KENEDIX Real Estate Market Report 4Q 2021
Contents
Macroeconomic
Conditions …………………2
J-REIT Market …………………2
Real Estate
Investment Market …………3
Office Market …………………5
Residential Market ……………6
Retail Facility Market …………7
Logistics Facility Market………8
Hotel Market ………………… 9
Summary
The real GDP growth rate in July-September 2021 showed negative for the first time in 2 quarters
The real GDP growth rate in July-September 2021 was down 3.0% QoQ at an annualized rate (seasonally adjusted), returning to negative growth. Consumption of households impacted by the declaration of a state of emergency in urban areas, fell 4.5% QoQ at an annualized rate. In addition, both exports (-8.3% over the same period) and private non-residential investment (-14.1%) fell considerably due to factors such as lower auto sales resulting from supply restrictions such as the semiconductor shortage. Consumers continue to visit retail districts in increasing numbers since bottoming out in September, and personal consumption is expected to recover. In addition, the improving conditions regarding the COVID-19 pandemic have led to the appearance of some bright signs in corporate production activities as well, and the real GDP growth rate is predicted to show a strong recovery in the quarter October-December.
Investment in commercial real estate is trending up YoY
According to CBRE, the amount of investment in commercial real estate in July- September 2021 was up 77% YoY to JPY1.184 trillion. This was due mainly to restraint on investment in light of the effects of COVID-19 in the same period last year. Another contributing factor was the conclusion of a deal on the Dentsu head office building, said to involve an amount of approximately JPY270 billion (based on media reports). Replacement of asset portfolios also appears to have been a major contributing factor behind the increase in the amount of investment by J- REITs. As internal growth is not easy to achieve due to the delayed economic recovery, it appears likely that many J-REITs will emphasize portfolio improvements and external growth strategies leveraging the favorable conditions in the commercial real estate investment market.
Expected yields on class-A buildings in Tokyo (Marunouchi/ Otemachi) have fallen for the first time in 4 and one-half years
Investors' expected yields on class-A buildings in Tokyo's Marunouchi and Otemachi districts have fallen for the first time in 4 and one-half years, to 3.4%. Although investors' expected yields on class-A buildings in Tokyo (Marunouchi/Otemachi) had remained largely unchanged since before the COVID- 19 pandemic, it appears that appetite for investment in superior properties may have increased further following the pandemic. The decrease in expected yields is not limited to office buildings in Tokyo (Marunouchi/Otemachi) alone but extends to a wide range of assets and regions, as investors appear to have a strong appetite for investment.
While the vacancy rate in central Tokyo continues to rise, the breadth of the increase is narrowing
At the end of September 2021, the vacancy rate for the 5 central wards of Tokyo was up 0.24%pt from the end of June, to 6.43%. While the vacancy rate continues to rise, the breadth of the increase is narrowing. According to a survey by Sanko Estate, contracted floor space in office buildings in the 23 wards of Tokyo in July- September was up 25% YoY to 207 thousand tsubo (calculated by Kenedix based on monthly data), as leasing conditions appear to be in an improving trend. While relocations due to revised office strategies are apparent here and there, it would appear that tenants also are increasing floor space in current buildings or relocating to larger offices in response to favorable business performance. At the same time, lease terminations due to worsening business conditions and other factors resulting from the economic downturn appear to have settled down. While developments such as lease terminations due to expiration of fixed-term lease agreements and reductions in office space due to revised office strategies resulting from the underlying cause of increased use of teleworking are likely to continue, the rapid increasing trend in vacant floor space appears to have levelled off.
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KENEDIX JAPAN REAL ESTATE MARKET REPORT 4Q2021
【Macroeconomic Conditions】
The real GDP growth rate in July-September 2021 showed negative for the first time in 2 quarters
The real GDP growth rate in July-September 2021 was down 3.0% QoQ at an annualized rate (seasonally adjusted), returning to negative growth. On July 12, the 4th state of emergency was declared in Tokyo, and after that it spread to other prefectures as well. As a result, private consumption fell and consumption of households decreased by 4.5% QoQ at an annualized rate. In addition, both exports (-8.3% over the same period) and private non-residential investment (-14.1%) fell considerably due to factors such as lower auto sales resulting from global supply restrictions such as the semiconductor shortage. Private residential investment fell by 10.1% over the same period, its first decrease in 3 quarters.
