Spotlight 2018 review and 2019 prospects - December 2018 Savills World Research Japan - Savills.asia
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Savills World Research
Japan
Spotlight
2018 review and
2019 prospects December 2018
savills.co.jp/research
Spotlight | 2018 review and 2019 prospects December 2018
Spotlight
2018 review and
2019 prospects
Introduction The favourable environment for While the domestic market is
Despite historically high office supply Japanese real estate is supported by showing few signs of a correction,
in 2018, the Japanese real estate sound corporate performance and rising global economic uncertainty
market showed resilience, supported increasing investment. According now overshadows Japan’s good
by sound fundamentals with a stable to the Development Bank of Japan, prospects. According to the Cabinet
government and a competitive yield capital expenditure in FY2018 is Office, Japan’s economy is now more
gap. Although there is concern about expected to increase by 21.6% correlated to the global economy:
the extended upward phase of the across all industries. Over 45% whereas in 2006, 1% growth in global
current cycle, GDP growth is steady, of surveyed companies named GDP was matched by 0.08% growth
helped by rising corporate profits. capacity expansion as a reason for in Japan’s GDP, that figure has grown
Tourism is also energising local investment. to 0.31% as of 2016. As the nation
economies; Osaka especially is well
positioned for further growth as the GRAPH 1
2019 Rugby World Cup, the 2020 10-year government bond yields, 1989—Aug 2018
Tokyo Olympics, and now the World
Expo 2025 are expected to add to the US UK Canada Germany France Japan
city’s dynamism. 14.0%
12.0%
Interest rates should remain relatively
10.0%
low due to weak capital demand from
10 year bond yield
cash-rich Japanese corporations 8.0%
and households, though the Bank
6.0%
of Japan (BOJ) has begun skillful
stealth tapering. The low interest 4.0%
environment offers attractive spreads 2.0%
compared to other countries, even
0.0%
with the Japanese real estate market’s
tight cap rates. As dry powder for -2.0%
real estate is increasing globally
and other developed markets face
larger uncertainty, Japan remains an Source: FRED Economic Data, Savills Research & Consultancy
attractive market with prospects of
steady yields. GRAPH 2
Rent and vacancy cycle in the Tokyo all-grade office
Office market performance generally
reflects trends in the overall
market, 2002—Oct 2018
Japanese real estate market. Graph 2 Peak Downswing Trough
23,000 Upswing 2018
demonstrates that the office market Peak 2007-8 2018
has remained in the upswing phase 22,000
2007-8
Downswing 2002
2003
2011-3 2004-6
2009-10 2009-10
since 2014. Supported by strong 2014-7
demand, the majority of office supply 21,000
that will enter the market by 2020 has
Rent (JPY/Tsubo)
20,000
already been pre-leased and there is
little sign of a loosening in the near 19,000 2002
2018
term. Rents should grow moderately
18,000
even as vacancy ticks up slightly. Upswing
2003
2004-6
In previous cycles, rents have not 17,000 2014-7
declined until vacancy has risen above Trough
16,000
4%, which suggests there may be 2011-3
additional room for the current property 15,000
2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
upswing to extend through this period
Vacancy (%)
of heightened supply, barring an
exogenous shock. Source: Miki Shoji, Savills Research & Consultancy
savills.co.jp/research 02Spotlight | 2018 review and 2019 prospects December 2018
has pulled out of a multi-decade Japanese economy might be less Office
economic malaise and entered a vulnerable to it. Cap rates and investment volumes
steady growth track, investors would In-house Tokyo office cap rates
be justified in taking a more cautious Overall, domestic fundamentals are have held steady at 2.9% since the
stance given the current global robust and should remain stable over end of 2017, reflecting buyers’ still
environment. Indeed, the resiliency the medium term. Considering the bullish but cautionary attitudes. The
of this revitalised Japanese economy somewhat bearish outlook for China, October 2018 survey by Japan Real
might soon be tested. Japan should offer better value than Estate Institute (JREI)1 puts expected
Asia Pacific peers who have a greater cap rate premiums in Osaka,
Cap rates and dependence on the region’s largest
Nagoya, and Fukuoka at roughly
investment volumes economy. Although relatively insulated
120 basis points (bps), 150bps, and
Cap rates stayed largely flat across from current global issues, Japan is by
150bps, a tightening of between
all sectors in 2018 as sellers have no means immune to global economic
20bps and 40bps from last year, as
remained bullish in light of improved ripples. With an already-extended
investor interest in regional assets
NOI, while investors have become upward cycle, which may in fact be
has grown.
more cautious of the resulting high peaking, a global correction could
price tags and already-compressed very well put an abrupt end to this
1 Expected cap rates reported by JREI tend to be
yields. Prime Tokyo office cap rates bull market. looser than market cap rates.
