Transaction Volume Falls for Fifth Consecutive Quarter; Expected Yields Decline Overall But Remain Flat for Tokyo Offices and Retail
Tokyo, November 16, 2016 - CBRE today released its 53rd Quarterly Survey on Japanese Real Estate Investment along with the Q3 2016 edition of its Japan Investment MarketView. (The methodology for the survey is detailed on page 7 of this release.)
Transaction volume in Q3 2016 fell by 18.5% y-o-y to JPY 786 billion, marking the fifth consecutive year-on-year quarterly decline.
CBRE's investor survey found that expected yields in Tokyo were flat for offices and retail, but fell 20bps q-o-q for hotels, bringing it lower than for industrial properties.
CBRE Tankan survey: Tokyo Grade A offices DI deteriorated for all items for the second consecutive quarter.
Investment market: Few opportunities in central Tokyo, volume increases in regional cities
The total value of real estate investment transactions (worth JPY 1 billion or more) in Japan in Q3 2016 declined by 18.5% y-o-y to JPY 786 billion. By type of investor, acquisitions by J-REITs and overseas investors rose y-o-y, by 14% and by 18.8% respectively. However, the value of acquisitions by non-J-REIT domestic investors fell by 51.9% y-o-y to JPY 235 billion. Total transaction volume has now declined y-o-y for five consecutive quarters since Q3 2015. While investors remain keen to invest and the funding environment is still favorable, buyers are struggling with the lack of investment opportunities.
Transactions in regional cities (including Osaka and Nagoya) declined by 13% y-o-y to JPY 264 billion, approx. 60% of which were investments by J-REITs. While transaction volume also dropped y-o-y in regional cities, they accounted for 38.8% of all transactions, the second highest share since 2013, exceeded only by 44.2% recorded in Q4 2015. By asset type, residential, hotel, and healthcare properties saw y-o-y increases in transaction value. Of the total value of transactions during the first three quarters of 2016, offices and retail saw their share decline, while the shares of all other asset types rose. The period saw a particularly large rise in the share of hotel properties, from 7.7% in the first three quarters of 2015 to 15.1% in the first three quarters of 2016.
Expected yields: All sectors reach record lows in Tokyo; hotel yields fall below industrial properties
CBRE's latest quarterly survey (as of October 2016) found that average* expected yields (based on NOI* ) declined in Tokyo for three out of six sectors, and were flat for the other three. Expected yields were the lowest for offices (Otemachi) and retail (Ginza Chuo Dori) at 3.65% for both, unchanged q-o-q. The steepest decline was for hotels (in Tokyo's central five wards; management contract-type), for which expected yields fell by 20 bps q-o-q to 4.75%, bringing it below those for industrial (multi-tenant), which fell by 5 bps to 4.8%. In Tokyo, expected yields for all sectors are at their lowest levels since CBRE's surveys began in July 2003. However, the office and retail occupier markets have seen prime rental growth stall. With rents potentially starting to decline within the next several quarters, further compression in yields for these major asset types in central Tokyo are likely to be limited.
Expected yields for offices declined by 5 bps q-o-q to 5.3% in Osaka and by 9 bps to 5.55% in Nagoya. In regional cities, rental office markets are expected to remain tight, as new supply is limited. Most deals for office buildings in regional cities have taken place in Osaka, but investors are likely to start considering a broader range of cities. While further compression may be limited in expected yields for Tokyo offices, yields in regional cities should continue to fall.
CBRE Tankan survey: DI for offices and industrial properties both deteriorated
CBRE's October 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 for current conditions decreased for all six items for the second consecutive quarter. The greatest deterioration was in the DI for expected yields, which was eight points lower than in the previous quarter. (A 'deterioration' in the DI for expected yields indicates a decrease in the number of respondents saying expected yields will fall and an increase in the number saying yields will be the same or higher.) For logistics properties (multi-tenant-type), the DI for current conditions improved by four points q-o-q for expected yields, but deteriorated for all other items.
The deteriorating trend in the DI for current conditions in 2016 is due to an increase in the number of respondents answering "no change." Investors believe that declining trading volume, despite the positive lending attitude of financial institutions, implies that sales prices remain high. Investors are optimistic about their strategies for investment and loans, expecting to maintain or increase them. However, the forward-looking DIs for "one year from now" and "two years from now" has deteriorated. Around 60% of respondents answered "no change," but the number of pessimistic responses was slightly higher than in the previous survey. The deterioration in the DIs for Grade A office buildings was due to an increase in the number of respondents expecting sale prices to fall due to lower NOI. For industrial properties (multi-tenant-type), fewer respondents expected vacancy rates to fall, reflecting people’s reactions towards frequent new supply announcements and theirless optimistic outlook about occupancy levels.
To download the Q3 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).”
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
Questions asked about the position in the investment market cycle "now" (as of the survey date) and "one year from now" in sixteen stages, covering three criteria (trading volume, transaction prices, and NOI) for each sector in Tokyo and the Greater Tokyo area: office buildings (large), multi-family residential (studio-type), retail (city center stores), hotels (based on lease contract), and industrial (multi-tenant).
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 September 21 and October 7, 2016.
Recipients surveyed and response rate ・Recipients: 183 individuals (166corporations) ・Responses: 141 individuals (139 corporations) ・Response rate: 77.0% from individuals (83.7% 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