The 4th state of emergency ended on September 30, as the number of COVID-19 new cases decreased. Consumers are visiting commercial areas in increasing numbers since bottoming out in September, and private consumption is expected to recover. In addition, the improving the state of the COVID-19 pandemic has led to the appearance of some bright signs in corporate production activities as well, and the real GDP growth rate is predicted to show a strong recovery in the quarter October-December. Conceivable risk factors include global limitations on supply of semiconductors and other materials, oil prices, increasing uncertainty in the Chinese economy, and the possibility of a new wave of COVID-19.
【Fig.1】Real GDP Growth Rate and Contribution to Change | 【Fig.2】Mobility Report(Retail, & Recreation) | ||
25 | (%) | 0 | |
20 | |||
15
10
5
0 -5
-10-15-20-25
-30
Q1 Q2 Q3 Q4 Q1 Q2 Q3
20192020
Source: The Cabinet Office
-10 | ||||||||||
-20 | ||||||||||
-30 | ||||||||||
Private Inventories | -40 | |||||||||
Net Exports | ||||||||||
Public Demand | -50 | |||||||||
Private Non-Resi. Investment | ||||||||||
Private Residential Investment | ||||||||||
Consumption of Households | -60 | |||||||||
Real GDP Growth Rate | ||||||||||
Q4 Q1 | Q2 | Q3 | -70 | |||||||
2021 | 3/'20 | 6/'20 | 9/'20 | 12/'20 | 3/'21 | 6/'21 | 9/'21 | |||
Source: Google LLC "Google COVID-19 Community Mobility Reports". https://www.google.com/covid19/mobility/ Accessed 2021/11/15
【J-REIT Market】
The TSE REIT Index was down for the | 【Fig.3】TSE REIT Index, TOPIX、JGB 10 Yield | |||||||||||
first time in 6 quarters | 0.2(%) | 2,300 | ||||||||||
The TSE REIT Index's performance in July-September | 2,100 | |||||||||||
2021 was -3.7%, showing the first decrease in 6 | ||||||||||||
quarters. TOPIX was up 3.7% during the same period, | 0.0 | 1,900 | ||||||||||
while the J-REIT market underperformed. Although | ||||||||||||
conditions remained largely unchanged in July-August | ||||||||||||
despite continued ups and downs, the decrease in | 1,700 | |||||||||||
September had an impact. The September decrease is | ||||||||||||
surmised to reflect the effects of rising interest rates | -0.2 | 1,500 | ||||||||||
worldwide. In the U.S., the yield on 10-year Treasuries | JGB 10 Yield (LHS) | |||||||||||
rose by 0.179%pt from the end of August, and the REIT | 1,300 | |||||||||||
TSEREIT Index(RHS) | ||||||||||||
Index fell by 5.9% in one month. In Japan, the yield on | ||||||||||||
10-year JGBs rose by 0.047%pt, dividend yields based | -0.4 | TOPIX (RHS) | 1,100 | |||||||||
on the TSE REIT Index rose by 0.126%pt, and the yield | ||||||||||||
spread rose (dividend yields minus the yield on 10-year | 1/'19 | 5/'19 | 9/'19 | 1/'20 | 5/'20 | 9/'20 | 1/'21 | 5/'21 | 9/'21 | |||
Source: Bloomberg, Kenedix | ||||||||||||
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KENEDIX JAPAN REAL ESTATE MARKET REPORT 4Q2021
JGBs) by 0.112%pt to 3.40%. The NAV ratio at the end of September stood at 1.14 times, down from 1.19 times at the end of July.
