Japanese stocks are the biggest winners in the world this year. The yen is down the most of any major currency, helping exporters. And as Prime Minister Shinzo Abe’s efforts to stoke the economy take tentative hold, Japan’s commercial property market is coming back to life.
Sales of offices, logistics and retail space surged 70 percent to 1.48 trillion yen ($15 billion) in the first five months of 2013 from a year earlier, according to Jones Lang LaSalle Inc. Deals will rise to as much as 3.5 trillion yen this year, the most since 2008, Takeshi Akagi, local director at the Chicago-based broker estimates.
Abe, who took office in December, has boosted spending and the Bank of Japan has embarked on an unprecedented monetary easing in a drive to end 15 years of deflation. The approach, dubbed Abenomics, is lifting the confidence of investors such as Nippon Building Fund Inc. and AXA Real Estate Investment Managers in a market that has languished since an asset bubble burst more than two decades ago.
“I don’t think anyone would argue that there hasn’t been a favorable sentiment shift since Abe came to power,” Christian Mancini, chief executive officer of North East Asia at Savills Asia Pacific Ltd., said in an interview. “Inflation translates into balance-sheet recovery and has a knock-on effect on the real estate market.”
Among the signs of improvement: Tokyo’s office vacancy rate fell for a third month in May and is down from a record a year ago, while prices are inching higher. Land values are rising, according to government data that tracks 150 prime sites around the country.
The 43-member Topix Real Estate Index rose to the highest in a week, gaining 1.9 percent at the close of trading in Tokyo today. The Tokyo Stock Exchange REIT Index advanced 1.2 percent, the biggest gain in two weeks.
Japanese real estate investment trusts, known as J-REITs, are leading the charge after a 28 percent gain in their shares since Abe took office has made it easier to raise funds to acquire properties. The Tokyo Stock Exchange REIT Index has risen 23 percent so far this year.
J-REITs may sell about 900 billion yen of shares this year to help pay for acquisitions that will probably total 2.5 trillion yen, said Yoji Otani, a Tokyo-based analyst at Deutsche Bank AG. The figures would exceed the 848 billion yen in financing and 1.9 trillion yen in purchases in 2006, both records, Otani said.
“Some of the J-REITs and some of the property companies are willing to purchase very aggressively right now to lock into what they believe would be an improvement in the market,” Savills’s Mancini said. “You can expect prices going forward will continue to improve.”
Nippon Building Fund, Japan’s biggest REIT, has spent 156.8 billion yen on office buildings this year, including a Tokyo tower it bought with other investors from Sony Corp. for 111.1 billion yen. The REIT may acquire more than 50 billion yen a year if there are good properties, Kenichi Tanaka, president and chief executive officer of Nippon Building Fund Management Ltd., which manages the REIT, said in an interview in November. The amount the REIT has spent so far this year is more than three times that.
The capitalization rate, a measure of investment yield, for office properties in Tokyo fell to 5.2 percent in May from a record high of 5.5 percent in October, according to Real Capital Analytics Inc. 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 number of listed Japanese companies that sold properties in the 12 months ended March 31 rose 20 percent to 60, the first increase in eight years, amid corporate restructurings and ramped up acquisitions by J-REITs, according to Tokyo Shoko Research Ltd. Selling prices totaled 305.8 billion yen, more than triple the 99.7 billion yen of properties sold a year earlier, it said.
Japan’s real estate market was a key part of the asset-price bubble of the 1980s, when economic growth, loose monetary policy and bank lending led to speculation on property and sent the Nikkei 225 Stock Average to its peak in 1989. The Nikkei is two-thirds off that high and residential land prices in Tokyo are one-third of their peak in 1988.
Abe has promised to loosen business regulations and increase government support to help Japan’s industry as part of the “third arrow” of a three-pronged strategy to end deflation, following fiscal and monetary stimulus.
His plan includes creating incentives to attract foreign investment and boosting the competitiveness of major cities in Japan. The government may also consider relaxing development rules in certain zones to meet demand for office buildings and residential space in metropolitan areas, it said.
The BOJ, which under Governor Haruhiko Kuroda unveiled a plan in April to target a 2 percent inflation rate, has acquired 138.7 billion yen of REIT shares since December 2010 to help support the market.
