Structural Changes Enhance Investment in Japan’s Regional Markets

​Tokyo, July 23rd, 2015 - CBRE published today a major report: Beyond Tokyo – What’s Ahead in Japan’s Regional Markets?, analyzing investment activity across Japan’s regional markets, and discussing long-term diversified real estate investment opportunities.  The report also discusses structural changes that are gradually impacting ex-Greater Tokyo interest in logistics, hotel, and healthcare sectors.

Key Highlights

• Total J-REIT investment in regional cities continued to rise in 2014 to JPY 366 billion, the highest amount to date.
• The yield gap between central Tokyo and regional markets has been narrowing since 2012
• Investment asset types are broadening across regional cities.
• Structural changes, including inbound tourist demand, e-commerce, and the ageing society are more pronounced outside of Greater Tokyo, driving demand in the logistics, hotel and healthcare sectors.

The most recent CBRE Quarterly Investment Survey found that more investors are interested in regional cities.  The proportion of respondents naming regional cities outside of the Greater Tokyo Area as “the most preferred city for investment” surged from 5% of all respondents in April 2014 to 23 in April 2015.  Some regional office markets saw a faster recovery in the supply/demand balance than Tokyo did, which was a catalyst for some investors to look more closely at regional cities.  In addition, office vacancy rates in major regional cities are approaching their lowest levels or have reached their lowest level in 10 years.  The total transaction value in 2014 (ex-Greater Tokyo) stood at JPY 1.05 trillion, up 103% y-o-y, and representing the second largest amount since 2007 when the transaction value was JPY 1.34 trillion.  Although 2014 volume dropped to JPY 866 billion, the figure was more than double the annual average of JPY 381 billion during the 2009 to 2012 period.  In addition, the number of transactions in regional cities as a percentage of total transactions has consistently risen since 2011; in 2014 it rose 4 points y-o-y to 35%.

To date, the most popular types of assets for investment in regional cities have been office and retail buildings. Combined, the two asset types accounted for more than 70% of the investment share from 2005 to 2010, before declining to around 60% today.  This indicates that investor interest in other asset types is broadening.  Looking at the number of transactions, office and retail together accounted for an average of 59% of all investment transactions in regional cities from 2005 to 2010.  However, since 2011, their share has slipped to 51%, while other asset types such as residential and hotels are increasing their market presence.  While yield compression has been seen in the office and retail sectors, mainly caused by increasing competition in the Greater Tokyo Area and in regional cities, investors are becoming more interested in other asset classes.

The real estate investment market in regional cities is gradually recovering and should continue to do so in the coming years.　 Structural changes, including the increasing inbound tourist demand, growth in e-commerce, and accelerating ageing society are becoming more pronounced outside of Greater Tokyo.  These changes have become a new demand driver in the logistics, hotel and healthcare sectors which is now gradually spreading to regional cities.  CBRE expects that more investments focusing on structural changes, in addition to cyclical-oriented approaches, will encourage investors to look into much broader asset types and further enhance investment in regional markets, thus improving liquidity in these markets.

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