As a result of the effects of the state of emergency, performance of retail REITs was bearish while office REITs suffered a pronounced decrease compared to the end of 2019
Viewed by asset type, the performance of REITs investing mainly in each asset type showed decreases, -1.3% in the office REITs, -2.3% in the residential REITs, and -6.5% in the retail REITs, while the logistics REITs was up 0.1% (calculated by Kenedix based on the SMTRI J-REIT Index® from the Sumitomo Mitsui Trust Research Institute). It appears that investors looked less favorably on REITs investing in retail facilities as consumers were requested to stay at home during the state of emergency. At the end of September 2021, the TSE REIT Index was down 3.4% compared with the end of FY2019, before the COVID-19 pandemic spread in Japan. Thus, the index still has not recovered to its pre-COVID-19 level. The weakness of the resilience in the J-REIT market is pronounced when compared with the stock market, in which TOPIX is up 17.9% from the end of 2019, that is significantly higher than the pre-COVID-19 level. However, J-REIT performance varies considerably by type of property. A look at performance by asset type over the same period shows that office REITs were down 9.6%, residential REITs were down 0.3%, retail REITs were up 0.9%, and logistics REITs were up 29.7%. There is a stark contrast between the strength of logistics facilities and the bearish performance of office REITs.
While the increase in the cumulative amount of public offerings since the start of the year is roughly 10%, it remains somewhat lower than the pre-COVID-19 level
The total amount of 12 public offerings (POs) by J-REITs in July-September 2021 was up 71% YoY on the basis of the funds raised to JPY203.1 billion (based on payment dates). While the amount of funds raised exceeded JPY200 billion for the first time in 3 quarters, since POs were slow in H1, the cumulative amount since the start of the year is only JPY354.4 billion, up 9.3% from the same period in 2020. However, this level is down 25% from the same period in 2019, and thus it remains below the pre-COVID-19 level. The average amount of funds raised per PO is JPY16.6 billion (January-September), lower than the level of JPY20.8 billion in the same period one year earlier. Since the average amount of funds raised trended around JPY20 billion in 2019 and earlier, this year's figure could be said to be a result of the large number of small -scale POs.
【Fig.4】Price Performance by Asset Type(Jan.2020=100)
140
120
100
80 | |
Office | |
60 | Residential |
Retail | |
Logistics |
40
1/20 3/20 5/20 7/20 9/20 11/20 1/21 3/21 5/21 7/21 9/21
Source: SMTRI J-REIT Index® made by Sumitomo Mitsui Trust Research Institute, Kenedix
【Fig.5】Amount of Public Offering
(JPY in trillion) | ||
1.4 | Q4 | |
1.2 | Q3 | |
1.0 | Q2 | |
Q1 | ||
0.8 | ||
0.6 | ||
0.4 | ||
0.2 |
0.0
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Source: The Association Real Estate Securitization, Kenedix
【Real Estate Investment Market】
The amount of commercial property transactions in July-September 2021 increased significantly YoY due in part to large-scale transactions
According to CBRE, the amount of investment in commercial real estate in July-September 2021 was up 77% YoY to JPY1.184 trillion. This was due mainly to restraint on investment in light of the effects of COVID-19 in the same period last year. Another contributing factor was the conclusion of a deal on the Dentsu head office building, said to involve an amount of approximately JPY270 billion (based on media reports). A look at the figures by investor type shows YoY increases of 41% for J-REITs and 400% for non-J-REIT domestic investors. The deal for the Dentsu head office building was a major contributor behind the massive increase in the amount of investment by domestic investors other than J-REITs. Replacement of asset portfolios also appears to have been a major contributing factor behind the increase in the amount of investment by J-REITs. In July-September,J-REITs sold properties valued at JPY149.9 billion, which was a large amount
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KENEDIX JAPAN REAL ESTATE MARKET REPORT 4Q2021
of sales on a quarterly basis. Examples of property deals included the acquisition of Iidabashi Grand Bloom (acquisition price JPY77.6 billion) and sale of 4 properties including Nakano Sunbright Twin (sale price JPY75.4 billion) by Nippon Building Fund Inc., both announced August 16. While Nippon Building Fund cites qualitative portfolio improvements as the main objectives of these deals, it appears to be aiming to improve NOI and funds efficiency through external growth in light of the difficulty of improving office occupancy rates over the short term. As internal growth is not easy to achieve due to the delayed economic recovery, it appears likely that many J-REITs will emphasize portfolio improvements and external growth strategies leveraging the favorable conditions in the commercial real estate investment market. The cumulative amount of investment in the quarter January-September 2021 was down 2% YoY to JPY2.6 trillion. This would appear to reflect factors such as the high amount of transactions in January-March 2020 and the continued YoY decrease in the amount of investment by overseas investors.
