Tokyo Property Borrowers Play Negative Rates Game in Office Boon

  • Japan REIT enters swap deal at negative interest rate
  • Tokyo office prices may rise 10% in 2016: Credit Suisse

Credit Suisse Group AG is predicting prices for prime Tokyo office space may rise 10 percent this year as a Japanese real estate investment trust refinanced bank debt in an agreement that means it will get paid to borrow.

GLP J-REIT said in a statement last week it agreed to swap floating rates for a fixed cost with Nomura Securities Co. on about 5.3 billion yen ($46.6 million) of debt. The REIT will receive about 480,000 yen a year net for borrowing the funds, a rate of minus 0.009 percent, the statement shows. Credit Suisse said higher-rated property companies “could well obtain negative interest rate terms” when refinancing debt through such transactions as well.

“With the drop in interest rates, we are likely to see an increase in money pouring into real estate,” said Masahiro Mochizuki, a Tokyo-based analyst at Credit Suisse. “Regional banks must make profits somehow and they can’t make money lending, so they need to invest in property funds.”

The Bank of Japan’s decision to pay negative interest on some reserves and expand purchases of REITs will prompt investors to put more money into property, according to Mochizuki. Prices for A grade Tokyo offices will probably rise at least 10 percent this year, and investors will likely be able to earn even more income on real estate than on Japanese government bonds, according to property-services company, Jones Lang LaSalle Inc.

The average investment yield on A grade Tokyo office buildings fell to 3 percent at the end of last year, as the extra yield investors could make over 10-year sovereign notes contracted 2 basis points to 273 from three months earlier, according to data from JLL. Japanese government debt out to eight years currently have minus yields.

Japan’s economy contracted in the final three months of 2015 with gross domestic product shrinking an annualized 1.4 percent, the Cabinet Office said on Monday. Weaker growth may prompt the BOJ to boost stimulus again by April, according to Yuki Masujima, an economist with Bloomberg Intelligence Economics in Tokyo.

Real estate investment in Tokyo will probably climb 10 percent this year to 4.5 trillion yen after dropping 12 percent in 2015, as office rents in the Japanese capital look set to rise 5 percent to 10 percent this year, according to estimates by JLL. Vacancy rates in the city’s business area fell to 4.01 percent in January, the lowest since 2008, according to Miki Shoji Corp., a privately held office brokerage firm in Tokyo.

Office Prices

Prices for prime offices in Tokyo will probably increase by about 10 percent in the first half of 2016 as more money flows into Japanese REITs, making it possible for them to pay more for real estate acquisitions, according to Koichiro Obu, a director at Deutsche Asset in Tokyo. The Tokyo Stock Exchange REIT Index has declined 3.2 percent since the start of the year, compared with a 23 percent drop in the benchmark Topix gauge.

The price of grade A offices space in central Tokyo rose 8.5 percent last year to about 2.4 million yen per square meter, according to data from Daiwa Real Estate Appraisal Co. Mitsui Fudosan Co., Japan’s second-largest property developer, rose as much as 9 percent in trading Monday after reporting a 35 percent gain in net income to 95.2 billion yen in the nine months to the end of December. 

“This is a country where the government and the BOJ and are seeking to boost prices,” said Credit Suisse’s Mochizuki. “The momentum behind property prices is unlikely to stop.”

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