CBRE Releases Q4 2017 Japan Investment MarketView

Global Value of Commercial Real Estate Investment Transactions Increases y-o-y 2.1% to USD 957 Billion; Japan Transaction volume rises 29% y-o-y to JPY 3.9 trillion in 2017

Overseas investors show strong appetite. Expected NOI yields for all asset types in Tokyo reach record lows.

Tokyo, February 20, 2018 - CBRE today released its 58th CBRE Japan Cap Rate Survey along with the Q4 2017 edition of its Japan Investment MarketView. (The methodology of the survey is detailed at the end of this release.)

Summary

• In 2017, the global value of commercial real estate investment transactions reached USD 957 billion, a 2.1% increase y-o-y.
• In 2017, transaction volume in Japan rose 29% y-o-y to JPY 3.9 trillion. There was a 102% y-o-y increase in transaction volume by overseas investors, while J-REIT transaction volume only rose 3% y-o-y.
• CBRE's investor survey found that expected yields in Tokyo fell by 6 bps q-o-q for logistics facilities, recording yet another new low since the survey for this asset class began in 2009. All other asset types in Tokyo were also at their lowest levels.
• CBRE Tankan Survey (Tokyo): For both Grade A Offices and Large Multi-Tenant Logistics Properties, the lending attitude diffusion index (DI) of financial institutions worsened for the third consecutive quarter. That said, the DI level remains at a point where the funding environment is still favorable.

■ Investment market
Global commercial real estate investment volume was USD 957 billion, up 2.1% y-o-y in 2017. The volume increased in APAC (USD 140 billion, up 20% y-o-y) and in EMEA (USD 336 billion, up 9.5% y-o-y), but dropped in the Americas, at USD 480 billion (down 6.3% y-o-y). The volume decline in the Americas was focused in the United States where slowing rent growth (due to an increase in supply) and rising interest rates made investors more cautious.
Transaction volume in Japan (including deals worth JPY 1.0 billion or more) rose by 29% y-o-y to JPY 3.9 trillion in 2017. By quarter, transaction volume in Q1 2017 and Q4 2017 were up sharply, by 72% and 64% y-o-y respectively, mainly due to the completion of several big-ticket deals worth JPY 30 billion or more and a few large-scale M&A transactions during these periods. The largest increase was in acquisitions by overseas investors, which rose by 102% y-o-y to JPY 1.24 trillion. This was followed by an 18% y-o-y increase in acquisitions by domestic investors (excluding J-REITs) to JPY 1.34 trillion. Meanwhile, J-REIT transaction volume rose only 3% y-o-y to JPY 1.3 trillion. Although overall transaction volume was the largest over the past three years, the number of transactions fell by 9% y-o-y to the smallest number in this period.

The Tokyo 23 wards accounted for 41% of total transaction volume in 2017, the lowest level since CBRE's surveys started in 2005, as investment continued to diversify outside central Tokyo. Transaction volume increased significantly in the Greater Tokyo area excluding the Tokyo 23 wards, rising by 119％ y-o-y to JPY 1.1 trillion, the first time it has exceeded JPY 1 trillion since CBRE began compiling statistics in 2005. Large-scale deals, including Yokohama offices and a hotel in Urayasu (in Chiba), were the main drivers. The second largest increase in volume was in Osaka, which rose by 5% y-o-y to JPY 286 billion, also driven by several large acquisitions by domestic investors including J-REITs.

■ Expected yields
CBRE's latest quarterly survey published in January 2018 found that average¹ expected yields in Tokyo based on NOI² declined by 6 bps q-o-q to 4.64% for logistics facilities. The other four asset types remained unchanged. All asset types fell to their lowest levels since CBRE's surveys began³. Among expected yields for offices in regional cities, Sendai fell 5 bps to 5.60%, and Hiroshima fell 2 bps to 5.88%, the lowest levels for both cities since surveys began in 2003.

■ CBRE Tankan survey
CBRE's January 2018 Tankan survey asked respondents to compare current office market 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), 4) expected yield, 5) lending attitude of financial institutions, and 6) stance on investment and loans. For Grade A office buildings, the DI for current conditions worsened for lending attitude of financial institutions and trading volume, but improved for the other four questions. The biggest deterioration – in the ‘lending attitude of financial institutions’ (down 5points q-o-q) – was mainly due to a drop in those answering "accommodative" compared with the previous quarter. For large logistics properties (multi-tenant-type), the DI, which compares current conditions to six months ago, worsened for all five questions except ‘stance on investment and loans’ and ‘rents’ (the former improved by 2 points, while the latter was unchanged). The biggest deterioration – in ‘trading volume’ (down 10points q-o-q) – was mainly due to an increase in those answering "decreased". As with offices, ‘lending attitude of financial institutions’ also worsened, by 7 points q-o-q. This was due to a reduction in those answering "accommodative." There was an increase in those answering "no change" for the remaining three questions – ‘sales prices’, ‘vacancy rate’, and ‘expected yield’.

DI for ‘lending attitude of financial institutions’ dropped for both offices and logistics for the third quarter running. However, the level of DI for this question is still the highest among all the questions, and there were almost no investors answering "severe", which suggest that funding environment remains favorable.

The Q4 2017 edition of the CBRE Japan Investment MarketView is available for download at: https://www.cbre.co.jp/en/research-reports/investment-reports

^{1: Average: Average figure of the median of lowest/highest yield each.
2: NOI: Net income before depreciation and income taxes; total revenues from real estate less total expenses (excluding depreciation).
3: The survey started covering different asset types in different years – July 2003 for offices and residential; January 2009 for retail, hotels, and industrial.
4: DI: Diffusion index subtracts the ratio (%) of respondents that expected a “contraction (fall)” from the ratio (%) of respondents that expected an “expansion (rise).”}

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

1. Objective
   The objective of the survey is to collect and analyze data looking at the level of expected yields for real estate investments.
2. Survey method and period
   Sent and received by e-mail primarily between December 4, 2017 to January 12, 2018.
3. Recipients surveyed and response rate

   - Recipients: 184 individuals (168 corporations)
   - Responses: 147 individuals (145 corporations)
   - Response rate: 79.9% from individuals (86.3% from corporations)

4. 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.
5. 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