appear to keep testing a bottom of
around 2.9%, though regional office
markets may still offer pickups and GRAPH 3
have a more favourable market Investment volumes and cross-border share, 2007—
balance. Q3/2018
According to Real Capital Analytics Office Residential Retail Hospitality Logistics Other Overseas %
(RCA), YTD investment in Japanese 8 35%
real estate totalled 2.6 trillion yen
7 30%
through Q3/2018, 27% less than over
the same period last year. Demand 6
25%
for Japanese real estate is strong, 5
Trillion yen
20%
but a lack of opportunities in decent
4
locations and core asset markets, as 15%
well as high price tags, is moderating 3
transaction volumes. 10%
2
1 5%
Cross-border investments accounted
for 20% of volumes through 0 0%
Q3/2018. J-REITs remain active
among domestic players, though
in the logistics sector there were Source: RCA, Savills Research & Consultancy
concerns of exuberant purchasing
activity after a raft of equity
GRAPH 4
fundraisings in Q1.
JREI expected prime office cap rates by city, 2003—
The market may face some 2018
headwinds in 2019, most notably the
Osaka Nagoya Fukuoka Sendai Marunouchi Roppongi Shinjuku Shibuya
consumption tax hike scheduled for 8.0%
October. Planned countermeasures
should mitigate at least some of the 7.0%
fallout, however. Externally, rising
U.S. interest rates or the China-U.S. 6.0%
Expected cap rate
trade war could potentially reduce
global growth, but some countries 5.0%
could benefit by filling the gaps
created in supply chains. According 4.0%
to Nomura’s assessment, Japan
placed second, following Malaysia, 3.0%
out of those countries which might
benefit from import substitution 2.0%
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by the U.S. and China. While the
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
negative impact of rising tensions
should not be underestimated, the Source: JREI, Savills Research & Consultancy
savills.co.jp/research 03Spotlight | 2018 review and 2019 prospects December 2018
YTD investment in the Japan office GRAPH 5
market totalled 1.3 trillion yen as of Office investment volumes by region, 2007—
Q3/2018, down 23% from the same
Q3/2018
period last year, likely as a result of
Tokyo Yokohama Osaka Nagoya Fukuoka
limited investment opportunities.
Sapporo Sendai Other Tokyo % share
Tokyo’s share of office transaction 3,500 100%
volumes up to Q3/2018 was greater 90%
3,000
than the previous period; however, 80%
interest in regional office markets is 2,500 70%
Tokyo % share
Billion yen
increasing. 60%
2,000
50%
Review and prospects 1,500
40%
Tokyo’s office market has extended 1,000 30%
2017’s strong performance through 20%
500
2018. Exceptionally strong pre- 10%
leasing is keeping vacancy low and 0 0%
rents are steady. Although Grade A
office supply volumes are expected
to remain elevated until 2020, a
Source: RCA, Savills Research & Consultancy
decline in rents over the short term
seems unlikely while fundamentals
remain strong. Landlords are adopting GRAPH 6
a conservative long-term strategy, High-grade office YoY rental growth, Q3/2018
keeping a lid on growth rates as they
focus on securing high-credit tenants.
Regional high-grade offices are 12.0%
performing well, with vacancy below
1% in all three major markets and 10.0%
rents rising over 10% YoY on average
as of Q3/2018. Regional demand 8.0%
Rental growth YoY
is strong and supply is limited,
providing a favourable environment 6.0%
for rent appreciation.
4.0%
Co-working exploded onto the
Tokyo office market in 2018,
2.0%
securing a significant portion of
supply. Although WeWork, the most
0.0%
prominent new entrant, is currently Tokyo Osaka Nagoya Fukuoka
lossmaking, its major shareholder
SoftBank continues to supply more Source: Savills Research & Consultancy
capital. The company looks set to
open an eleventh location in Tokyo
Bearing WeWork’s mismatched There do not appear to be any
by early 2019, bringing total leased
leasing structures and rapid catalysts for a significant correction
area to approximately 47,500 sq m.
expansion plans in mind, if it were to in the office market. With a large
Competitors are following suit with
prove relatively unpopular after a few number of firms relocating to new
expansion plans.
years, the effect on the office market high-grade offices, there could be
could be sizeable. Furthermore, this a delayed emergence of secondary
It is estimated that co-working
office leasing strategy may not be as vacancy in lower-grade properties,
providers took up almost 20% of
appealing to companies in Japan, for instance, as fixed-term leasing
new C5W supply that came online contracts expire. The Grade A
through the first half of 2018. Client and especially Tokyo, where already-
market, however, should continue
demand appears to be strong, with flexible leasing terms with much
to perform well. So long as the
reports of strong occupancy at all smaller down payments and plenty
economy remains sound, rents
of WeWork’s sites in Tokyo and of affordable grade B and C space should inch up while cap rates
commitments for probably the next somewhat dilute co-working’s main remain flat-ish. If an exogenous
one to two years. economic selling points. More broadly, shock does occur, cap rates could
revisions in lease accounting treatment wobble temporarily, but strong
That being said, firms are still could have a large negative impact on fundamentals should contain the
evaluating the efficacy of co-working. the industry’s business model. effects.
