An urban metropolis criss-crossed by world-leading bullet trains that glide on modern tracks above tiny noodle joints on the street. Bluetooth-connected businessmen sitting shoeless on the floors of traditional restaurants down winding back streets. Shiny new buildings boasting the latest in cutting-edge earthquake technology alongside ancient temples.
Tokyo has it all. Perhaps one of the biggest and most overarching juxtapositions is the disparity between the old city districts and the clusters of huge cranes towering over the City’s bay area, where large swathes of land are being prepared for the 2020 Olympic Games.
And it is not just the publicity and construction around an event in five years’ time that is driving activity in the Japanese capital. Cheap financing and steady rents have drawn increased attention from around the world to the city over the past 18 months and it is starting to hold its own as an attractive investment option alongside its Asian rivals. Indeed, if you were to ask any real estate investor where they were looking to deploy capital around the world, today’s Tokyo would almost certainly be near the top of the list.
But just how attractive an option is it? And why is the city only coming to the investment fore now?
Emerging from the rubble
Up until as little as two years ago Tokyo was suffering. The city had fallen behind in the global ratings, buffeted by 20 years of deflation, the Asian financial crisis, the global financial crisis and the biggest earthquake in Japanese history in March 2011.
But the government says that times are changing.
Designated as one of the pro-business government’s special zones, Tokyo is set to be boosted by new measures to make relocation easier, including tax subsidies, streamlined business start-up rules, new infrastructure, and bilingual services.
“We are going to make Tokyo a place where people can come and both do business and enjoy themselves,” says the city’s governor, Yoichi Masuzoe.
So far, it seems to be working. Driven by rising prices and the cheap cost of borrowing, the city has seen levels of investment rocket – especially in the offices sector where investment volumes hit $6.3bn (£4bn) in Q1 2015, a 165% increase on Q1 2014. And in the first quarter of this year, sales transactions in Japan hit their highest point since the global financial crisis, ¥2.44tn (£12.4bn). The Nikkei Real Estate Market Report, a Tokyo-based information service, says there have been as many as 40 transactions worth more than ¥10bn in this period, and observes: “Momentum is nowhere near a slowdown.”
The big question is what all of this means for property.
A draw for investment
A series of factors are making Tokyo a draw for international real estate investment. Firstly, it is the largest office market in the world at almost 1bn sq ft.
New supply coming to the market has consistently come in at a level below that of the average absorption rate. The average annual office supply in Tokyo is projected by Savills to be 1.1m sq m from 2015 to 2018. This figure is 2% below the average level of net absorption between 2003 and 2014, and 27% lower than the average absorption rate for the five years to 2007, when the last cyclical upswing occurred.
For investors comparing a typical $100m (£64.7m) office building in London and Tokyo, the Tokyo office is likely to be much newer, with a similar demand profile. Both will have a cap rate of about 4%, but the Tokyo building will have a much, much lower debt term. In Japan, investors can borrow money at less than one full per cent.
“The market here is extremely active at present for a number of reasons,” says Chris Mancini, chief executive of Savills Japan. “Look at it from the perspective of a Europe-based fund. If you look at this market, you see an incredibly stable political environment, the cheapest real estate debt on the planet, an extremely transparent legal structure, and a very well developed services sector.
“There is, perhaps, a little bit less transparency around gathering data for rental and transactions than you would like, but all things being equal it is very attractive,” he adds. “There is also no statutory impediments to foreigners investing here. Your tax is the same, you can own land in freehold. So there is no different between foreign entities and nationals owning land. It is only Australia and Japan where you can really find this.
He continues: “Go and do a straw poll of investors in the UK and across Europe and ask them where in Asia they have an allocation now. They will all tell you the same thing: Japan and Australia. Japan has always been a favourite destination for life insurance and the German open-ended funds, and the interest is beginning to surge.
“The Japanese market went dormant for a while. It is now very much back.”
Standout deals in the first three months of the year include the sales of Tokyo’s Aoyama Building by Mitsubishi Jisho Investment Advisors for over ¥46bn and the Cross Place Hamamatsucho deal, in which the newly completed building was sold by Mitsui Fudosan to Tokyo Land for ¥18.5bn. The highest price in recent months was the sale of Meguro Gajoen to LaSalle Investment Management for an estimated ¥142bn yen.
High cap rates were set at the purchase of the GranTokyo South Tower, with purchaser Goldman Sachs achieving a 12% rate. But there is still plenty of room in the market for more growth.
