Expected Yields for Offices Fall Below 4.0% for First Time Since 2008
Expected Yields for Offices Fall Below 4.0% for First Time Since 2008
November 12, 2014
Investment market remains active; foreign investors more prominent
CBRE released today its 45th Quarterly Survey on Japanese Real Estate Investment along with the Q3 2014 edition of its Japan Investment MarketView. The objective of the survey is to look at the latest investment real estate market through data including expected yields and others. The July 2014 survey polled 226 investors and had 150 respondents.
The expected yield for offices (Otemachi, Tokyo) declined by 15 basis points (bps) compared to the July 2014 survey, falling to 3.95%, the first time since April 2008 it has dropped below 4.0%
The expected yield for hotels in Tokyo’s 5 central wards declined significantly from last quarter, falling 33bps to 5.75%
The CBRE Tankan survey for Tokyo offices shows the Diffusion Indices (DI) increased for NOI*1, expected yields, and stance on investments and loans
The CBRE Tankan survey for large-scale multi-tenant logistics facilities in the metropolitan area shows the DI for expected yields increased significantly
Total Q3 investment volume was down y-o-y but J-REITs and overseas investors exceeded last year’s level by 5% and 13%, respectively
According to CBRE’s latest Investor Survey, expected yields were the lowest for Otemachi offices, where they were down 15bps q-o-q to 3.95%, marking the first time since April 2008 that yields were under 4.0%. Ginza high-street retail was flat q-o-q at 4.15%, but residential studio-type apartments were down 5bps q-o-q to 4.90%, and like offices, are approaching their lowest level since before the 2008 financial crisis. Additionally, hotels (Tokyo’s 5 central wards, management type) were down 33bps to 5.75%, the largest decline of any asset class. This is due to a variety of factors including the weak yen drawing in foreign tourists; the tight supply/demand balance; and large transactions such as the acquisition of the Tokyo Bay Maihama Hotel, all of which are believed to have reduced investors’ assessment of yields. Cities other than Tokyo also showed a continued decline in expected yields this quarter. Osaka and Nagoya dropped by around 10bps q-o-q, while Sapporo, Sendai and Fukuoka recorded decreases in the 15bps to 25bps range. Fukuoka recorded the largest drop among regional cities with a range of 5.75% - 6.00% and an average of 5.88%, down 25bps q-o-q.
CBRE Tankan: Investor sentiment remains strong
The survey also includes the CBRE Tankan (investment market condition survey) on offices and logistics facilities, where respondents were asked to compare current conditions over the preceding three months (with the results collected as Diffusion Indices* ). Topics included: 1) real estate trading volume, 2) sales price, 3) NOI (rents and vacancy rates for logistics facilities), 4) expected yields, 5) lending attitude of financial institutions, and 6) stance on investment and loans. For Grade A offices, improvement was seen in NOI, which rose four points; expected yields, which rose by three points; and stance on investment and loans, which rose nine points. For non-Grade A offices, sales prices saw an increase of two points in addition to the topics which increased for Grade A properties. Meanwhile, multi-tenant logistics facilities saw the value for rents increase by five points, and expected yields increase by 13 points, but real estate trading volume was down 10 points.
The survey shows that for both offices and logistics facilities, investors expect increases in both NOI and rents, as well as declines in expected yields, reflecting positive sentiment. For offices, investors also expect the trend to continue for the next six months. For logistics facilities, there were more investors, compared to the previous survey, who expected vacancies to rise, reflecting some concern about the large volume of new supply coming online in the second half of 2015.
Transactions: Foreign investors more active
Data collected by CBRE involving J-REIT transactions and other published deals (those worth at least \1 billion, excluding J-REIT acquisitions at IPO) show that the total value of investment real estate transactions in Q3 2014 (Jul - Sep) was \1.07 trillion, down 25% y-o-y. J-REITs and foreign investors were more active this quarter, with transaction volume of deals completed by J-REITs seeing an increase of 5.0% y-o-y to \373 billion (those worth at least \1 billion, excluding acquisitions at IPO), and the deals by foreign investors increasing by 13% to \251 billion. Japanese investors excluding J-REITs accounted for a total transaction volume of \449 billion, a decline of 48% y-o-y. Of note, total volume sold by overseas investors in the year to Q3 2014 is already nearly equal to the total for 2013, and investment during the same period also accounted for approximately 80% of last year’s total, reflecting an increase in the presence of foreign investors in the marketplace.
With a shortage of assets available for sale in central Tokyo, investors are looking to fringe areas and regional cities for opportunities. While this quarter saw a decline of 46% y-o-y for deals in Tokyo’s five central wards, Tokyo’s other 18 wards, and Nagoya, saw an overall increase on a y-o-y basis. By asset type, only logistics facilities saw an increase over the previous year. The total transaction volume for logistics facilities was \224 billion, an increase of 67% y-o-y, accounting for 21% of the overall total, second only to office buildings. The total investment amount by foreign investors for the quarter was up 13% y-o-y to \251 billion.
The official survey results are downloadable in PDF format from our website (www.cbre.co.jp).
As this survey covers many unpublished items, full results are only provided to respondents. See the list of surveys below for details.
Notes to Editors:
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 July 1 and July 18, 2014.
3. Recipients surveyed and response rate
Recipients: 214 individuals (194 corporations)
Responses: 150 individuals (150 corporations)
Response rate: 70.1% from individuals (77.3% 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.
Download a PDF version of the press release here.
*1 Diffusion index (DI) subtracts the ratio (%) of respondents that expected a “contraction (fall)” from the ratio (%) of respondents that expected an “expansion (rise)” for all six items, including expected yields, selling price and trading volume, for office buildings in the major areas of Tokyo. A positive DI means that the number of respondents that answered “expansion (rise)” exceeded the number that answered “contraction (fall).” Topics of the office survey include: 1) real estate trading volume, 2) sales prices, 3) NOI, 4) expected yields, 5) the lending attitude of financial institutions, and 6) stance on investment and loans. Topics of the industrial survey include 1) real estate trading volume, 2) sales prices, 3) rents, 4) vacancy rates, 5) expected yields, 6) the lending attitude of financial institutions, and 7) stance on investment and loans.
*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).
About CBRE Group, Inc.
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 (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.