savills.co.jp/research 04Spotlight | 2018 review and 2019 prospects December 2018
Residential stalled after the Crisis. Examining by GRAPH 7
Cap rates and investment volumes residence type, households living in JREI expected residential cap rates
Based on our in-house survey, cap condos more than doubled between
1995 and 2016, while the number of
by city, 2003—2018
rates for mid-market residential
property in the 23 wards have detached house dwellers remained Osaka Nagoya Fukuoka Sendai Tokyo: Jonan Tokyo: Joto
9.0%
compressed 10bps to 3.6% from a virtually unchanged. Concurrently, the
year ago. According to JREI, expected number of households that rent homes
8.0%
cap rates for residential property in doubled from 15,400 in 1995 to 30,600
Jonan and Joto have compressed in 2015, in proportion to increases 7.0%
Expected cap rate
20bps to 4.4% and 4.7%. in condo dwellers, indicating a large
portion of condos in the area were 6.0%
YTD investment in residential property purchased for investment purposes
5.0%
has decreased by about 65% from and placed in the rental pool.
a year ago and totals 182 billion yen. 4.0%
A significant drop in cross-border Mitsui Fudosan and Mori Building,
investment is due to a lack of large two major developers of luxury 3.0%
portfolio sales such as Anbang condos, continue to build new high-
Insurance’s US$2.3 billion acquisition rise residences. Park Court Aoyama 2.0%
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in 2017. According to RCA, TH Real The Tower and Park Court Akasaka 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Estate’s 19.5 billion yen acquisition of Hinokicho The Tower were among
Source: JREI, Savills Research & Consultancy
six properties through a partnership those completed in 2018, with the
with Kenedix was the largest residential most expensive units rumoured to GRAPH 8
be between 1.5 and 3 billion yen, or
transaction of the year. TH Real Estate
20 to 30 million yen per tsubo. Mori
Residential investment volumes,
aims to expand the venture’s AUM to
100 billion yen. Building’s Toranomon Residential 2007—Q3/2018
Tower planned for 2021 may even Overseas Equity & institutional
feature an ultra-luxury unit that Listed companies & REITs Private
Review and prospects Unknown Other
Tokyo’s residential market is and exceeds 10 billion yen. 900
should remain stable as urbanisation 800
drives residential demand and steady As Tokyo offers more residences with 700
rental growth in central areas. While increasing levels of opulence, ultra
600
luxury could be the next trend. With
Billion yen
mid-market rental apartments are 500
of major interest, the luxury condo growth in tourism and many catalysts
400
market, which is considered historically such as integrated resorts and the
underserved, is growing its presence Linear Chuo Shinkansen (Maglev), 300
among high net worth individuals Tokyo is building more high-end hotels 200
(HNWI). In 2017, Park Mansion with global standards, enhancing its 100
Hinokicho Koen was completed just appeal to ultra HNWI. Redevelopment 0
of various areas in Tokyo should
east of Tokyo Midtown in Akasaka.
also continue to enhance the city’s
Based on various reports, the most
attractiveness for wealthy buyers.
expensive unit was sold for an Source: RCA, Savills Research & Consultancy
astonishing 5.5 billion yen, or 31 million
On the other hand, there are signs
yen per tsubo. It is rumoured that this GRAPH 9
of a softening in mid-market condo
ultra-luxury penthouse was snatched Household by dwelling types and
sales. According to the Real Estate
up by a Hong Kong national.
Economic Institute, with the exception renters in Azabu, Akasaka, and
Even the most expensive dwellings in
of one month, contract rates of new Takanawa, 1995—2015
condo units in Greater Tokyo were
Japan are still somewhat reasonable Condo Detached house Other Renter
below 70% between January and
compared with global peers. According 80,000
October 2018. Additionally, the media
to JREI, luxury condos in Hong Kong
has reported that contract rates were 70,000
are almost twice as expensive as
lower in some areas, though not fully
in Japan. The Rating and Valuation 60,000
Department of Hong Kong reports reflected in published statistics. When
residential property yields of 2.0% to demand feels soft, developers keep 50,000
Households
2.6% in Q3/2018 while JREI’s investor more units on their balance sheets and
40,000
survey showed that of the Jonan area control the amount of units available
in Tokyo was 4.4% in October 2018. for sale, creating “latent supply” that 30,000
is not accounted for as unsold units.
