Although global real GDP growth is expected to fall below 2% in 2023, Japan’s real GDP growth is expected to remain steady at+1.1% in 2023 and +1.2% in 2024. In December, the latest employment figure rose for nine consecutive months to 60.5 million with the seasonally adjusted unemployment rate falling 0.1pp to 2.5%. As Japan's labor participation rate has already risen to 63%, equivalent tothat in the U.S., securing labor is expected to become a similar supply constraint, capping the potential annual growth rate at around 0.7%.
Real wages continue to decline at 1.5% y-o-y with a continued upswing in the core CPI. In December, the national core CPI increased 4.0% y-o-y, setting a record since December 1981. Excluding one-off factors, such as government fuel subsidies, the normalized core CPI rose a further 4.6% y-o-y, pushing the consumer confidence index further into negative territory. According to the BoJ survey, the price outlook in retail industries has already exceeded the level reached at the 2008 price hike, indicating wider price increases at least until mid-2023. The rising cost of living remains a major impediment to recovery of consumption. However, with an expected shift in monetary policy, declining commodity prices and the Yen's modest appreciation ahead should gradually offset some of the inflationary pressures as illustrated in the chart overpage. Furthermore, with Japan’s household savings rate remaining elevated, as shown overpage, the sustained high savings rate in the high-income group is expected to support the current strength of luxury spending.
Supply:
In Q4 2022, retail sales indicators recovered to near the pre-COVID level. The pace of recovery in department store sales has accelerated, with the 3-month rolling average of nationwide sales rising by 6.2% y-o-y, albeit lower than the 22% increase of mid-2022. Monthly department store sales have recovered to 92.9 of the base year sales (2015 = 100), indicating the near-full recovery of consumerdemand. By region, sales in medium-sized cities trended downward through reduced people traffic, as demand returned to big cities. Conversely, sales of daily necessities remain largely unchanged on a volume basis, with national sales in drug stores (+7.9% y-o-y) and convenience stores (+7.9% y-o-y).
New developments are on the rise, with area-wide redevelopments over the medium to long-term gaining traction. Despite many challenges unique to Ginza, including its smaller-sized buildings, outdated building structure, and fractional ownership, Hulichas announced a six-year plan to redevelop at least 14 of its 37 buildings for JPY300 billion. A consortium led by Tokyu-Hulicalso announced the Shibuya Redevelopment Project (GFA: 200,080 sq.m) with phased deliveries up to 2028. A second consortium, led by Hulic/ Takenaka/ JR West/ LVMH, has announced the redevelopment of ShinsaibashiPlaza building (GFA: 46,241 sq.m). With major redevelopments of top locations in progress, we expect vacancy in secondary locations to trend upwards over the next few years.
Occupier Transactions:
High-end brands led leasing demand on the back of strong luxury spending in Q4 2022. Little rent movement was noted, albeit with growing demand in Ginza, Omotesando, and Shinsaibashi. Major store openings included Herman Miller in Ginza and American Eagle’s reopening in Shibuya. Elsewhere, a series of medium-priced mass brand store openings followed in Shinjuku, Ikebukuro and regional cities with recovery in foot traffic. A combination of wealth effects, seeking substitutes for brand new products, and growing consumer awareness of sustainability also means renewed opportunities for pre-owned goods resellers. In summary, a gap between tenant and landlord achievable rental expectations remains wide, extending vacanciesin non-corelocations within submarkets. However, over the next 18 months we expect a gradual recovery in prime rents in Ginza, Omotesandoand Shinsaibashi, where high-end tenants continue to demand top locations amid limited supply.
Investor Transactions:
Increasingheadwindsfrom rising interest rates and risk premiumscontinued to constrain investmenttransactions. Rolling annual transaction volume reached JPY562 billion, down 16% y-o-y. Excluding corporate acquisitions, investors remain cautious with the average transaction size on a downward trend. Foreign investors remain the net sellers through disposals of outdated urban center retail facilities with declining profitability. Conversely, J-REITs remain the net buyers seeking stable income from Neighborhood Shopping Center (NSC) assets. Major transactions in Q4 included the purchase by FPG, an emerging real invest securitization fund focusing on retail investors, of three retail buildings, including the HaimantenShibuya Building owned by Heitman, for JPY40 billion. FPG’s real estate fund business continues to expand with cumulative sales exceeding JPY100 billion at September 2022. Elsewhere, Grosvenor sold two buildings in Ginza to Eaton Real Estate, a Kajima subsidiary specializing in luxury real estate, for JPY19 billion.
