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Investment Marketbeat Report

Yoshiyuki Tanaka • 25/09/2020

GDP Plunged 27.8% in Q2, Economic Challenges Still Lie Ahead

Japan’s economy continued to shrink in Q2. Real GDP plunged by an annualized 27.8% (first preliminary data), steeper than the 17.9% fall during the GFC and the most severe in the postwar period. Due to the state of emergency imposed in of April and May, private consumption dived 28.9%. Exports, also taking inbound tourism spending into account, suffered a 56.0% fall, with the pandemic shaking the global economy. While economic activities restarted in June, concerns over a COVID-19 second wave spread will poses further challenges to the economy in Q3.

Transaction Volume Down 11.0% y-o-y but Several Portfolio Deals Still Concluded

Trading volumes for real estate investments over JPY 500 million were at JPY 1,324.6 billion in Q2 (preliminary data). The market was driven by a couple of large portfolio deals. Foreign investment transaction volume for 1H 2020 has already exceeded the annual total of 2018, signaling strong appetite by foreign investors for the Japan market. These major transactions led to a 190.0% y-o-y rise in residential investment, closing 31.9% of the total. Along with logistics properties, lower-risk asset classes will remain attractive to investors. On the other hand, office, retail and hotel transaction volumes fell sharply, down 42.2%, 58.7% and 57.2% y-o-y respectively. In terms of share of buyers, J-REITs, non-listed investors and listed real estate companies fell by 46.7%, 74.7% and 34.8% y-o-y respectively, while institutional investors grew 157.4%, accounting for 47.6% of the total transaction value.

Business Sentiment Hits 11-Year Low Under COVID-19 Pandemic

Although data has yet to indicate significant changes in the office market, the C&W Prime Office Asset Price Index (5 central wards) for Q2 2020 recorded a slight decline of 0.9% quarter-on-quarter. Demand for small- and medium-sized office space is certain to recede due to increasing remote working, with vacancies set to increase, which might lead Office assets to be exited to book profits. Moreover, the BoJ’s Tankan survey reveals an 11-year low for business sentiment, at -31 for all manufacturing companies and -36 for non-manufacturing sector. The Lending Attitude of Financial Institutes for Real Estate Companies index reveals banks are now more cautious, with the all enterprises category dropped to 12, the lowest figure since 2014.

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