20,000
Populations in prime residential areas Although major developers are cash
have been growing. Between 1995 rich and can wait for demand to return 10,000
and 2015, the number of households using this strategy, current high prices
in the Akasaka, Azabu, and Takanawa may need to lower at some point. If 0
1995 2000 2005 2010 2015
districts increased by about 33,600, this were to happen, the extent to
or 80%, though growth temporarily which prices would slip is unclear. Source: National Census, Savills Research & Consultancy
savills.co.jp/research 05Spotlight | 2018 review and 2019 prospects December 2018
Retail years. The figure is about 4.2 million GRAPH 10
Cap rate and investment volumes yen in large cities and about 2.6 JREI expected retail cap rates by city,
million yen in medium cities, up
Based on our in-house survey, cap
15% and 13%, respectively, from
2H/2003—2018
rates for high street retail in Tokyo
have held at 2.9% since the end 2016. As discussed in our “Japan Osaka Nagoya Fukuoka Sendai Tokyo
of last year. According to JREI, Retail October 2018” report, 9.0%
expected cap rates for prime retail general merchandise store (GMS)
8.0%
property in Ginza and Omotesando brands also appear to be seeing
have compressed 20bps to 3.4% positive results, which show that 7.0%
Expected cap rate
and 3.5%, while those in Osaka improvement is being felt across
registered at 4.6%. a wide range of markets and retail 6.0%
categories.
5.0%
YTD investment in retail property
has decreased by about 30% from Consolidation of regional shopping 4.0%
a year ago and totals 329 billion centres is likely to continue as
3.0%
yen. Considering sound acquisition underperforming stores are forced
interest, especially in urban retail, to exit the market. This creates 2.0%
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investment volume could increase in opportunities for winning stores
03 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2019. Some J-REITs may continue to reap larger shares. AEON, for
to shuffle their assets, depending on instance, is actively renovating Source: JREI, Savills Research & Consultancy
unit prices. and expanding existing facilities
to enhance its presence in certain GRAPH 11
Review and prospects markets. Large supply is also limited
Japan’s retail market is going through Retail investment volumes, 2007—
as, in principle, the City Planning
a steady growth period driven by
Act (revised in 2007) prohibits the
Q3/2018
somewhat improving domestic Overseas Equity & institutional
opening of over-10,000 sq m retail Listed companies & REITs Private
demand and robust inbound tourism
stores in suburbs. Unknown Other
demand. Based on the Current Survey 1,400
of Commerce, overall retail sales2
The outlook for Japan’s retail market 1,200
between Q1/2018 and Q3/2018 have
largely depends on economic
improved by 0.9% from the same 1,000
period in 2017. During the same time, conditions and inbound tourism.
Billion yen
800
duty-free sales increased by over 30% Although consumer confidence has
YoY according to Japan Department been improving somewhat since 600
Stores Association. Expendable mid-2016, supported by increasing
400
items in particular saw strong growth, cash earnings and stock rallies,
increasing sales by over 40% YoY, rising global economic uncertainty 200
reflecting the popularity of Japanese appears to be putting a damper on 0
cosmetics products. general sentiment. The planned tax
hike in 2019 will be a true test of
In terms of land price, inbound resiliency, especially for the retail
Source: RCA, Savills Research & Consultancy
tourism is likely the key to a market. On the other hand, inbound
winning market. Based on the July tourism is expected to continue
land value survey, commercial land to expand and contribute to retail GRAPH 12
prices in second tier regional cities sales. Cosmetics are still popular Sales per tsubo in shopping centres,
are on the rise. While land prices among overseas tourists and should 2012—Sep 2018
have strengthened in the top three continue to perform well for a while, Large city Medium city
metropolitan areas (Tokyo, Osaka, given its expendable nature. 4,500
and Nagoya), growth in Sendai,
Sapporo, Hiroshima, and Fukuoka
4,000
outperformed them. With the
population decreasing, polarisation
Thousand yen/tsubo
of winning and losing retail markets is 3,500
expected to deepen.
3,000
According to Japan Council of
Shopping Centers, sales per tsubo
per year in large cities and medium 2,500
cities3 have improved in recent
2 Excluding sales of motor vehicles, machinery and 2,000
equipment, fuel, and non-store retailers. 2012 2013 2014 2015 2016 2017 Oct 17 -
3 Large cities include major designated cities. Sep 18
Medium cities are those with populations exceeding
150,000. Source: Japan Council of Shopping Centers, Savills Research & Consultancy
savills.co.jp/research 06Spotlight | 2018 review and 2019 prospects December 2018
Hotel Other traditional players, including GRAPH 13
Cap rate and investment volumes APA Group and Japan Railway, are Hotel investment volumes, 2007—
moving to develop limited-service
According to JREI, as of October,
hotels in cities such as Fukuoka
Q3/2018
expected cap rates for limited-
Overseas Equity & institutional
service hotels in Tokyo have held and Sapporo. With regional areas
Listed companies & REITs Private
steady at 4.5%, while those of all expected to host significantly Unknown Other
900
regional markets have compressed, more foreign visitors in the future,
800
with a notable drop of 30bps in development and investment activity
700
Sapporo since April. Actual cap rates should continue.