【Fig.6】Major Transaction Volume by Investor Type
(JPY in billion)
6,000 | Domestic (J-REITs) | Domestic (Others) | Overseas |
5,000
4,000
3,000
2,000
1,000
-
Source: CBRE "Investment Market View", Kenedix
Real estate investors' expected yields are down for numerous assets and regions
According to the Japanese Real Estate Investor Survey conducted in October 2021 by the Japan Real Estate Institute, the investors' expected yield on class-A buildings in Tokyo (Marunouchi and Otemachi) was down 0.1%pt from 6 months earlier, to 3.4%. This is the first decline in 4 and one-half years since April 2017, and could be considered symbolic. Although the investors' expected yield on class-A buildings in Tokyo (Marunouchi/Otemachi) had remained largely unchanged since before the COVID-19 pandemic, it appears that appetite for investment in superior properties may have increased further following the pandemic.
【Fig.7】Significant Deals
Property Name | Asset Type | Buyer | Prefecture | Value | TFS | Date |
(JPY in bn) | (sqm) | |||||
Dentsu Head Office Bldg./Shiodome An | Office | Shibahasikuti G.K. | Tokyo | approx 270 | - | Sep-21 |
Idabashi Grand Blooom | Office | Nippon Building Fund | Tokyo | 77.6 | 31,150 | Aug-21 |
Nakano-Sakaue Sun Bright Twin Bldg. | Office | Domestic SPC | Tokyo | 40.0 | 32,194 | Aug-21 |
Kamiyacho Trust Tower | Office | SMFL MIRAI Partners | Tokyo | 32.5 | 7,595 | Jul-21 |
DPL Nagareyama Ⅲ | Logistic | Daiwa House REIT | Chiba | 32.0 | 106,917 | Aug-21 |
LogiSquare Osaka Katano | Logistic | CRE Logistics REIT | Osaka | 22.4 | 76,393 | Sep-21 |
Tokyo Opera City Bldg. | Office | NTT UD REIT | Tokyo | 22.0 | 55,507 | Oct-21 |
Akasaka Garden City | Office | SEKISUI House REIT | Tokyo | 21.3 | 9,103 | Oct-21 |
Q Plaza Shinjuku-3chome | Office | Activia Properties | Tokyo | 18.4 | 6,317 | Aug-21 |
Sphere Tower Tennozu | Office | Domestic Corporation | Tokyo | 18.0 | 29,130 | Oct-21 |
Aeon Mall Takasaki | Retail | AEON REIT | Gunma | 17.2 | 126,348 | Aug-21 |
Landport Ome Ⅲ | Logistic | Nomura Real Estate Master Fund | Tokyo | 17.0 | 73,087 | Oct-21 |
Meguro Tokyu Bldg. | Office | Activia Properties | Tokyo | 16.3 | 8,814 | Aug-21 |
NBF Ochanomizu Bldg. | Office | Hulic | Tokyo | 16.1 | 9,258 | Aug-21 |
Source: Companies publication documents, News reports, Kenedix
The decrease in expected yields is not limited to office buildings in Tokyo (Marunouchi/Otemachi) alone but extends to a wide range of assets and regions. Expected yields on class-A buildings in Tokyo were down in 13 of 14 areas, and the yields were down in 8 of 13 provincial cities as well. In Sendai, Yokohama, Nagoya, and Hiroshima in particular, expected yields were down 0.2%pt. For standard studio residential properties, expected yields were down in 12 of 13 areas, with Fukuoka being the only exception. In particular, expected yields in provincial cities were down 0.2%pt in Sapporo, Sendai, Nagoya, Kyoto, Osaka, and Hiroshima and down 0.3%pt in Yokohama, providing a sense of the strength of investors' appetite for investment. Expected yields on logistics facilities also were down, for all types and in all areas. Among the 18 poi nts surveyed, those in 8 areas/types showed a decrease of 0.2%pt. Even retail facilities, which have showed few decreases in expected yields in recent years, showed decreases in 6 areas/assets, and expected yields on hotels, which had been increasing since the spread of COVID-19, showed their first decrease in 2 years. In addition, the percentage of investors telling the survey that they would be proactive about new investment rose from 94% to 95%, while the percentage saying they would curtail new investment for the time being fell from 7% to 5%. Overall, these survey results seem to show investors' strong appetites to invest.