“Tokyo rents are about 15% above the trough, and have still got quite a way to go,” says Megan Walters, head of research for Asia Pacific capital markets at JLL. “We are predicting that over the next four to five years Tokyo rents will rise by another 30%.
“Compared with other global cities, Tokyo fares extremely well. Part of the reason why it does well is that Tokyo is cost-competitive.
Looking at price per sq ft measured in US dollars, it is in line with Singapore. So if you are looking across the region for a regional headquarters, or somewhere to expand staff, Hong Kong, Beijing, Shanghai all look more expensive when measured by US dollars per sq ft.”
Confidence and openness
The increasing openness of Tokyo has also boosted its attractiveness. “The market has gradually been opening up, more companies have been coming here, and confidence has been growing as a result of the prime minister’s economic policies,” says Nick Loup, who now leads Chelsfield Group’s Asia business.
“Grosvenor, which I was running for 20-odd years, has been investing here for 14 years, and we found it a very good place to do business. We worked with a number of very good local partners, and more recently, in the past year or two, we have noticed a lot more interest in Tokyo from within Asia, both private high-net-worth individuals, and institutions.”
Most of the deals are between established players, reinforcing one of the central draws of the Tokyo office market: its stability. This is definitely not an opportunistic market, say locals. Relationships matter, and taking time to get to know the market matters.
“There is enough opacity in the market to allow people who have been investors here for a long time to get to know the marketing, understand the market and find great opportunities,” said Jon Paul Toppino, managing partner for real estate at PAG Real Estate Investment, speaking at the MIPIM Japan conference in May.
“You need to put in a lot of effort to access the market,” says Ken Chan, country head of Japan at GIC Real Estate International. “In the future it will be more and more important to build those relationships.”
According to the ANREV Investment Intentions Survey 2015, within the Asia Pacific region, the preferred combination of destination and sector is Tokyo offices, with 45% of investors expecting to invest in this market in 2015. But the slow pace of the market means that it can be difficult to channel money in the right direction.
Global head of Asia at AXA Real Estate, Frank Khoo, says his firm is looking to deploy at least $1bn (£640m) of capital in Japan over the next two years. He acknowledges, however, the difficulty in finding the right assets. “I think it is not so much how much you want to put up, but whether you can get the deals,” he says. “We want to put out the money, but it depends on finding the assets.”
In May one of the largest real estate companies in Japan, Mitsui Fudosan, reported a seven-year high in its fiscal year results to 2014. Revenue climbed to ¥1.52tn, and operating income soared by 330% to ¥18.7bn. “Since investors were buying aggressively, we were able to be tough in negotiations over sale prices,” said Masatoshi Satou, Mitsui Fudosan’s executive managing officer.
The company is expecting to set another record for its 2015 year in terms of income, a result in part of the recent opening of several new shopping centres.
Fast fashion giants
In terms of retail, Tokyo’s market is split between the fast fashion giants and the luxury outfits.
Mancini says: “People are still willing to go out and buy a $5,000 Hermes handbag, but they are not going to go and spend more than they need to on socks and underwear. They are going to go to a place like Uniqlo, with reasonably priced goods which had not existed previously.
“So the luxury end continues to do very robust trade, and so do the likes of H&M, Zara and Uniqlo.”
In recent years a flood of Chinese shoppers has also boosted demand, drawn by the allure of Japanese branded products. Get a flight from Tokyo to Shanghai and chances are that at least 70% of passengers will be carrying a Japanese electrical device of some kind, or a rice cooker, electric toilet seat or camera.
Cushman & Wakefield’s retail snapshot report found that after the enforcement of consumption tax exemption in October, the monthly influx of tourists skyrocketed, increasing year-on-year by 180.8% in January and by 235.8% in February this year. While the tourist market is a key element of the city’s spend, the government is keen to build up domestic consumption.
According to a recent CBRE report, Tokyo is the world’s hottest market for retail expansion, attracting 63 new brands last year. Rents have remained fairly flat in the shopping districts of Omotesando, Shinjuku and Shibuya, but in the luxury area of Ginza, C&W has noted a 10.3% yearly hike.
And official figures released by the Japanese government in January reveal that commercial land prices increased in 70% of the plots in Tokyo, boosted by property transactions in the corporate sector and by J-REITs.
But C&W warns that rents have risen “far beyond the level where tenants can afford to pay, driven by expectations of investors or landlords” and “as such, the market may have peaked”. It warns of a slump in business for particular sectors, but says brands seeing an uptick are sports brands, given the city’s recent healthy lifestyle boom and the upcoming Olympics.