600
tend to be 50-100bps lower than
Billion yen
these expected rates. On the other hand, 2018 also offered 500
a sharp reminder of an inherent risk 400
to the hospitality industry: natural 300
YTD hotel transaction volumes
disasters. In September alone,
reached 229 billion yen as of 200
Kansai International Airport, Osaka’s
Q3/2018, an increase of over 70% 100
largest airport and Japan’s primary
on the same period last year, but 0
LCC hub, was closed down for ten
25% less than the 2017 annual total,
days following typhoon Jebi, while an
as overseas investors more than
estimated 500,000 people cancelled
doubled their investment volumes.
their Hokkaido (Sapporo) lodging Source: RCA, Savills Research & Consultancy
Indeed, Japanese assets are now
reservations in the week following
among the most sought after in GRAPH 14
the Eastern Iburi Earthquake.
the Asia Pacific hospitality market. Hotel guest room supply, 1982—2020
Hotel J-REIT unit prices have
Even so, relatively modest supply
unsurprisingly dropped since the
in the past has limited acquisitions,
summer. Equity investors may have
particularly in Tokyo. The current Guest room supply Historical avg. % change in stock
moved to rebalance their portfolios 60,000 14.0%
development boom leading into the following this clear reminder of
2020 Olympics should open up more the sector’s risks. Large supply is 12.0%
50,000
investment opportunities, though also doing little to alleviate investor
10.0%
this may weigh on individual hotel concerns. 40,000
Guest rooms
performance. In this environment, 8.0%
% change
some investors may be turning to More positively for traditional 30,000
6.0%
less crowded regional markets. hoteliers, the implementation of the
20,000
Minpaku Law in June 2018 led to 4.0%
Review and prospects the removal of nearly 80% of Airbnb 10,000
2.0%
Inbound tourism is expected to listings and many small individual
keep growing and Japan has the operators have since closed shop. 0 0.0%
capacity to accommodate. As However, a recent survey by the
the hotel market develops and JTA suggests that other types of
diversifies, operators new and old alternative lodging have for now
Source: Ministry of Health, Labour and Welfare, Savills Research & Consultancy
are employing various strategies to filled some of the gap left by delisted
capitalise on this unprecedented minpaku. Most importantly, the GRAPH 15
tourism boom. Some are expanding large number of hotels opening in
their geographic scope to capture
Change in reported lodging utilised
2018 and 2019 might outweigh any
growing demand for lodging outside reduction in competition caused by by foreign travellers, Jul-Sep 2018 v.
of major metropolitan areas, while the new regulation. These added Apr-Jun 2018
others are moving into specialist competitive pressures may weaken 40.0%
roles, designing boutique hotels that the performance of limited-service
30.0%
meet a specific niche of the market. hotels in crowded markets.
20.0%
According to the Japan Tourism
10.0%
Agency (JTA), stays by foreign
visitors outside of Japan’s top three 0.0%
metro areas accounted for over 40%
of all foreign stays for the first time -10.0%
in 2017. Developers have taken note
-20.0%
of this trend and are extending their
reach into regional markets. Marriott -30.0%
and Sekisui House announced a
-40.0%
collaboration in late 2018 to develop Hotel Ryokan Hostel / Capsule Hotel Minpaku
Guesthouse
a portfolio of up to 50 hotels in rural
areas near roadside rest stops. Source: JTA, Savills Research & Consultancy
savills.co.jp/research 07Spotlight | 2018 review and 2019 prospects December 2018
Logistics investment manager Angelo Gordon GRAPH 16
Cap rates and investment volumes made its own Japan industrial foray, JREI expected logistics cap rates by
purchasing a 100,000 sq m facility
According to JREI’s October 2018 city, 2005—2H/2018
survey, expected cap rates have in the Osaka bay area, one of the
tightened somewhat in all markets largest logistics facilities transacted Tokyo Osaka Nagoya Fukuoka
9.0%
since last year. Cap rates in Osaka, this year. This may even be an
now at 5.1%, and Nagoya have opportunistic buy as the facility, 8.0%
continued to decline steadily, while which was developed in 2016 at
7.0%
those of Tokyo, now at 4.5%, and an estimated cost of 20 billion
Expected cap rate
Fukuoka appear to be flattening. As yen, is rumoured to have had low 6.0%
with other sectors, actual transaction occupancy at purchase.
