CBRE Releases Q4 2016 Japan Investment MarketView

Tokyo, February 15, 2017 - ​​CBRE today released its 54th Quarterly Survey on Japanese Real Estate Investment along with the Q4 2016 edition of its Japan Investment MarketView. The methodology for the survey is detailed on page 8 of this release.

Summary

• Transaction volume fell by 20% y-o-y to JPY 2.9 trillion in 2016, the second consecutive year-on-year decline. However, Q4 2016 saw the first quarterly y-o-y increase in six quarters as investors continued to show a strong appetite.
• In Tokyo, the expected yields for office, industrial, and studio-type apartment sectors all fell to a record low. Nevertheless, the rate of the decline slowed in 2016.
• CBRE Tankan survey: Tokyo Grade A offices DI deteriorated for all items, with some change in the lending attitude of financial institutions
• The survey began coverage of expected yields (IRR) for solar power generators, in which 23% of respondents said they have invested or were considering an investment.

Investment m​arket

The total value of real estate investment transactions (worth JPY 1 billion or more) in Japan in 2016 declined by 20% y-o-y to JPY 2.9 trillion. J-REITs were the most active investors, completing JPY 1.3 trillion worth of acqusitions, a decline of 3% y-o-y, but still accounting for 43% of the overall total. Acquisitions by other Japanese investors decreased by 32% y-o-y to JPY 1.1 trillion, a 37% share, and those by overseas investors fell 24% to JPY 579 billion, a 20% share.

Despite the favourable funding environment, which ensured investor appetite remained solid, the value of transactions declined in 2016 as a whole, mainly because of the lack of properties for sale, especially in central Tokyo. There were also some cases where the pricing gap between buyers and sellers impeded the deals to be completed. However, transactions in Q4 2016 rose by 15% y-o-y to JPY 777 billion. This was mainly due to the completion of a few relatively large deals involving industrial and office properties. This y-o-y rise in quarterly transaction volume was the first since Q3 2015. Because of the large volume of supply scheduled to be completed 2018 onwards, there are concerns that rents for central Tokyo offices and for Greater Tokyo Area industrial properties could weaken. Consequently, more properties are likely to be offered for sale in order to lock in gains. With investors' appetite for acquisitions still strong, transactions in H1 2017 could increase y-o-y.

Investment in regional cities remained robust this quarter. The total value of acquisitions in regional cities (excluding Osaka and Nagoya) increased by 12% y-o-y to JPY 617 billion, the second highest total after the JPY 900 billion recorded in 2007. This accounted for 22% of overall transactions which is the highest share since the survey began. J-REITs completed 49% of overall acquisitions in regional cities. By asset type, hotels were the most popular, accounting for 30%, while shopping malls and other retail properties accounted for 29%. During the quarter, the volume of transactions fell 32% y-o-y to JPY 253 billion in Osaka, and rose by 2.3% to JPY 67 billion in Nagoya. The decline in transaction volume in Osaka was mainly due to a fall in the number of large deals worth more than JPY 20 billion.

Expected yi​elds

CBRE's latest quarterly survey (as of January 2017) found that average*  expected yields in Tokyo based on NOI*  declined q-o-q for three out of six sectors while the other three remained unchanged. Expected yields were the lowest for offices (Otemachi), which fell 5 bps q-o-q to 3.60%, followed by retail (Ginza Chuo Dori), which was unchanged at 3.65%. Apart from offices, declines were also recorded for industrial (multi-tenant) properties, for which expected yields fell by 5 bps q-o-q to 4.75%, and studio-type apartments, which fell by 3 bps to 4.45%. Expected yields for all sectors in Tokyo are now at their lowest level since CBRE's surveys began. However, they have remained unchanged for at least two consecutive quarters for retail and residential (multi-room) properties.

The pace of decline in expected yields in regional cities slowed somewhat this quarter. However, yields are still above their all-time lows, except in Fukuoka. Expected office yields declined by 5-7 bps q-o-q in Sapporo, Sendai and Osaka, while Nagoya, Hiroshima, and Fukuoka were unchanged. While there are signs that further decline in expected yields for Tokyo offices is limited, yields in regional cities, where occupier markets are likely to remain tight, could continue to fall.

Beginning in Q4 2016, CBRE added solar power generators to its survey. Marking its first record, 23% of respondents said that they had invested, or were considering investing in solar power. Only a limited number of real estate investors have so far entered the investment market for solar power generators to date. However, the market is expected to become more transparent in the coming years, especially since the establishment of the Infrastructure Fund Market in 2015. As the feed-in tariff for electricity falls, an increasing number of investors are investing in existing infrastructure to expand operations while maintaining cash flow income. According to the survey, the average expected yield (IRR) on existing projects was 4.75%. Yields are likely to decline as the number of transactions in existing infrastructure increases.

(CBRE has offered appraisal and consulting services for solar power generation since 2013, and will continue to help the market expand and become more transparent.)

CBRE Tankan survey

CBRE's January 2017 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 deteriorated for all six questions for the third consecutive quarter. The greatest deterioration was in the DI for the lending attitude of financial institutions, which was seven points lower than in the previous quarter. This was due to a decline in the number of respondents answering "favourable" and a rise in the number answering "not too unfavourable." This is likely to be because, given the shortage of properties for sale, especially prime properties, transactions are occuring in more diverse sectors, and consequently it is taking longer for lending decisions to be made on some properties. For large logistics properties (multi-tenant-type), the DI for current conditions improved by 3 points q-o-q for expected yields and by 1 point q-o-q for strategies for investment and loans, but deteriorated for all other questions.

Having begun to deteriorate in H2 2015, some DIs deteriorated by 10 points or more in 2016, but this was because of an increasing sense that markets had peaked and because there were no longer any remarkable changes in the transaction market. While investors' appetite remains strong overall, a considerable number of investors are concerned about a fall in prices or turnaround in the transaction market. This is because the high volume of supply scheduled in the rental market for 2018 and beyond has begun to cast a shadow over the outlook for cash flow growth.

To download the Q4 2016 edition of the CBRE Japan Investment MarketView, please click on the link below. http://www.cbre.co.jp/JP/research/Pages/MarketViews.aspx​

^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).”

Transaction Volume by Investor Type

Covering transactions of at least JPY1bn, excluding acquisitions by J-REITs at IPO 　Source：RCA, CBRE

Changes in NOI Yield

Source: CBRE

CBRE Tankan survey (DI)

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NOI Yield

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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 NOI / NCF Cap Rate, Project / Equity IRR

• 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

• Questio​​ns were asked on topics for the Real Estate Investor Survey on overseas investment, which is carried out by CBRE Global Research.

Notes to Editors:​
Quarterly 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 15, 2016 to January 13, 2017.
3. Recipients surveyed and response rate
   - Recipients:  194 individuals (178corporations)
   - Responses:  142 individuals (139 corporations)
   - Response rate:  73.2% from individuals (78.1% 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. 

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Press Release

Q4 2016 edition of its Japan Investment MarketView
54th Quarterly Survey on Japanese Real Estate Investment​
 

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