Transaction Volume in Q2 2016 Falls 9.2% y-o-y to JPY 692.8 Billion
Expected NOI Yields at Record Lows for Tokyo Offices and Retail
Tokyo, August 10th - CBRE today released its 52nd Quarterly Survey on Japanese Real Estate Investment along with the Q2 2016 edition of its Japan Investment MarketView. (The methodology for the survey is detailed on page 7 of this release.)
Investment transactions in Q2 2016 fell 9.2% y-o-y to JPY 692.8 billion
Purchases by J-REITs fell y-o-y, but was partly offset by an increase in transactions by other Japanese investors and overseas investors
CBRE's investor survey found expected yields in Tokyo at record lows for offices and retail
CBRE Tankan survey: expected yields DI worsened by 26 points for Tokyo Grade A offices; more respondents see limited further downside in yields
While investors may become more cautious about investing in the UK following its vote to leave the EU, the inflow of investment capital into Japan could increase
The total value of real estate investment transactions (transactions of JPY 1 billion or more) in Japan in Q2 2016 declined 9.2% y-o-y to JPY 692.8 billion. J-REITs were the only investor type to register a y-o-y decline, down 32% to JPY 225 billion. Acquisitions by other Japanese investors increased by 13% to JPY 251 billion, and those by overseas investors rose by 8% to JPY 217 billion. Thanks to the favorable funding environment, investors' appetite for acquisitions remains strong.
By asset type, only industrial and hotel properties saw a y-o-y increase in acquisitions, driven by a few major transactions. However, offices continued to dominate the investment market, comprising 54% of all acquisitions by value, with retail accounting for 15%. Regional cities continued to see solid investment activity, mainly by J-REITs. Acquisitions in Nagoya totaled JPY 18.2 billion, up 80% y-o-y, while other regional cities recorded JPY 85.7 billion, up 6.3% y-o-y. The large increase in Nagoya was due mainly to acquisitions by J-REITs (around JPY 15 billion). Acquisitions by J-REITs accounted for 66% of the total in regional cities other than Osaka and Nagoya.
Expected yields: All sectors in Tokyo decline to record lows
CBRE's latest quarterly survey (July 2016) found that average* expected yields (based on NOI* ) declined in Tokyo for office and retail properties, with four other sectors more or less unchanged from the previous quarter. The largest decline was for retail (Ginza Chuo Dori), which fell by 10bps q-o-q to 3.65%, the same level as offices (Otemachi), which fell by 5bps. This is likely because of the number of high profile transactions since the start of the year, including some at cap rates estimated to be around 3%.
In Tokyo, expected yields for all sectors are at their lowest levels since CBRE's surveys began in July 2003. However, the rate of decline for hotel and industrial properties slowed somewhat this quarter. Although the rental market, not least for offices, is still tight, growth in rents is expected to slow, due to new supply and increasing uncertainty over the macroeconomic outlook. Consequently, further yield compression is likely to be limited, especially for prime assets in central Tokyo.
Expected yields for offices in regional cities also continued to decline in Q2 2016. The lowest expected NOI yields among the main regional cities are now in Fukuoka, where they declined by 4bps q-o-q to 5.30%, lower than Osaka's 5.35%.
CBRE Tankan survey: Expected yields DI for Tokyo Grade A offices decreases by 26 points
CBRE's July 2016 Tankan survey asked respondents to compare current conditions to three months ago (with results collected as Diffusion Indices* ). Topics were: 1) trading volume, 2) sales prices, 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. For Grade A office buildings, the DI worsened for all questions, the largest being the DI for expected yields, which was 26 points lower q-o-q. Of note, the deterioration in all questions was because of a rise in the percentage of respondents answering "no change." That being said, for expected yields, percentage of respondents expecting to see lower yield was down 22 points compared to the previous survey, and now at the same level as in 2012. More investors see limited further downside in expected yields.
For logistics facilities (multi-tenant-type), which saw the second highest volume of new supply on record in the Greater Tokyo area in Q2 2016, the DI for current conditions deteriorated by 9 points q-o-q for sales prices and expected yields. This too was mainly due to a higher percentage of respondents answering "no change." However, there was a 3 point improvement q-o-q for vacancy rates, which means a higher number of respondents said that they would fall. In fact, the vacancy rate for Greater Tokyo LMT* properties rose in Q2 2016 because of an increase in new supply, but demand is also very healthy, with record figures for net absorption. On rents, for which the DI was almost flat this quarter, the percentage of respondents saying they will fall was 15% for one year from now, compared to 2% for six months from now. It appears that investors expect owners in areas expecting large supply to start lowering rents to attract tenants.
The latest survey was carried out around the time of the UK's referendum on EU membership. There are no concrete signs yet of any impact on investment strategy in Japan, as there were no major changes in the "strategies for investment and loans" DI, with fewer than 5% of respondents answering "reduce." Investors are likely to maintain a cautious stance towards real estate investment in the UK, at least in the short term. If investment risk in the EU rises, more overseas investors could seek more stability and switch to core investments in Japan.
To download the Q2 2016 edition of the CBRE Japan Investment MarketView, please click on the link below.
*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 DI: Diffusion index subtracts the ratio (%) of respondents that expected a “contraction (fall)” from the ratio (%) of respondents that expected an “expansion (rise).” *4 LMT = Large Multi-Tenant Properties
Transation Volume by Investor Type
Covering transactions of at least JPY1bn, excluding acquisitions by J-REITs at IPO Source：RCA, CBRE
Changes in NOI Yield
CBRE Tankan survey (DI)
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.
*1 Cap Rate
NOI cap rate: Minimum and Maximum of the range of Median, Average, Highest, Lowest and Standard deviation
NCF cap rate: Minimum and Maximum of the range of Median, Average, Highest, Lowest and Standard deviation
Some of the questions include result by respondent type.
*2 Questions Polled
Investors were asked about changes to their investment strategy after the adoption of a negative interest rates policy, and about the outlook up to 2018 for future changes in rents, real estate prices and vacancy rates in the office and industrial markets in the Tokyo and Osaka areas.
Notes to Editors:
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 June 22 and July 22, 2016.
Recipients surveyed and response rate - Recipients: 187 individuals (1675corporations) - Responses: 135 individuals (133 corporations) - Response rate: 72.2% from individuals (80.6% 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.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.co.jp