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KENEDIX JAPAN REAL ESTATE MARKET REPORT 4Q2021
【Fig.8】Real Estate Investor's Expected Cap Rate
Office(Marunouchi/Otemachi) | Residential/Standard Studio(Southern Tokyo) | ||
Downtown high-end Retail property (Tokyo Ginza) | Suburban Retail Facility | ||
7.0 | (%) | Logistics/Multiple tenants type (Tokyo coastal area) | Hotel (Tokyo/around a main station of JR or subway) |
6.0 | |||
5.0 | |||
4.0 | |||
3.0 |
Source: Japan Real Estate Institute "The Japan Real Estate Investor Survey"
【Office Market】
While the vacancy rate in central Tokyo continues to rise, the breadth of the increase is narrowing
The vacancy rate in Tokyo business districts (the 5 central wards) announced by Miki Shoji stood at 6.43% at the end of September 2021, up 0.24%pt from the end of June 2021. While the vacancy rate continues to rise, the breadth of the increase was narrowing compared to the rise of 0.77%pt in April-June 2021. Over this period, vacant floor space rose by 17 thousand tsubo to 507 thousand tsubo, reaching the 500 thousand tsubo level for the first time in 7 years and 8 months, since January 2014. However, in light of the fact that vacant floor space rose by 62 thousand tsubo in April-June, the pace of the increase in vacant floor space can be said to be limited.
According to a survey by Sanko Estate, contracted floor space in office buildings in the 23 wards of Tokyo in July-September was up 25% YoY to 207 thousand tsubo (calculated by Kenedix based on monthly data). While this figure is down 22.3% form the same month in 2019 and has not yet recovered to the pre-COVID-19 level, leasing conditions appear to be in an improving trend. While relocations due to revised office strategies are apparent, it would appear that tenants also are increasing floor spaces or relocating to larger offices in response to favorable business performance. At the same time, lease terminations due to worsening business conditions and other factors resulting from the economic downturn appear to have settled down. While developments such as lease terminations due to expiration of fixed-term lease agreements and reductions in office space due to revised office strategies resulting from the underlying cause of increased use of teleworki ng are likely to continue, the rapid increasing trend in vacant floor space appears to have levelled off.
【Fig.9】Vacancy Rate in Tokyo Central 5 wards | 【Fig.10】Changes in Vacancy Area in Tokyo Central 5 Ward |
(thousand yen / tsubo) | (%) | (thousand tsubo) | |||||||||||||||||||||||||||||
25 | 10 | 150 | |||||||||||||||||||||||||||||
Existing building | Newly-built building | ||||||||||||||||||||||||||||||
20 | 8 | 100 | |||||||||||||||||||||||||||||
15 | 6 | 50 | |||||||||||||||||||||||||||||
10 | 4 | 0 | |||||||||||||||||||||||||||||
5 | Asking Rent Rate (LHS) | 2 | -50 | ||||||||||||||||||||||||||||
Vacancy Rate (RHS) | |||||||||||||||||||||||||||||||
0 | 0 | -100 | |||||||||||||||||||||||||||||
06 | 07 | 08 | 09 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | ||||||||||||||||
06 | 07 | 08 | 09 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | ||||||||||||||||
Source: Miki Shoji, Kenedix | Source: Miki Shoji, Kenedix |
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KENEDIX JAPAN REAL ESTATE MARKET REPORT 4Q2021
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Kenedix Inc. published this content on 05 January 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 05 January 2022 08:42:31 UTC.