Global Real Estate Transaction Volume Rises 1.2% y-o-y in Q3 2018 to US$ 254 billion, but Japan Transaction Volume Falls 25% y-o-y to JPY 592 billion; Expected Yields for Offices in Three Regional Cities at Lowest Recorded Level
CBRE today released its 61st CBRE Japan Cap Rate Survey along with the Q3 2018 edition of its Japan Investment MarketView. (The methodology of the survey is detailed at the end of this release.)
Summary
- Global commercial real estate transaction volume increased by 1.2% y-o-y in Q3 2018 to US$ 254 billion. The rise was mainly due to several large mergers and acquisitions in the U.S. Meanwhile, volume in Asia Pacific decreased by 29% y-o-y, mainly driven by China where investor sentiment was somewhat affected by rising trade tensions and stock market volatility.
- For Q3 2018, commercial real estate transaction volume fell 25% y-o-y to JPY 592 billion in Japan. Investment by J-REITs was up year-on-year, but activity by other domestic and overseas investors fell below the previous year’s level. Nevertheless, investor appetite remains strong and the period saw the completion of several large transactions, mainly by J-REITs and overseas investors.
- CBRE's latest investor survey found that expected yields in Tokyo had fallen to record lows for offices (Otemachi) and retail (Ginza Chuo-dori). There was no change for the other asset types. Expected yields for offices outside Tokyo fell in four cities (Sendai, Nagoya, Osaka, Fukuoka), with yields in three of these cities (excluding Osaka) falling to their lowest levels since the surveys began1.
- CBRE Tankan Survey (Tokyo): For Grade A office buildings, the Diffusion Index (DI) for "lending attitude of financial institutions" worsened, but there was no significant change in investor appetite. The "vacancy rate" DI for Large Multi-Tenant Logistics Properties improved for the second consecutive quarter. Solid tenant demand allayed fears of higher vacancy resulting from new supply.
- Cumulative commercial real estate transaction volume in Japan from Q1 2018 to Q3 2018 fell 18% y-o-y to JPY 2.19 trillion, mainly due to a decline in large transactions. Although lenders are becoming slightly more cautious, sellers remain rather bullish on pricing, meaning that transactions tend to take longer to conclude. Transaction volume for full-year 2018 is therefore expected to register a year-on-year decline.
■ Global Investment Market
Global commercial real estate transaction volume rose 1.2% y-o-y to US$ 254 billion in Q3 2018. Transaction volume in the Americas rose 13% y-o-y to US$ 150 billion, declined 6% y-o-y to US$ 80.5 billion in EMEA, and fell 29% y-o-y to US$ 24 billion in Asia Pacific. The increase in global transaction volume was mainly due to several major entity transactions in the U.S., where the volume rose 17% y-o-y, accounting for more than half of total global transaction volume. Meanwhile, activity in Asia Pacific weakened, mainly led by China where investor sentiment was somewhat affected by rising trade tensions and stock market volatility.
■ Japan Investment Market
Commercial real estate transaction volume in Japan decreased by 25% y-o-y to JPY 592 billion in Q3 2018. Investment by J-REITs increased by 14% y-o-y to JPY 325 billion, but activity by other domestic investors and overseas investors fell short of the previous year’s level. Transaction volume by other domestic investors saw a 40% y-o-y decline to JPY 156 billion, while there was a 54% fall in transaction volume by overseas investors to JPY 111 billion. The main reason behind the year-on-year decline in transaction volume was because there were fewer large transactions concluded by overseas investors compared to the previous year. However, investor appetite remains robust, as indicated by CBRE's Q3 2018 real estate investor survey (see below). Overseas investors concluded a number of major deals during the quarter, including an acquisition of a large logistics facility in the Greater Osaka region.
Investment in regional cities also remained active. Transaction volume for regional cities including Osaka and Nagoya increased by 28% y-o-y to JPY 292 billion. Regional cities' share of total transaction volume amounted to 51%, the highest level on a quarterly basis since our surveys began recording this figure in 2005. Among the regional cities, transaction volume in the Greater Osaka region grew particularly strongly – it increased by 74% y-o-y to JPY 218 billion, with Osaka's share amounting to around half of that figure (JPY 106 billion; +67% y-o-y).
■ Expected yields
CBRE's latest cap rate survey (held in October 2018) found that average2 expected yields (NOI3 basis) in Tokyo fell for two asset types compared with the previous quarter and were unchanged for four asset types. There were declines in retail (Ginza Chuo-dori) and offices (Otemachi), which were down by 7bps and 2bps q-o-q, respectively. In both cases, these were the lowest levels since our survey began monitoring this data.
