Tokyo Office Yields at New Record Lows

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According to CBRE's latest Tokyo quarterly office survey for April 2015, the average expected yields (based on NOI) in major areas of Tokyo declined across all sectors.

Yields were lowest in the office sector (Otemachi), falling by 5 bps q-o-q to 3.85%, a record low since the survey began in July 2003 (in comparison with July 2007: 3.90%). Expected yields for hotels (in Tokyo's central five wards; subcontracted management) dropped by 45 bps q-o-q to 5.30%. Other sectors also saw declines of 10 to 15 bps. Expected yields remain on a downward trend; offices in cities other than Tokyo saw a 15 bps drop in Nagoya, and were flat in Osaka. The fall in yields has also spread to regional cities, with declines of at least 10 bps in Sapporo, Sendai and Hiroshima.
 
Tokyo Office Market Summary:

• Expected yields for offices (Otemachi, Tokyo) declined by 5 basis points (bps) compared to the January 2015 survey, falling to 3.85%, the lowest level since CBRE began its surveys in 2003.

• Expected yields in Tokyo declined by at least 10 bps across all sectors, with hotels down 45 bps q-o-q to 5.30%.

• The CBRE's Tankan survey for Tokyo Grade A offices showed the Diffusion Indices (DI) improved by 7 points q-o-q for NOI, and the outlook also improved.

• The Tankan survey for large-scale multi-tenant logistics facilities in the Greater Tokyo Area showed the DI for vacancy rates improved by 8 bps q-o-q. However, the outlook deteriorated due to concern about the large volume of new supply.

• Investment volume in Q1 2015 rose 8.6% y-o-y to JPY 1.1 trillion. Investment activity is becoming more diverse both by area and sector.

The April 2015 survey included a study of offices and logistics facilities, for which the respondents were asked to compare current conditions with three months ago (with results collected as Diffusion Indices 2). Topics were: 1) transaction volume, 2) sales price, 3) NOI (or rents and vacancy rates for logistics facilities), 4) expected yields, 5) lending attitude of financial institutions, and 6) strategies for investment and loans. The DI for Grade A offices improved for NOI (up 7 points q-o-q), the lending attitude of financial institutions (up 3 points) and sales price (up 1 point). The DI for strategies for investment and loans deteriorated by 4 points, transaction volume by 2 points and expected yields by one point. However, this was because more respondents saw no change on three months ago. NOI also improved for non-Grade A offices (up 9 points), and the outlook for three months from now also improved by around 7 points. This shows that investors still remain bullish on earnings.

Multi-tenant logistics facilities recorded improvements in DI for vacancy rates (up 8 points q-o-q), lending attitude of financial institutions (up 6 points), sales prices (up 3 points), rents and strategies for investment and loans (up 2 points). The DI for expected yields was flat, and only transaction volume saw a deterioration (down 5 points). The DI for vacancy rates improved in Q1, but remained low. The outlook for six months from now deteriorated by 8 points for expected yields and by six points for vacancy rates, likely reflecting concerns for future oversupply.

The total value of real estate investment transactions (those worth at least JPY 1 billion, excluding acquisitions at J-REIT IPOs) in Q1 2015 rose 8.6% y-o-y to JPY 1.1 trillion. Investments by J-REITs totaled JPY 500 billion, accounting for 45% of the total. This was a 33% y-o-y increase, showing that J-REIT appetite for acquisitions has not diminished. However, the value of acquisitions by Japanese investors excluding J-REITs fell by 23% y-o-y to JPY 438 billion. This accounted for 39% of the total, a significant decrease from 55% in Q1 2014. In contrast, the total value of transactions by overseas investors doubled y-o-y to JPY 182 billion, 16% of the overall total. Although the size of their transactions is still smaller than those of Japanese investors, the rate of increase outpaced Japanese investors for the fourth consecutive quarter.
 
With increasing competition for properties in central Tokyo and with yields declining, investors are broadening the geographical and sector focus of their investments. Transaction volume in Osaka increased by 77% y-o-y and investment in regional cities including Osaka and Nagoya accounted for 20% of the overall total. This is approaching the 25% share seen in 2007, just before the onset of the global financial crisis. By asset type, there was an increase of 41% in the retail sector and a threefold increase in the logistics sector. The hotel sector, although still small, is also becoming increasingly important, with a threefold increase in the value of acquisitions.