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Japanese Commercial Real Estate Overcoming Setbacks

08/15/2012 | By Carisa Chappell

Japanese Commercial Real Estate Overcoming Setbacks

Commercial real estate fundamentals in Japan appear to be picking up steam after setbacks to the market in 2011.

The earthquake in Japan and floods in Thailand a year ago posed near-term risks to the Japanese market's health. In 2012, however, the country's industrial sector has helped lead the resurgence.

"The Japanese retail commercial real estate market is now bottoming out," said Takuya Kuga, president and CEO of the Japan Retail Fund Investment Corporation, in an interview with REIT.com.

During the second quarter of 2012, the vacancy rate in greater Tokyo's large logistics facilities decreased 0.9 points to 3.6 percent, according to research firm CBRE Group Inc. It marked the fourth consecutive quarter in which the vacancy rate had dropped.

"In Tokyo, amid firm demand at high-grade buildings coupled with a shortage of supply, the vacancy rate continues to improve, and rents are trending towards an increase," said Junichi Taguchi, managing director of industrial services at CBRE.

Kuga noted that the transactions market has shown signs of life, too. For example, Singapore-based Global Logistics Properties (SGX: GLP) partnered with the sovereign wealth fund China Investment Corp. in December 2011 on a $1.6 billion purchase of 15 industrial properties from LaSalle Investment Management.

"I believe more and more investors are looking to [the industrial] sector with a 5 to 6 percent yield and a stable cash flow based on the long-term lease," Kuga said.

Despite a small upturn in vacancies, Japan's office sector is also healthy, according to observers. Grade-A office development in Tokyo is also growing, with an influx of new supply having come on the market in the second quarter. CBRE noted that vacancies rose slightly to 7.9 percent in the second quarter due to the new supply, but the research firm said it expects demand to increase going forward.

The vacancy rate doesn't appear to have had a dramatic effect on office rents, either. In a July 2012 report, CBRE ranked Tokyo third among the world's most expensive office markets.

"Greater Tokyo has a population of 32 million, which is still growing by 0.5 percent annually," Kuga said. "Tokyo is still the largest international city in the world, which is creating a unique attraction every day."

Looking ahead, Taguchi said leasing is "proceeding smoothly" for buildings scheduled to come online in the second half of 2012 and he expects the tight supply-demand dynamic to continue. Additionally, Kuga said stable labor income in Japan and growing household consumption rates provide encouraging signs for investors.

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