cap rates may be up to 100bps 5.0%
tighter than these values. Existing players are also
4.0%
strengthening their positions. Nomura
YTD investment in industrial property Real Estate, for example, intends 3.0%
totalled 327 billion yen through to develop at least nine facilities in
Q3/2018, up 48% YoY, already the Greater Tokyo area from 2018 2.0%
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exceeding the 2017 annual total. to 2020, adding over 600,000 sq m 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Overseas investment accounted for to the market. 2018 has also seen
Source: JREI, Savills Research & Consultancy
48% of the total amount, though robust REIT activity, including the IPO
this is largely attributable to a single of two new logistics J-REITs. Capital
portfolio transfer related to the markets appear to have had a mixed GRAPH 17
acquisition of GLP. Even so, 2018 has response to this large financing, Logistics investment volumes, 2007—
seen significant investment activity however, with logistics J-REIT unit Q3/2018
among a diverse set of foreign and prices underperforming the TSE
Overseas Equity & institutional
domestic players, especially J-REITs. REIT index by 14% YTD4. Concerns Listed companies & REITs Private
regarding large supply, in addition to Unknown Other
700
Review and prospects significant capital raising by J-REITs
After a sharp increase in vacancy in particular, may be weighing on 600
in the wake of historically large equity investors. Nevertheless, 500
supply, the Greater Osaka market is prospects for hard assets remain
Billion yen
400
steadily recovering as supply cools. sound, supported by strong demand.
According to Ichigo Real Estate With limited acquisition opportunities 300
Service, vacancy fell from 12.8% in other sectors, increased supply
200
in January to 9.6% in October and may even provide much-needed
flexibility to prospective buyers. 100
rents rose 3.2% YoY. Greater Tokyo,
on the other hand, saw over 2 million 0
sq m of supply in 2018, though To be sure, large supply to Greater
vacancy has risen only slightly so Tokyo will likely increase vacancy
far as e-commerce and 3PL firms in the near term, particularly for
Source: RCA, Savills Research & Consultancy
actively sweep up space. Further, the inland areas where new supply
rising e-commerce revenues and the is concentrated. Bayside vacancy
GRAPH 18
expected influx of new high-spec remains low as the submarket enjoys
facilities has turned expectations of excellent access to transportation Total parcels handled, 2006—2017
rental growth positive for the first infrastructure and limited supply.
time since early 2016. As the overall Greater Osaka has seen a similar 4,500
market strengthens, however, large divergence, as bayside locations
supply is being met with strong have been struggling to fill spaces,
4,000
but uneven demand, leading to a while well-located inland facilities
divergence among submarkets as are seeing tighter vacancy. However,
Millions of parcels
some new facilities require more time 2019’s supply is expected to be 3,500
to fill space. around 40% of 2018’s, which should
give more breathing room for new
3,000
Against this backdrop, a slew of new facilities to secure tenants.
players entered the field in 2018.
Tokyo Tatemono, a major domestic 2,500
developer, has made its first push
into the sector by partnering with
2,000
CRE to construct a built-to-suit 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
facility in Saitama, with plans for 4 Based on the simple average of unit price
Source: Ministry of Land, Infrastructure, Transport and Tourism, Savills Research
movements from 4 January to 30 November for seven
additional developments in Greater pure logistics REITs and two mixed-sector REITs with & Consultancy
Osaka. In August, U.S.-based logistics exposure Note: Data refers to individual packages under 30 kg.
savills.co.jp/research 08Spotlight | 2018 review and 2019 prospects December 2018
Alternative assets Student housing GRAPH 19
As core asset yields continue to Student housing offers stable Over-75 population as share of total,
revenues as education demand
tighten, some investors are exploring 2015—2045F
new asset classes in search of higher is relatively insulated from the
returns. Alternative asset classes economic cycle. End-users of Over 75 Under 75 Over 75, % of total pop
upscale student housing tend to 140,000,000 25.0%
such as healthcare, student housing,
self-storage, and data centres have be from affluent backgrounds, and
120,000,000
become more prominent over the in some cases, student housing 20.0%
past several years. Investor interest is master leased to specialised
100,000,000
is steadily picking up as some operators or universities, providing a
large players enter the arena and layer of protection for investors. 80,000,000
15.0%
People
new opportunities emerge. That
said, current opportunities are still The number of international students 60,000,000
10.0%
relatively small and markets are coming to Japan has expanded in
fragmented, possibly requiring more recent years, fuelled by growing 40,000,000
time to scale up. demand from nearby countries for 5.0%
20,000,000
high-quality tertiary education that
Healthcare offers good value for money, a safe
0 0.0%
Japan’s over-75 population is environment, and the possibility of 2015 2020F 2025F 2030F 2035F 2040F 2045F
forecast to increase from 16 million gainful employment after graduation. Source: Ministry of Internal Affairs and Communications, Savills Research &
Consultancy
in 2015 to 22 million in 2025. Current A government-set target of 300,000
projections suggest that senior international students by 2020 as well
housing supply will not keep up as recent relaxations in immigration GRAPH 20
with demand over the medium term, restrictions is also aiding growth. Number of international students in
despite a 160% increase in private Foreign students, who often struggle Japan, FY2011—FY2017 & FY2020
stock since 2011. to rent private accommodation
in Japan, represent a significant
goal
Volumes since 2007 have typically proportion of the growing number of Higher education Language programs
not exceeded 30 billion yen per students. Current stock is forecast to 350,000
annum, demonstrating a lack of fall below strong demand, providing 2020 goal
300,000
investment opportunities, though a positive outlook for the sector.
