Although Tokyo’s office vacancy rate has been climbing for the past 20 months, institutional investors are not shying away from the nation’s capital. With vacancy rates on the rise and rents falling, real estate prices should typically decrease. However, in a low interest rate environment investors are content with lower yields and are paying more to secure prime real estate.
According to the Japan Real Estate Institute, the expected gross yield on real estate in Tokyo’s Marunouchi and Otemachi business districts is 3.5%, showing no change from the previous survey carried out in October 2020. This number is the median, with half of the responses being for yields below 3.5%.
The Institute believes there is a trend for prices to continue to grow based on bidding activity. Around 94% of their survey respondents said they were looking to invest.
In the year to September 2021, REITs have acquired 1.28 trillion Yen (approx. US$11.2 billion) of real estate, of which 40% were office buildings. At this pace, the annual total for 2021 is expected to reach 1.45 trillion Yen, exceeding the 1.39 trillion Yen of acquisitions made in 2020. An analyst from SMBC Nikko Securities says this is due to REITS taking this chance to improve their portfolios by switching out poor-performing assets with better ones.
Unlike the credit tightening seen in the aftermath of the 2008 global financial crisis, cheap capital is currently easily available to institutional investors. The low cost of borrowing means they can acquire lower-yielding assets and still come out ahead.
A similar story for residential
Cheap financing is also making its impact felt in the residential market, with home buyers able to obtain variable interest rates as low as 0.4%. This, along with additional tax breaks and a growing number of double-income households has been contributing to the high demand for housing, new and old, in Tokyo. Supply and inventory have been shrinking, with the same number of buyers competing for less stock.
The often-told stories of people fleeing the urban cities for a rural life away from the stresses of the pandemic are often just anecdotes, with transaction data showing buyer demand continues to be focused in urban cores with convenient access to transport, schooling and education.
Source: Nikkei Style, November 14, 2021.
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