Japan's commercial property market to rise despite tight conditions

Prime rents within Tokyo’s 23 CBDs pushed to $71.57 per 1,420 sqft per month, a cyclical high for stock of this nature.

Optimism continued across Japan’s commercial real estate market in Q1 despite the continued threat of a consumption tax increase in October, with strong corporate balance sheets providing the flexibility to invest, according to a report by Colliers International.

Japan’s property market remained strong in Q1, suggesting more upside in asset prices, and Colliers International said it expects historically tight market conditions to continue for occupiers, developers and investors despite some uptick in Tokyo’s net supply towards 2020.

“Although economic prospects for all regional cities, including Osaka and Nagoya, are not as robust as those in Tokyo, investors seeking steady income-producing assets ought to find more attractive opportunities in local cities where more underutilised assets exist, notably Osaka,” the firm noted in its report.

Market sentiment remained cautiously optimistic as Japan continued to attract investors with more infrastructure development ahead of the 2020 Tokyo Olympics. That said, transactional volumes remained down for Q1 2019 as stock remains limited.

However, Colliers International noted that Japan’s investment market is still favorable to overseas and domestic buyers alike, with the logistics market remaining an ‘interesting sector’ as yields continued to track towards 4%. Prime rents within Tokyo’s 23 Central Business Districts (CBDs) were observed to push to $71.57 (JPY8,000) per 1,420 sqft (tsubo) per month, a cyclical high for stock of this nature.

The report highlighted notable deals inked during the quarter, such as Japan Retail Fund’s (JRF) divestment of Osaka Shinsaibashi Building in Osaka for $136.9m (JPY14.9b) at a capitalisation rate of 3.5% to a domestic special purpose company (SPC). Likewise, Nippon Building Fund reportedly sold G-BASE Tamachi in Tokyo to contracting firm Shimizu for $259.1m (JPY28.9b) at a capitalisation rate of 3.4%.

According to Colliers International, office space in Osaka remains as the top investment pick, although Tokyo has better fundamentals to support rental growth beyond the cyclical horizon.

A lower-than-expected vacancy rate in markets is expected to keep net investment yields above an attractive 3.5%, even with more money chasing steady yields in real estate.

“Regionally, rents continue a modest upward trajectory as limited supply is met with strong demand for good quality stock. The logistics market continues to show strong investment returns and sets a positive tone for Q2 2019,” Colliers International said.