Commercial property prices in Tokyo, a bellwether for Japan’s market, look to have peaked as the capital faces a glut of new offices even as the number of office workers is set to decline.
The property market had rebounded in the past three years as Japanese Prime Minister Shinzo Abe’s economic policies, with ultra-low interest rates, drew in investors attracted by the wider gap than in other developed markets between returns on property and borrowing costs.
Also, as Japanese companies regained confidence, they sought more space, helping drive down office vacancy rates in the capital. Rents have been rising since 2014.
Photo: Reuters
However, office rents are now expected to start falling as early as next year as new space comes on to the market, analysts and commercial property owners say.
“Tokyo’s office space is almost full, but if the economy turns negative, some tenants may reduce their space or move to a cheaper location,” said Masashi Saio, section manager at the real-estate department of Nippon Life Insurance, which owns office buildings nationwide.
“If that happens, owners of office properties may have to cut rents. We expect a large supply of office space that could affect the balance between supply and demand,” he added.
Between next year and 2020, when Tokyo is due to host the Olympic Games, the capital expects to add 2 million square meters of new office space — equal to more than 8 percent of its total as of the middle of last year, said Shunji Kobayashi, senior manager at the real-estate research team for Sumitomo Mitsui Trust Bank.
“Newer space may be filled, but there will be vacancies in older properties,” he said. “Demand for new office space is not expanding because financial institutions are not growing their space like they used to.”
Tokyo’s office vacancy rate has fallen in almost every month since June 2012, from 9.43 percent to 3.61 percent, said Miki Shoji, a broker, and office rents rose 10.6 percent over that period, though that increase was tempered by the prospect of so much new office space coming onstream.
The vacancy rate is expected to rise again, to around 6 percent — more than the 5 percent level considered healthy — and that will push down rents from 2019, Kobayashi said.
CBRE, a global real-estate research firm, predicts Tokyo’s prime office rents will fall 1 percent in 2017-2018, and some new office towers will open with vacancies.
With an average annual office rent of US$160 per square foot (0.09m2), Tokyo’s Marunouchi financial district ranks sixth among global business centers, some way behind Hong Kong’s Central (US$290) and London’s West End (US$262), according to CBRE.
Predictions of falling rents have already slowed property deals, with the value of office property transactions falling 28 percent to ¥1.3 trillion (US$11.37 billion) last year.
Urban Research Institute, a think-tank affiliated with Mizuho Trust & Banking Co, said this is because prices have risen too high for investors to justify income.
Office deals made up less than a third of all transactions last year, down from 41 percent in 2015, Urban Research said.
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