CBRE Releases Q1 2018 Japan Investment MarketView

Global Commercial Real Estate Transaction Volume Rises 1.3% y-o-y to US$ 208 billion
While Transaction Volume in Japan Falls 23% y-o-y to JPY 1.07 trillion, J-REIT Transaction Volume Hits Record High
All Six Regional Cities Record Survey's Historic Low for Offices Expected Yield

Tokyo, May 22, 2018 - CBRE today released its 59th CBRE Japan Cap Rate Survey along with the Q1 2018 edition of its Japan Investment MarketView. (The methodology of the survey is detailed at the end of this release.)

Summary

• Global commercial real estate investment transaction volume reached US$ 208 billion in Q1 2018, up 1.3% y-o-y.
• Meanwhile, transaction volume in Japan fell 23% y-o-y to JPY 1.07 trillion during the same period, mainly due to a 76% y-o-y drop in transaction volume by overseas investors. However, acquisitions by domestic investors were up y-o-y, accounting for 90% of total transaction volume. Investment by J-REITs rose 2% y-o-y to JPY 583 billion, the highest quarterly volume recorded since CBRE's surveys began in 2005.
• CBRE's latest investor survey found that expected yield for offices in Tokyo (Otemachi) fell 10bps q-o-q to 3.45%, while expected yield for multi-family apartments (Tokyo South, Tokyo East) also fell 1bps to 4.44%. Similarly, expected yield for logistics facilities (Tokyo bay area) was also down by 1bps q-o-q to 4.63%. In all cases, these are record lows since CBRE's surveys began. Beyond Tokyo, expected yield for offices in all six surveyed cities (Sapporo, Sendai, Nagoya, Osaka, Hiroshima, Fukuoka) also hit the survey's record low.
• CBRE's latest Tankan survey found that the Tokyo Grade A Offices Diffusion Index (DI) showed that investors see limited scope of further drop in expected yield. The DI for Large Multi-Tenant Logistics Properties saw a deterioration for vacancy rate, while the DI for respondents' stance towards investment and loans improved. Although there is still concern that vacancy rates may rise due to ongoing large-scale supply, investment appetite is improving.

■ Investment market
Global commercial real estate transaction volume was US$ 208 billion in Q1 2018, up 1.3% y-o-y. Transaction volume in the Americas rose slightly in Q1 2018, reporting y-o-y growth of 2.3%, while the volumes were stable in Asia Pacific (US$ 26 billion, +0.7% y-o-y) and EMEA (US$ 70 billion, +0.1% y-o-y). The U.S. saw US$ 108 billion worth of transactions, representing 52% of the global total, up 3.8% y-o-y, led by hotel and multifamily acquisitions.

Transaction volume in Japan (deals worth JPY 1 billion or more) fell by 23% y-o-y to JPY 1.07 trillion in Q1 2018. Nevertheless, it was the third largest first quarter total since 2009. Weaker purchasing by overseas investors, which fell 76% y-o-y to JPY 117 billion, was the main reason behind the overall fall in transaction volume. Purchasing activity was driven by domestic investors, which was up 13% y-o-y, and accounted for 90% of total transaction volume. Investment by J-REITs rose 2% y-o-y to JPY 583 billion, the highest quarterly level since the start of CBRE's surveys in Q1 2005.

Hotels, logistics facilities, and offices all saw y-o-y growth in transaction volume. Hotels saw the biggest increase (+84% y-o-y to JPY 69 billion) due mainly to a J-REIT's JPY 34 billion acquisition of a hotel in Osaka, which accounted for almost half of total transaction volume. The second largest increase was for logistics facilities, which rose 66% y-o-y to JPY 253 billion, marking the highest first quarter transaction volume since the survey began in 2005. Transaction volume for offices rose 10% y-o-y to JPY 504 billion.

The region with the highest share of transaction volume in Q1 2018 was the central five wards at 39%, significantly higher than 19% in Q1 2017 and also higher than its 30% share for full-year 2017. Investment in regional cities also remained solid. Although transaction volume fell in Osaka, volumes were up y-o-y in Nagoya and other regional cities, and their share of overall transaction volume (2% and 18%, respectively) also exceeded the previous year’s level. Regional cities saw a high number of deals for hotels and logistics facilities, with almost all involving acquisitions by J-REITs.

■ Expected yields
CBRE's latest Cap Rate Survey published in April 2018 found that the average¹ expected yield (NOI² basis) for offices in Tokyo (Otemachi) fell 10bps q-o-q to 3.45%, while expected yield for multi-family apartments (Tokyo South, Tokyo East) also fell 1bps to 4.44%. Similarly, expected yield for logistics facilities (Tokyo bay area) was also down by 1bps to 4.63%. In all cases, these marked the lowest levels since CBRE's surveys began³. Since July 2017, expected yield for retail (Tokyo Ginza Chuo Dori) had been lower than for offices, but for the first time in four quarters offices are now the lowest. Expected yield for the other three asset types was unchanged from the previous quarter. Additionally, expected yield for offices in regional cities was lower than the previous quarter in all six surveyed cities, recording the lowest levels for these cities since surveys began. The figures are as follows: Osaka 4.90% (–10bps), Nagoya 5.30% (–5bps), Sapporo 5.40% (–18bps), Sendai 5.50% (–10bps), Hiroshima 5.83% (–5bps), and Fukuoka 4.98% (–12bps).

■ CBRE Tankan survey
CBRE's April 2018 Tankan survey asked respondents to compare current office market conditions to three months ago, with results collected as Diffusion Indices (DI)⁴. Topics were: 1) trading volume, 2) sales prices, 3) NOI (or rents and vacancy rates for logistics facilities), 4) expected yield, 5) lending attitude of financial institutions, and 6) stance on investment and loans. For Grade A office buildings, the DI for current conditions improved for the lending attitude of financial institutions, but worsened for the other five questions. The biggest deterioration – in expected yield (–6pts q-o-q) – was mainly due to a drop in those answering that the yield will compress further, and a rise in those answering that yields will remain the same. At the same time, only a small number of respondents think that trading volume will increase, as can be seen from the 1pt q-o-q drop in the DI for trading volume. This indicates a continuation of the challenging trading environment, with limited investment opportunities.

For large logistics properties (multi-tenant-type), the DI for current conditions compared with six months ago worsened for all questions except "expected yield" and "stance on investment and loans" (flat for "expected yield"; up 3pts q-o-q for "stance on investment and loans"). There was an increase in those answering that the vacancy rate would increase. Meanwhile, the DI for "stance on investment and loans" improved for the second consecutive quarter. There appears to have been an increase in the number of investors who are concerned about a rise in the vacancy rate, mainly due to large-scale supply. However, investment appetite remains strong, on the back of solid leasing demand for large logistics facilities, as well as ongoing favourable funding conditions.

The Q1 2018 edition of the CBRE Japan Investment MarketView is available for download at:
https://www.cbre.co.jp/en/research-reports/investment-reports

<sup>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. The survey started covering different asset types in different years – July 2003 for offices and residential; January 2009 for retail, hotels, and industrial.
4. DI: Diffusion index subtracts the ratio (%) of respondents that expected a "contraction (fall)" from the ratio (%) of respondents that expected an "expansion (rise)."</sup>

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.

Note to Editors:
CBRE Japan Cap Rate 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 March 15 to April 11, 2018.
3. Recipients surveyed and response rate

   - Recipients: 179 individuals (163 corporations)
   - Responses: 136 individuals (134 corporations)
   - Response rate: 76.0% from individuals (82.2% 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.

The report is available for download at:
https://www.cbre.co.jp/en/research-reports/investment-reports

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