Japan ViewPoint - Pandemic Era Office Investment September 2021

OFFICE YIELDS REMAIN LOW DESPITE WEAKER LEASING

• Since the onset of the COVID-19 pandemic, the Tokyo investment market has seen several office transactions with the same or lower yields than prior to the pandemic, due to intensifying competition for office assets. 
• However, there are concerns that the supply-demand balance will ease in the future due to large-scale new supply in Tokyo. CBRE has categorised the properties that are trading at low yields into three types, despite these subdued market conditions.
• The first type is properties whose cash flow is expected to remain stable in the long term. The second type is properties whose in-place rents are seen to be below current market levels. The third type is properties where an increase in cash flow can be expected through redevelopment.
• There have been a number of transactions for Grade B buildings at yields below 3%. One reason for this is that investors believe that Grade B buildings are less likely to be affected by future new supply in Tokyo.
• Paradoxically, however, CBRE believes that should there be signs of pandemic approaching an end, office yields could slightly decompress due to reducing competition for offices that have performed well since the pandemic.
• However, transactional yields may generally remain low for offices as the popularity of office acquisitions is unlikely to change significantly. That said, office demand is expected to evolve in line with changes in working styles. Apart from buildings in central Tokyo that will serve as the nucleus, offices that should continue to attract investor interest will include those in the surrounding areas that are equipped not only with solid hardware, but also which are managed to promote and support more flexible working styles.