Expected yields dropped q-o-q in four cities, including Nagoya (5.15%, –15bps), Fukuoka (4.85%, –10bps), Sendai (5.46%, –4bps), and Osaka (4.90%, –3bps). Nagoya, Fukuoka, and Sendai were at the lowest levels since the surveys began. Figures for other cities included Sapporo (5.35%, unchanged q-o-q) and Hiroshima (5.75%, +2bps).
■ CBRE Tankan survey
CBRE's October 2018 Tankan survey asked respondents to compare current conditions to three months ago (with results collected as Diffusion Indices4). Topics were: 1) trading volume, 2) sales prices, 3) NOI (or rents and vacancy rates for logistics facilities), 2) expected yields, 5) lending attitude of financial institutions, and 6) stance on investment and loans. For Grade A office buildings (in Tokyo 23 wards), the DI declined for trading volume, NOI, and stance on investment and loans; was unchanged for lending attitude of financial institutions; and rose for the other two questions. The biggest deterioration was seen in the stance on investment and loans (–4pts q-o-q), mainly due to a drop in those answering "accommodative", and an increase in those answering "maintaining the current level".
For large logistics properties (Greater Tokyo area, multi-tenant-type), the DI for current conditions compared with six months ago improved for "vacancy rate" and "expected yield"; was unchanged for "rent"; and declined for the other four questions. The biggest drop was seen in "sales prices" (–9pts q-o-q), mainly due to a drop in those answering "higher", and an increase in those answering "unchanged". Meanwhile, "vacancy rate" (+4pts q-o-q) improved for the second consecutive quarter. There was a fall in those answering "higher", and an increase in those answering "unchanged". Tenant demand for logistics facilities is solid, and the improvement in DI appears to be due to a receding of fears concerning a market downturn resulting from new supply.
Looking at the DI for both offices and logistics facilities this quarter, there was no significant change in either market. The funding environment is favorable and investors' appetite remains high.
■ Outlook
CBRE's "2018 Lender Survey"5 published on October 4, 2018 - the first of its kind - found that new lending could exceed the level recorded in fiscal 2017. However, lenders are becoming slightly more cautious with rising transaction prices and appear to be taking a more selective approach to properties. Although the funding environment remains positive, the scarcity of high-quality properties available at favorable terms and the low cap rates being sought by sellers means that transactions are taking longer to conclude, a situation that looks set to continue.
Cumulative transaction volume in Q3 2018 declined by 18% y-o-y to JPY 2.19 trillion, mainly because the number of large transactions exceeding JPY 30 billion (including offices and residential) fell by 30% y-o-y. Full-year transaction volume for 2018 is expected to register a decline from last year's JPY 4.1 trillion.
The Q3 2018 edition of the CBRE Japan Investment MarketView is available for download at:
https://www.cbre.co.jp/en/research-reports/investment-reports
1. The survey started covering different asset types in different years – July 2003 for offices and residential; January 2009 for retail, hotels, and industrial.
2. Average: Average figure of the median of lowest/highest yield each.
3. NOI: Net income before depreciation and income taxes; total revenues from real estate less total expenses (excluding depreciation).
4. DI: Diffusion index subtracts the ratio (%) of respondents that expected a "contraction (fall)" from the ratio (%) of respondents that expected an "expansion (rise)."
5. "CBRE Lender Survey 2018" summarizes the results from a survey of lenders providing finances for domestic real estate investment.
As the survey goes beyond the scope of this publication, full results are only provided to respondents. Please refer to the following list for all surveyed items.
Note to Editors:
CBRE Japan Cap Rate Survey
- Objective
The objective of the survey is to collect and analyze data looking at the level of expected yields for real estate investments. - Survey method and period
Sent and received by e-mail primarily between September 19 to October 17, 2018. - Recipients surveyed and response rate
- Recipients: 167 individuals (164 corporations)
- Responses: 139 individuals (136 corporations)
- Response rate: 83.2% from individuals (82.9% from corporations) - Type of respondents
Arrangers, Lenders (senior), Lenders (mezzanine), Developers, Real property lessors, Asset managers (mainly for J-REITs), Asset managers (mainly for non J-REITs), and Equity investors, among other respondents. - Policy regarding the release of survey results
- This report is an excerpt of the results from our quarterly survey.
The report is available for download at:
https://www.cbre.co.jp/en/research-reports/investment-reports
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