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Japanese Property Market Quarterly Review, Third Quarter 2016-Inbound Demand Peaks Out Affecting Retail Stores and Hotels-

mamoru masumiya 

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The logistics leasing market has been facing massive supply both in the Tokyo and Osaka metropolitan areas. Vacancy rates of large logistics facilities for multi-tenants in the Tokyo and Osaka metropolitan area deteriorated from 8.9% to 9.1% and from 1.9% to 6.9%, respectively (Chart-24).

Logistics facility demand has continuously emerged and absorbed new supply. However, vacancy rates in areas along with Ken-O-Do which is quite far from the center of Tokyo rose above 20% in the third quarter. Supply volume will be smaller for the time being, however, as another round of massive supply will come in the second quarter of 2017.
Chart-24 Logistics Facility Rents and Vacancy Rates (Large Sized Multi-Tenant-Use)
Supply volume will remain extraordinary large until 2018 (Chart-25, 26). Internet shopping is expected to grow continuously and create the logistics facility demand necessary to absorb the coming massive supply. However, considering that operating conditions such as securing labor has become increasingly difficult, tenants should be selective in location and specifications of logistics facilities. It will be often the case to see rents decline in specific areas as seen with Ken-O-Do.
Chart-25 Logistics Market in the Tokyo Metropolitan Area (Large Sized Multi-Tenant Use)/Chart-26 Logistics Market in the Osaka Metropolitan Area (Large Sized Multi-Tenant Use)

4.Property Investment and J-REIT Markets

The TSE REIT Index did not change much in waiting for a comprehensive review of the Bank of Japan's policies on Sep. 21, producing a slight decline by 1.0% in the third quarter. The office sector declined by 0.8%, residential rose by 2.8% and others – including retail and logistics – declined by 2.6% (Chart-27). At the end of September, the J-REIT market value was 11.7 trillion JPY, while the price to NAV ratio was 1.2 times and the dividend yield was 3.5%, with a 3.6% yield spread on 10-year JGBs.

J-REITs acquired properties amounting to 526 billion JPY in the third quarter, totaling 1.46 trillion JPY for September in 2016 (Chart-28). Four REITs were newly listed and two REITs disappeared in mergers, bringing the number of J-REITs to 56.

Dividends of J-REITs have been increasing based on asset acquisitions, funding cost control and NOI increase of existing office buildings. NOI of office buildings owned by J-REITs increased by 2.4% a year, 0.8% y-o-y in the latter half of 2015 and 1.6% in the former half of 2016. Nippon Building Fund REIT, the largest office J-REIT, says that the NOI of existing buildings will increase at least for a year. As offices account for 40% of J-REIT portfolios, dividends of J-REITs will keep growing for a while. 
Chart-27 TSE REIT Index/Chart-28 J-REIT Asset Acquisitions
Despite aggressive acquisitions by J-REITs (Chart-28), other investors reduced their activities drastically. The transaction volume has remained much smaller compared with those in 2014 and 2015 when the yearly volume exceeded 50 billion USD (Chart-29).

Foreign investors acquired a shrinking volume of Japanese properties (Chart-30). Due to the termination of JPY depreciation Japanese assets appear no longer particularly cheap. Furthermore, under the negative interest rate policy, competition among Japanese investors to acquire assets has been increasingly tough.
Chart-29 Property Transaction Volume in Japan
Chart-30 Acquisitions by Foreign Capital

mamoru masumiya

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