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Goodman to Boost Japan Rents as Land, Building Costs Rise

Goodman Group, the world’s second-biggest industrial property manager by market value, plans to increase rents in Japan by about 5 percent amid rising land and construction costs.

Prices of land sites used for distribution centers and the cost of construction, which has increased as much as 20 percent, are making development more expensive, said Paul McGarry, chief executive officer of Goodman Japan Ltd. Even as demand for modern warehouses and investor interest remain strong, the supply of such facilities will be limited, he said.

The logistics property market in Tokyo is rebounding from record-high vacancy rates three years ago amid increasing demand for modern storage. The city is Asia’s second-most active warehouse market after Hong Kong with $1.6 billion of transactions in the past one year, according to New York-based Real Capital Analytics Inc.

“What we have seen in the last six months is a sharp increase in land prices for logistics,” said McGarry in an interview in Tokyo yesterday, declining to provide an estimate of how much land prices have risen. “There will be less supply moving forward just because the numbers don’t add up.”

GLP J-REIT, a REIT that consists of 30 logistics facilities acquired from its sponsor Global Logistic Properties Ltd., gained 3.1 percent in Tokyo, bringing its increase since the trading debut on Dec. 21 to 52 percent. Nippon Prologis REIT Inc., a trust set up by Prologis Inc., the world’s largest owner of industrial buildings, rose 0.6 percent, taking its gain since it started trading Feb. 14 to 24 percent. Goodman fell for the first time in seven days, declining 1 percent to A$5.14 in Sydney trading.

Government Measures

The plan to increase rents comes as Japan accelerates efforts under Prime Minister Shinzo Abe to end deflation and boost the world’s third-largest economy, including measures to revive the property industry, which has been struggling since an asset bubble burst two decades ago. The government has a target to increase assets owned by real estate investment trusts by 40 percent by 2020.

The capitalization rate, a measure of investment yield, for office buildings in Tokyo declined to 6.4 percent in February from 6.7 percent a month earlier, according to Real Capital Analytics. A drop in the cap rate, which is a property’s net income divided by the purchase price, usually signals an increase in real estate prices.

The vacancy rate for warehouses in the Tokyo metropolitan area fell to 3.7 percent in the fourth quarter from 5.2 percent a year earlier, CBRE Group Inc. said. The rate has been in decline from a peak of 20 percent in September 2009, it said.

Working Metrics

Goodman, which has $22 billion of properties under management globally, is currently developing a combined 433,000 square meters (4.7 million square feet) of space in Tokyo and Osaka metropolitan areas, according to the company. That is more than half of 700,000 square meters of space it has developed since 2005, McGarry said. The developer is currently looking at half a dozen opportunities, he said.

“We think the demand is there if you can get the metrics to work,” said McGarry. “From the capital perspective, we’ve really got unlimited capital as long as we can find the opportunities.”

Goodman said last September it partnered with Abu Dhabi Investment Council to buy warehouses in Japan. With $500 million of borrowings, the fund can buy about $1.2 billion worth of warehouses in the country, McGarry said. The venture has invested $700 million so far, consisting of four properties under development, he said.

Modern Facilities

Modern distribution facilities -- which have bigger floor space that allows trucks to reach every floor via ramps, reducing time needed to load and unload goods -- only account for 2 percent of the total warehouse space in Japan, according to data compiled by LaSalle Investment Management Ltd.

Industrial spaces returned 4.4 percent in 2012, more than double the total return for office properties, according to London-based Investment Property Databank Ltd.

An increase in demand has lured Mitsubishi Estate Co. and Mitsui Fudosan Co., Japan’s two-biggest developers, to enter the business.

Mitsui Fudosan on Jan. 17 said it plans to invest 200 billion yen in warehouses over five years to meet rising demand, while Mitsubishi Estate last year announced two warehouse projects with partners in Tokyo Bay and Kanagawa prefecture.

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