On 1 May 2019, Japan celebrated the nation’s new era “Reiwa” with the new emperor Naruhito’s reign. The phrase “Reiwa” means “beautiful harmony” and was taken from the oldest Japanese poetry anthology, the Manyoshu. This is indeed an exciting time for Japan and its commercial real estate markets.
Being the third largest in the world, Japan’s economy is by most metrics performing well, and by extension, so are its property markets. As a whole, the nation’s jobs vacancies are 2.5 times the applicants and unemployment is very low at 2.4%. In Tokyo specifically, jobs growth for 2019 is forecast to remain robust with an additional 97,000 expected over the year, of which 44,000 are in office-using sectors (Information & Communication, Financial & Insurance activities, Real Estate activities, administrative & support activities, Public administration). Demand for space is therefore likely to remain strong.
As a result of these drivers, Tokyo has one of the lowest office vacancy rates in the world and is placed number four in the world for office demand, recording a net absorption of 9.9 million square feet in 2018. Keeping up with this job growth and continued space absorption, Tokyo has a strong pipeline of new Grade A office supply with around 12 million square feet of office space expected to be completed over the next two years. In addition, there is a further 27 million square feet of supply yet to confirm completion date. All of these are on top of ongoing infrastructure improvements for the upcoming Tokyo 2020 Olympic games and Paralympic Games. The upcoming Rugby World Cup in October will also test the transportation infrastructure and soft services of the host cities prior to 2020.
The investment market also remains active, recording a sales volume of US$17.4 billion (2018), which places Tokyo in the top 10 metro markets globally. The market, that used to be dominated by value-add / opportunistic players in a pre-Global Financial Crisis period, is now also crowded with core players, in a good mix with all kinds of investors, posing a positively high liquidity. This nation has truly become one of the most institutionalized mature property markets around the globe, and this will be even so as the government continues to commit the growth strategy of the J-REIT market.
Currently, investors’ concerns are not, therefore, on these healthy real estate fundamentals; but more on macro environment. On the top of escalated China/U.S. Trade War, Japan is currently in a negotiation for Trade Agreement on Goods with U.S., the House of Councillors Election to be potentially held in July, and the planned Consumption Tax hike in October:
- June – G20 Summit (Osaka)
- July – House of Councillors Election
- August – Japan / U.S. Trade Agreement on Goods “in potential agreement”
- October – Consumption Tax hike from 8% into 10%
Potentially these events may have an impact on Tokyo Grade A office market where the supply is concentrated in, and adjust the current market rental level downwards — as IMF forecasts that Trade War will potentially pose a downward pressure on the Japanese economy by -0.6%. However, Cushman & Wakefield Japan Research forecasts a limited impact on Non-Grade A office in coming years and certain sub-markets will continue to thrive. Although Tokyo is known to the home of high-rise buildings, Grade A office stock still represents only around 20% of the total stock. Non-Grade A office market will have limited supply and still offer attractive rental differentials amid the current tight office market. So, at the dawn of the new era, formation of asset allocation strategy in the office sector has become even more important.
Nonetheless, much clearer directions of the national economy will be revealed over the next few months as the above events take place.
If you are interested to hear more insights and discuss Japan’s property market, please feel free to contact me.