Moving online, the Japanese e-commerce market was estimated to be worth around ¥11tn at the end of 2013. This still only represented 3.7% of total retail spending, and some estimates suggest the market will exceed ¥20tn by 2018.
The e-commerce boom has in turn been driving a surge in the city’s logistics market. Real Capital Analytics says the industrial sector has seen significant volume growth – up by 128% – in the past 12 months, reflecting the strong income return the sector can still deliver and particular interest from cross-border investors.
Pelham Higgins, director of Asia Pacific capital markets for industrial at JLL, says: “The e-commerce phenomena is the reason most people in Japan became interested in logistics and infrastructure. That was when it started to become sexy. The first J-REIT for logistics launched in 2005, and soon several of the big players came to Japan.”
Logistics: a hot market
As with the rest of Asia, logistics is a hot market in Japan, given the previous undersupply, growing e-commerce and demand from third-party logistics firms.
According to CBRE research, the demand for large multi-tenant logistics properties is growing; logistics properties currently represent only 4% of the Tokyo market. It forecasts this market to grow 40% by the end of 2016, driven by companies’ efforts to consolidate and outsource their logistics functions. A record volume of new supply is planned, raising concerns over vacancy – CBRE estimates a 15% vacancy rate in some areas by 2016. Nonetheless, healthy rental growth of between 2% and 4% is still forecast over the next two years.
The market also looks set to enter a new phase as the population ages.
“Online drugs and groceries are still basically non-existent here,” says Higgins. “The aging population is going to generate a greater need for over-the-counter drugs. So these large multi-purpose facilities will now need to be smaller, urban facilities, more specialised and in the city centres to allow same-day deliveries.
“As the size of retail units gets smaller, and there is less need for physical stores, we might well see smaller satellite facilities that double as both retail blocks and small logistics centres to facilitate e-commerce. Small logistics centres could pick up retail space left empty as it loses out to online retail.”
As the Tokyo markets continue to develop, the Tokyo government is keen to emphasise that it wants international participation.
“Over the past 20 years of deflation, we have seen people shift their offices and headquarters and offices from Tokyo to Singapore and other cities,” says Yoichi Masuzoe. “We are going to bring them back.”
Tokyo 2020 Olympics
Tokyo is playing host to the Olympics in 2020, a year which the government is hoping will prove to be a turning point in the city’s history. Construction is planned for a ¥95.4bn (£494m) Olympic Village complex, which will occupy a 109-acre parcel of land next to Tokyo Bay on the man-made island of Harumi. The project, the city’s biggest development in 42 years, will provide a temporary home to around 17,000 people during the Games. Afterwards, it is set to be converted into a town with a population of around 10,000.
On a separate site is planned the controversial new 2020 Olympic stadium, inspired by a cycling helmet and designed by the Iraq-born architect Zaha Hadid.
The city will also focus on using hydrogen energy, bicycle transport, green cars as part of its aim to be the greenest Olympic Games of recent times.
A legacy committee has also been set up to consider the post-Games effect on the city. Governor Yoichi Masuzoe says, “We want to be the number one city in the world, and the Olympics is going to help us do it.”
National strategic special zones
The government has implemented five regions as strategic zones. These include Tokyo, which has been designated as an innovation and international business hub. This has meant the city is a so-called Employment and Labor Counseling Center, and will support start-ups and foreign companies and implement measures to support foreign ventures.
Other special zones employ measures relating to private companies and agriculture, increasing the numbers and standard of conference centres, and relaxing rules around accommodating tourists.
A nearby adversary
Relations between China and Japan have been tense for years, and rows about disputed territories have done little to improve the situation. And the rivalry is just as fierce when it comes to battling for investors. According to the ANREV Investment Intentions Survey 2015, both Tokyo and China’s Tier One cities are top investment destinations for investors.
Over the past 20 years, while Japan has seen a slow exodus of international tenants, China has become a powerhouse of rapid growth. And Chinese investors, both institutional and private buyers, are being drawn to Japanese real estate. The yen has fallen in value by 25% against the Chinese renminbi over the past five years, and since 2011, Chinese investors have bought some $84m (£54.2m) of apartments in Japan. JLL says that Chinese tourist arrivals in Japan hit a record high in 2014. The influx has boosted the Japanese economy but hasn’t cooled tensions.
“The rivalry with the PRC is very tense,” says Jesper Koll, managing director and head of Japan Equity Research at JP Morgan Securities Japan. “Japan does not want to become a colony of China. Japan wants to be a member of the global club that makes the rules. And Japan knows that to be a member of the club they must have an economy that grows and is competitive.”