The world’s third-largest economy grew at an annualized 4.1 percent in the first three months of this year, the fastest expansion in a year, the government said last month.
Investors are responding. AXA Real Estate, a unit of Europe’s second-largest insurer, bought two office buildings in central Tokyo this year for 10 billion yen and plans to double the acquisitions by the end of the year, said Hidetoshi Ono, the head of Japan Core Fund at AXA Real Estate in Singapore.
“More and more capital -- domestic and foreign -- is going after real estate,” said Ono. “The good news is that there are much more transactions happening this year than last year. The bad news is prices are getting higher.”
Prime retail properties may benefit as consumer confidence increases, according to Akagi of Jones Lang LaSalle in Tokyo. Abe’s plan to increase government spending helped bolster consumer confidence in May to the highest level since 2007.
Parco Co., a Tokyo-based shopping-center operator, bought two buildings in Fukuoka City, in southwestern Japan, for 26.5 billion yen in March, the company said in a statement. SEB Asset Management, a Frankfurt-based investment company, said in April it sold a mall in Chiba for 100 million euro ($131 million), 13 percent more than it paid for the property in 2009.
The capitalization rate for retail properties in Tokyo fell to 4.2 percent in the second quarter, the lowest since Real Capital Analytics started compiling the data in 2009, from 6 percent in the previous quarter. The cap rate for the same type of properties in Osaka narrowed to 5.7 percent in the second quarter from 7.6 percent three months earlier, it said.
Mitsubishi Estate Co., Japan’s largest developer by market value, said revenue generated from its retail space will probably reach a record this fiscal year. Mitsui Fudosan Co., the biggest developer by sales, said it expects full-year profit to rise for the first time in four years, as new malls opened during the reporting period that ended March 31 contribute to leasing revenue. Both companies are based in Tokyo.
Mitsui Fudosan was raised to overweight from equal weight on June 25 by Takashi Hashimoto at Barclays Plc with a target price of 3,400 yen. The shares rose 1.3 percent to 3,225 yen today in Tokyo. Among 25 analysts who cover Mitsubishi Estate, 16 have buy recommendations for the stock, while only one advises to sell, according to data compiled by Bloomberg.
Prime office, commercial and residential properties in major centers such as Tokyo will probably benefit as more people from regional areas move to the cities, said billionaire Akira Mori. His Mori Trust Co., the nation’s most profitable closely held developer, may buy more land after it accumulated about 10,000 tsubo (33,000 square meters or 355,210 square feet) of space in central Tokyo, depending on how well Abe’s growth plan is implemented, 76-year-old Mori said in an interview.
“Land prices rose across the board during the bubble period in the 1980s,” said Mori. “This time, with an inflation target of 2 percent and economic growth, real estate will certainly benefit. However, unlike the bubble in the ’80s, the recovery will only be limited to certain areas.”
Some are skeptical that Abe’s policies will attract more foreign companies.
“I cannot identify any policy that I think is going to lead to any long-term growth, long-term inflation or any increase in demand in office space or high rents,” Seth Sulkin, a representative director at Tokyo-based real estate and asset manager Pacifica Capital KK, said.
A government policy to enable developers to build taller buildings is primarily going to benefit Mitsubishi Estate and Mitsui Fudosan or other big developers and won’t have any impact on the overall real estate market, Sulkin said.
Still, the office vacancy rate in Tokyo’s central five wards fell for a third month in May to 8.3 percent, according to Tokyo-based Miki Shoji Co. It hit a record a record 9.4 percent in June last year.
The vacancy rate rose to 8.46 percent last month as tenants left their current locations to move into new buildings, Miki Shoji said today.
The number of prime sites throughout Japan where values increased rose to 80 out of 150 locations as of April 1, from 51 sites three months earlier, according to government data. It was the first time since 2007 that more than half of the places recorded increases.
“Tokyo stands out as a bright spot on a global stage when investors consider where to put their money,” said Akagi of Jones Lang LaSalle. “It’s no doubt Abenomics is immensely positive for the real estate market and has a huge impact and property prices.”