they are steadily increasing over time. 250,000
For example, Hoosiers, a developer In March 2017, Global Student
of retirement homes, is ramping Accommodation announced a 200,000
Students
up development plans and aims to partnership with Star Asia Group,
launch a REIT in 2020. Sector cap targeting 20,000 student beds. Also 150,000
rates have compressed rapidly since in 2017, Mizuho launched a 10 billion
yen fund, planning to lease land from 100,000
the emergence of healthcare J-REITs
in 2013. While REITs have mainly national universities and develop
50,000
focused on private senior housing dormitories, while in April this year
so far, 2017 and 2018 saw further Mitsui Fudosan opened the Waseda 0
International Dormitory, boasting 500 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 2020
expansion into other healthcare asset
types. rooms at a premium location just five
Source: Japan Student Services Organisation, Savills Research & Consultancy
minutes from the Waseda Campus.
Concerns of a labour shortage pose
risks to operator profitability. Possible Cap rates on student housing in urban centres, perhaps raising
changes in government policy also transactions reported by J-REITs needs for personal storage, while
cloud the industry outlook somewhat. have compressed from the mid-6% e-commerce and small business sales
On the other hand, consolidations, to the low-4% level. As with senior growth should fuel needs for business
business transfers, and major housing, the market is still small, storage solutions.
shifts in healthcare demand may keeping assets under the radar of
lead to a wave of new investment larger investors. Consolidation of Storage facilities tend to have stable
opportunities. operators and build-out of complexes occupancy and low customer turnover.
should create more opportunities for Units are typically installed in lower
Although the healthcare market is institutional investors in the future. grade office buildings, with low setup
still in its infancy and lot sizes are and acquisition costs. As a result, they
relatively small, more opportunities Self-storage offer attractive yields compared to
for institutional players should Quraz, one of the largest self-storage office and residential assets, possibly
emerge over time as the sector providers in Japan, forecasts annual surpassing 6% in Tokyo.
matures. Please see our November market growth of nearly 9% up until
2018 “Japan Healthcare” report for a 2020. Japan’s population continues to The Japanese market for self-storage
more in-depth analysis of the market. congregate towards smaller abodes facilities was estimated to be about 65
savills.co.jp/research 09Spotlight | 2018 review and 2019 prospects December 2018
billion yen at the end of fiscal 2016, up As such, rapid growth in the market GRAPH 21
40% since 2011, according to Yano has largely been driven by international Japan self-storage market revenue,
Research Institute. In July 2017, Ichigo players, as in the logistics sector.
announced its intention to increase
2008—2020F
inventory to 10 billion yen and in 2018, The asset-heavy nature of the business Outdoor Indoor
80
Quraz announced that it would invest places high financial demands
35 billion yen in Japan over the next on providers, making tax efficient 70
five years. schemes such as REITs ideal for
60
expanding the data center business.
Investor interest appears to be Limited available land, however, 50
Billion yen
growing. Arealink, a Tokyo-based somewhat restricts the rollout of such
operator, sold 15 blocks of units products. Long lead times, particularly 40
in 2017 and plans to sell about 40 with respect to energy infrastructure 30
blocks in 2018, growing to 60 in 2019. installation which can take as long
According to the Nikkei, in 2017, as seven years, is also holding back 20
developer Palma was approached by expansion efforts. There may be 10
an overseas investor for facilities worth latent opportunities, however, as large
5 billion yen, and in January 2018, it Japanese firms own vast amounts of 0
established a joint venture to launch underutilised assets.
self-storage REITs and eventually list Source: Quraz, Savills Research & Consultancy
on the stock market. Ichigo also plans Opportunities and risks
to create private REITs.
Opportunities GRAPH 22
Given estimated market penetration of An increasing amount of capital is Number of data centres in Asia
just 0.3% versus 10% in the U.S., this chasing global real estate, and the Pacific countries
sector may have large growth potential Japanese market continues to attract
for many years to come. Investors who interest due to its sound prospects. 250
target the sector now could still benefit GPIF is slowly but steadily formulating
from an early-mover advantage, but its investment strategy, while J-REITs,
200
competition for land has been fierce which have seen unit prices rise
and it is not easy to outbid residential modestly through the year, may
Number of data centres
developers. increase investment activity in 2019 150
as demand for hard assets is strong.
