DTZ

31 January, 2012

DTZ, part of UGL Services, a division of UGL Limited (ASX: UGL), has issued a quarterly property market report, “Property Times Japan – Quarter 4 2011”. The report provides an office market overview of Tokyo and Osaka, as well as commentary on the trends being seen in the economy and real estate investment market in the fourth quarter of 2011.

Summary of the report

• The Tokyo occupier market entered another period of adjustment in Q4 2011, after showing gradual improvement in Q2 and Q3. Following two quarters of decline, the vacancy rate for Tokyo CBD grade A offices rose by 0.95 percentage points to 6.7% in Q4 2011 from 5.75% in Q3. This represents a drop of 0.32 percentage-point y-o-y. The vacancy increase was mainly caused by the completion of a new building with some space still vacant. Rents continued on a downward trend, falling by 1.6% q-o-q, or 7.3% y-o-y to reach JPY24,959 per month per tsubo. The major concern for the market at the moment is the potential impact of a global economic slowdown triggered by the European debt crisis, combined with the expected surge in supply in 2012. Looking ahead, we expect a slight increase in the grade A office vacancy rate before it shows signs of decline, with rents forecast to revert to growth in the second half of 2012. Although the market is close to the bottom of the cycle, any slowdown in the global economy is likely to delay the market turnaround.
• The Osaka office market continues to recover in the quarter. The grade A office vacancy rate in Osaka CBD fell for the third consecutive quarter in Q4, by 1.08 percentage-points to reach 8.46% from 9.54% in Q3 (a decline of 1.67 percentage-points y-o-y). Falling vacancy helped to bring an end to 11 consecutive quarters of rental decline. Rents remained stable q-o-q at JPY15,319 per tsubo per month. For the whole year, grade A office rents fell 1.6%. New supply in 2011 totaled approximately 23,000 tsubo, almost half the amount recorded in 2010. Limited supply helped to reduce vacancy levels in existing buildings and this helped bring vacancy down close to 2009 levels. Whilst the fall in vacancy helped bring rental decline to an end in Q4, it is too early to determine whether this is the beginning of upward growth.
• The investment transaction volume rose by 39% in Q4 2011 to JPY378.5bn. This was the second consecutive quarter of increasing volumes following the sharp decline (by 87%) witnessed in Q2 in the aftermath of the earthquake. Despite the quarterly increase in Q4, total investment volumes in 2011 contracted by 22% compared to 2010, reflecting the overall negative impact that the natural disaster had on investor sentiment and subsequent subdued investment activity. A lack of investable stock has created a bottleneck in the market, despite Japan’s relative financial stability. Investment activities continued to be dominated by local players, although the establishment of some foreign funds in Q4 signals a return of foreign investment to the market. Global Logistics Properties (GLP) and China Investment Corporation (CIC) purchased a portfolio of 15 modern logistics properties in Japan for JPY 122.6bn, the largest deal recorded in Japan in 2011.
• The REIT market weakened throughout 2011. Despite limited physical impact on its portfolio, the REIT market was hard-hit by March’s earthquake and further deteriorated in the second half of 2011 due to increasing global uncertainties. The TSE REIT Index fell significantly in Q4, by 10.1%, or by 26.2% y-o-y. The market capitalization also shrank by 8.9% q-o-q, or 20.5% y-o-y, to JPY2.94trillion. Dividend yields increased further to 6.15%. In an effort to support the J-REIT market in the wake of the earthquake, the Bank of Japan announced an increase in the purchase of J-REIT stocks. This was however not enough to stave off further softening in the market. J-REITs continued to be the largest buyers in the investment market. Some J-REITs purchased new assets acquired by capital increase through public offering.

Yoshiki Kaneko, CEO of DTZ Japan comments:“Although the Japanese real estate market is approaching the cyclical bottom, the concern is the increasing global economic uncertainties triggered by the European debt crisis. However, there is an increasing number of foreign investors seeking opportunities in Japan, given that the market is approaching the bottom, also the internal demand is expected to boost the economy. We foresee the increase in investment activities by foreign investors more significantly within this year.”