Regional Japanese office rents rise but vacancies "extremely tight": Savills

Vacancy rate in Fukuoka is the lowest among all regions at 0.3%.

According to Savills, amid the ongoing global pandemic, the pace of high-grade rental growth has expectedly slowed. Yet, the fact that growth is continuing at all provides some comfort, at least for now. Though the tenant profile found in this segment is better equipped to endure, the uncertainty surrounding the longevity of the outbreak remains a key concern.

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To be sure, airtight vacancy rates across all major regions and sound office demand, backed by healthy corporate profits, have been significant factors behind the steady rental growth up to this point. That said, rates have unsurprisingly started to creep up lately, including in the capital.

Despite this slight uptick, the vacancy rate in Fukuoka remains extremely tight at 0.3% — the lowest amongst the major regions. Elsewhere, having had close to no vacancy last period, Nagoya saw the most change this time around, with rates rising to 0.8% (Graph 1). 

As for rents, growth was strongest in Fukuoka in 1H/2020. Meanwhile, with growth in Osaka lagging behind its peers, the spread in high-grade rents compared to Tokyo widened. Office rents in the capital are now almost 64% higher following a 1.8 percentage point (ppts) expansion.
ALL-GRADE OFFICES

Much like its high-grade counterpart, the allgrade market continues to be underpinned by tight supply, albeit not to the same extent. In contrast to the broader market, vacancy rates in Sapporo experienced a slight year-on-year (YoY) tightening of 0.3ppts and, as a result, the city has the lowest rate amongst the regions at 2.0%.

Likewise, the momentum in rental growth has continued this period. Unlike the higher-grade segment, however, the pace has quickened in all but Sapporo. Growth in Fukuoka was particularly impressive at 7.0% YoY. Sendai, however, lagged with rents rising by only 2.0% YoY.

The disparity in rents compared to the capital was more pronounced in the all-grade market in 1H/2020. Specifically, rents in Tokyo stand at a 90% premium to the next most expensive, Osaka.

REGIONAL INVESTMENT

According to the bi-annual investor survey conducted by the Japan Real Estate Institute (JREI) in April 2020, cap rates in most submarkets tightened slightly over the year. Sendai and Nagoya witnessed the most change, with both cities experiencing a 0.2% narrowing.

Across the regions, rates continue to be around the 5% mark. In Tokyo, meanwhile, they are much tighter, lying closer to 4%. That said, considering the survey was conducted during the initial stages of COVID-19, when the extent of the crisis had yet to be fully understood, the market’s outlook may be more pessimistic in reality.

Total real estate investment volumes for 1H/2020 totalled around JPY2.1 trillion, according to data from Real Capital Analytics (RCA) – a near 25% decline compared to the same period last year.

In terms of investment flows into specific regions, Fukuoka, Tokyo and Sendai, in that order, saw the greatest falls, with Fukuoka, for instance, experiencing a 50% drop. In contrast, both Sapporo and Nagoya saw a 25% uplift in inflows. AXA Investment Managers’ JPY20 billion purchase of Royal Parks ER Sasashima – a large mixed-use apartment in Nagoya – no doubt contributed towards a significant share in the latter.

Other than Tokyo, Osaka attracted the largest volume of inflows in 1H/2020. Investment in the city rose by around 7% YoY to JPY320 billion, which includes the JPY32.8 billion purchase of Midosuji Front Tower by M&G Real Estate in April 2020.

Broadly speaking, the residential sector was the standout asset class during 1H/2020, with investments more than doubling YoY. Moreover, it was the only asset class to have experienced an increase in investment over the period.

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