Data centres Some investors are making forays into
Japan comes second in terms of the different asset categories and markets 100
number of data centres throughout in pursuit of higher yields. New
the Asia Pacific region, according to investment strategies are also being
50
Cloudscene, a data centre directory tested to take advantage of shifting
service provider. The Japanese data underlying trends. Below are some of
service provider market is expected our investment ideas for Japan. 0
Australia Japan Hong Kong India China
to exceed 2 trillion yen in the near
future. According to figures by Colt, Core and Core-plus Source: Cloudscene, Savills Research & Consultancy
a data centre provider, the Japanese Although Core and Core-plus
multi-tenant data center market is set continues to attract probably the
to grow faster than the global average strongest interest, ticket prices are popularity and companies like Marriott
in 2018, at a rate of 16%. high and acquisition opportunities that and Sekisui House are developing
meet investors’ target yields are rather hotels in rural areas where global hotel
In 2016, Google launched its first limited. Grade B offices in Tokyo, as brands have traditionally shied away.
Japanese cloud region in Tokyo, with well as regional offices, are expected Investors who are willing to venture
plans to launch another in Osaka in to see increasing interest from into these new hotel categories could
2019. In 2017, Digital Realty opened investors who are priced out of Tokyo’s earn premiums above typical hotel
its first Japanese data centre in Osaka Grade A market. Residential properties acquisitions.
and announced a joint venture with are the most sought after given their
Mitsubishi Corporation through which defensive nature, though cap rates are Opportunistic
it plans to manage more than 200 highly compressed. Although the logistics market in general
billion yen in assets by 2022. Other is stable, some logistics facilities in
corporations such as Salesforce, Value add areas where supply concentrates are
Oracle, NEC and Colt have also With inbound tourism growing, hotel struggling to fill vacancy. Opportunistic
announced plans to expand in Japan. guests’ preferences are diversifying, investors could snatch up those
and demand for different product underutilised properties, secure
Japanese firms are not well types, service levels, and locations tenants, and exit at better prices.
incentivised to cannibalise existing are increasing. Against this backdrop, Opportunistic investors could also
business with attractive profit margins. boutique hotels are growing in renovate ageing office properties
savills.co.jp/research 010Spotlight | 2018 review and 2019 prospects December 2018
and ratchet up values. For instance, Interest rates 2014, the government plans a number
GreenOak Real Estate relaunched The prospect of higher interest of countermeasures to mitigate the
the Aoyama Building in September rates is somewhat contributing to immediate impact on consumption.
after a large-scale renovation. There buyers’ cautionary stances. The Fed Some have even argued that the
should be more opportunities left for continues to taper, and the European government is going further than
long-term investors with well-thought- Central Bank is expected to follow necessary: measures include a
out strategies and strong intuitions. suit in 2019. The BOJ relaxed its 10- 5% rebate on cashless purchases,
year yield target to 0.2% as the side premium shopping vouchers, and
Risks effect of its monetary policy is being free early childhood education. As
echoed. However, capital demand long as sound economic conditions
Overseas risks in Japan is limited for cash-rich hold, the negative effects from
Bolstered by a stable government corporations and households, and tax increases are likely to be
and consistent economic policy, Japan’s relatively wide spreads have manageable.
Japan’s prospects are good; however, some room to narrow while remaining
the global economic and political attractive. Additionally, investment
climate is becoming more uncertain. appetite for Japanese real estate
Though Japan is relatively insulated continues to grow. We expect only
from current global issues, the mild increases in interest rates in the
U.S.-China trade war is disturbing near future, which should not have
supply chains and posing a risk to an observable impact on property
the global economy. The impact will prices. That said, a sharp rise in
be felt unevenly among countries, overseas interest rates, particularly
based upon their dependence on in the U.S., could have a significant
the U.S. and China in trade. Japan’s impact on interest rates in Japan
dependence on trade is relatively and, ultimately, property investment.
small, but the discord between the
world’s two largest economies is likely Consumption tax hike
to have a negative effect on global The consumption tax hike planned
markets, which could impact Japan in October 2019 could weaken
specifically. Political uncertainty in household spending and dampen
Europe presents another risk for global the current upswing of the domestic
prospects in 2019. economy. Learning from the fallout in
Please contact us for further information
Savills Japan Savills Research
Christian Mancini Tetsuya Kaneko Simon Smith
CEO, Asia Pacific Director, Head of Research Senior Director
(Ex Greater China) & Consultancy, Japan Asia Pacific
+81 3 6777 5150 +81 3 6777 5192 +852 2842 4573
cmancini@savills.co.jp tkaneko@savills.co.jp ssmith@savills.com.hk
Savills plc
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that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.
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