DTZ

14 July, 2010

DTZ Debenham Tie Leung K.K., a global property adviser, has issued a quarterly property market report, “Property Times Tokyo/Osaka – Quarter 2 2010”. The report contains office market overview of Tokyo and Osaka, as well as the trend of economy and real estate investment market in the second quarter of 2010.

Summary of the Report

• The Tokyo office market remained weak during Q2 2010. Tokyo CBD grade A office vacancy marginally rose by 0.09 percentage points from the previous quarter to 6.98%. The rise was the first since Q2 2009. Rents fell further by 0.4% from Q1 2010 to JPY 29,235 per month per tsubo on an asking basis; however the pace of decline slowed. Landlords have succeeded in reducing available space since last September by offering lower rents. However, the market has stagnated and likely postponed the adjustment period in the market cycle. Our outlook for grade A remains the same; vacancy begins to decline soon again and rents on a gradual decline at least until the end of 2010. However, concern remains as to the extent of the recent debt crisis which may lead to a global double dip, which will affect the office market. Without a sustainable economic recovery followed by an improvement in corporate performance, the real upturn in the office market will not be realised.
• Grade A office vacancy in the Osaka CBD for Q2 2010 reached over 10% as it rose by 1.24 percentage points from the previous quarter to 10.24%. This was the eleventh consecutive quarterly gain. Rents declined by 0.4% q-on-q or 1.7% y-on-y to JPY 15,963 per tsubo per month. The leasing market in Osaka further deteriorated. Some buildings are left without tenants more than a year after completion. In addition to the vacancies of existing buildings, new supplied space is expanding availability. With little demand, we assume the market turnaround needs more time to be realised.
• The investment market in Q2 2010 remained very slow with little improvement compared to the previous quarter. Despite the increasing investor appetite especially from those with available equity, a lack of investable properties provides little liquidity. Asian based investors, especially new entries with a core investment strategy remain keen on the Japanese market. These investors have been looking for suitable assets above JPY 5 billion, however they have often found difficulties in matching the yield level and have passed up purchasing opportunities. Total investment volume in Q2 2010 fell 57% from Q1 2010, while the volume in Q1 2010 more than doubled q-on-q likely due to the fiscal year-end effect.
• The REIT market had been on a gradual recovery trend until the European debt crisis occurred. The TSE REIT Index fell by 7.7% from three months ago to 875.31 at the end of June, while it recorded 999.13 at the end of April, almost reaching 1,000. The market capitalisation also shrank by 4.5% to JPY 2.82 trillion. Further mergers were agreed in this quarter and this will reduce the total number of listed REITs from 42 during the peak to 35 by the end of 2010. Due to these M&As, some REITs have improved their credibility and succeed in refinancing, while some utilise negative goodwill, enabling the sales of holding assets without the dividend loss. Both the public offering and the new issuance of investment corporation bonds since last year have also activated the market.

Yoshiki Kaneko, CEO of DTZ Japan comments, “The global economic recovery has been continuously supported by the Asian countries including China. The real estate market has also seen the emergence of Asian investors, in addition to the existing European players. Those Asian investors have recently started showing specific interests in the Japanese market. Although the market still lacks liquidity, core investor’s purchasing activity for selected properties is expected to increase towards the end of the year”.