Nippon Building Says Prime Office Prices Rising in Tokyo

Nippon Building Fund Inc., Japan’s biggest real estate investment trust, said property prices for prime office buildings have started to rise, signaling a turnaround in a two-decade decline.

Demand to buy office buildings outpaced supply and has pushed prices higher, said Kenichi Tanaka, president and chief executive officer of Tokyo-based Nippon Building Fund Management Ltd., which manages the REIT. The REIT has acquired 156.8 billion yen ($1.6 billion) of office buildings so far this year, more than three times it had planned, he said.

“Even though the market hasn’t reached a point where you can call it is overheated, it has become tight,” Tanaka said in an interview yesterday. “We think it would be difficult to make a similar amount of acquisitions in the second half.”

Real estate broker Jones Lang LaSalle Inc. and Barclays Plc are forecasting rental for prime office space in the capital to climb this year and next. The office vacancy rate, a measurement of unoccupied office space, dropped to 8.6 percent in March in Tokyo after rising to a record high in June, according to Miki Shoji Co., an office brokerage company.

The capitalization rate, a measure of investment yield, for office buildings in Tokyo declined for four straight months to 5.2 percent in February from 5.5 percent in October, the highest since Real Capital Analytics Inc. started compiling the data in 2009. 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.

Office Rebound

Japan has been struggling with deflation that has caused companies and households to put off spending since the late 1990s, after asset prices collapsed. Prices have declined for 21 years, cutting rents for all categories of offices in the city’s five central wards by 63 percent, according to Miki Shoji.

Office rents in the central wards rose in the three years to 2008, before the global financial crisis, as increasing demand pushed vacancies to around 4 percent in 2005, leading landlords to raise rents, according to Miki Shoji.

Nippon Building Fund closed 0.2 percent higher at 1.42 million yen in Tokyo, while the 39-member Tokyo Stock Exchange REIT Index fell 0.5 percent. The REIT has risen 59 percent so far this year, compared with a 44 percent gain by the index.