeek and River

15 Nihonbashi Takashimaya Mitsui Building 2018.6 2,479 750 86,777 26,250 25,000 95% TDK, SMBC Nikko

Total: 240,209 231,065 96.19%

# Project NameFloor Size Total Rentable Pre-Commitment

KeyTenantsCompletion

Total: 240,209 231,065 96.19%

22


Source: Colliers International Japan Research, NikkeiNote : Above data is as of June 2018

APPENDIX (2) NEW SUPPLY COMMITMENT 2019

Sqm Tsubo Sqm Tsubo Tsubo % of Total

1 Sumitomo Fudosan Akihabara Ekimae Project 2019.5 1,091 330 16,860 5,100 0 0%

2 Shinagawa Heart 2019.2 1,114 337 13,369 4,044 3,000 74%

3 Sumitomo Nishi Shinjuku 6-chome Plan 2019.3 1,322 400 30,545 9,240 0 0%

4 Seibu HQ Ikebukuro Building 2019.3 2,116 640 31,736 9,600 2,560 27% Seibu Group 4 floors

5 Dogenzaka 1-chome Redevelopment (Tokyu Plaza) 2019.1 2,109 638 18,995 5,746 5,746 100% GMO

6 Nihonbashi Muromachi 3-chome Bekkan Redevelopment 2019 4,298 1,300 90,926 27,505 15,000 55% Boston Consulting, Mitsui Fudosan

7 Hotel Okura Office Project 2019.6 2,274 688 40,856 12,359 6,000 49% IWG (No 18)

8 Shibuya Scramble Square 2019.8 2,836 858 73,015 22,087 22,087 100% Mixi, WeWork

9 Shinjuku Minamiguchi Project 2019.8 1,861 563 24,179 7,314 6,200 85% Relia, JA, Aiming, WeWork

10 Sumitomo Fudosan Shibuya Tower 2019.6 1,488 450 19,339 5,850 5,850 100% Cyber Agent

11 Toranomon Hills Business Tower 2019.12 2,975 900 92,562 28,000 25,000 89% Facebook, Hitachi Hitech, Shinittetsu Solutions

12 Udagawacho 15 Redevelopment (Parco) 2019.9 1,633 494 11,451 3,464 3,464 100% Digital Garage

13 Sumitomo Fudosan Akihabara Manseibashi Project 2019.8 793 240 16,876 5,105 0 0%

14 Nittetsu Nihonbashi Building Project 2019.3 1,021 309 12,893 3,900 0 0%

15 Shinbashi 1-chome Plan 2019.6 1,091 330 14,182 4,290 0 0%

16 Museum Tower Kyobashi (Nagasaka Sangyo) 2019.7 1,322 400 15,048 4,552 2,000 44%

17 Shibuya Nanpeidai Project (tentative) 2019.3 1,749 529 27,779 8,403 8,000 95% Tokyu RE, Voyage

550,608 166,559 104,907 62.98%

# Project NameFloor Size Total Rentable Pre-Commitment

KeyTenantsCompletion

550,608 166,559 104,907 62.98%

About Colliers International Group Inc.

Colliers International Group Inc. (NASDAQ: CIGI) (TSX: CIGI) is a top tier global real estate services and investment management company operating in 69 countries with a workforce of more than 12,000 professionals.Colliers is the fastest-growing publicly listed global real estate services and investment management company, with 2017 corporate revenues of $2.3 billion ($2.7 billion including affiliates). With an enterprising cultureand significant employee ownership and control, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide, and through its investment management servicesplatform, has more than $20 billion of assets under management from the world’s most respected institutional real estate investors.

Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice to accelerate the success of its clients. Colliers has been ranked among the top 100 global outsourcing firms by theInternational Association of Outsourcing Professionals for 13 consecutive years, more than any other real estate services firm. Colliers is ranked the number one property manager in the world by Commercial PropertyExecutive for two years in a row.

Colliers is led by an experienced leadership team with significant equity ownership and a proven record of delivering more than 20% annualized returns for shareholders, over more than 20 years.

For the latest news from Colliers, visit our website or follow us on

Copyright © 2018 Colliers International

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for anyinaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Primary Authors:

Mari KumagaiSenior Director | Research| Japan+(81) 3 4572 [email protected]

Contributors:

Stephanie SunDirector | Research| Asia+(65) 6531 8635 [email protected]

Andrew HaskinsExecutive Director | Research | Asia+(852) 2822 0511 [email protected]

For further information, please contact:

Katsuji TokitaManaging Director | Japan+(81) 3 [email protected]

Hideki OtaExecutive Director | Capital Markets & Investor Services | Japan+(81) 3 [email protected]

Hazumu IwaseExecutive Director | Office Services | Japan+(81) 3 [email protected]

Masahiro FuseExecutive Director | Valuation & Advisory | Japan+(81) 3 [email protected]

Alistair Walker Senior Director | Occupier Services | Japan+(81) 3 [email protected]

http://www.colliers.com/

http://www.colliers.com/en-gb/asia

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catching the rhythm of tokyo - colliers.com · 10/9/2018 · limited; the still-small area...

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