Tokyo residential rents slip 0.4% in Q2 after strong rental growth streak

This mild pullback could be the initial blow of a bearish multi-family leasing market, according to Savills.

Savills notes that rents in the Tokyo 23 wards (23W) saw a slight pullback during Q2/2020, now standing at JPY4,138 per sq m – a decrease of 0.4% quarter-on-quarter (QoQ), but still 3.0% higher year-on-year (YoY).

Here’s more from Savills’ Q2 Residential Leasing Report:

In order to illustrate trends in the central Tokyo residential market, Savills has segmented Tokyo’s 23 wards into seven distinct geographical areas: Central (or “central five wards”), South, West, North (Inner and Outer) and East (Inner and Outer).

RENTAL INDEX DATA CHARACTERISTICS

Savills collates thousands of leasing comparables each quarter in order to analyse trends affecting “mid-market” rental apartment units in Tokyo. Our benchmark rental data is based on average advertised monthly rents for units which fit the following criteria:

1) studio and one- or two-bedroom rental apartments of up to 100 sq m in size,
2) reinforced concrete structures built within the last ten years, and
3) properties located in Tokyo’s 23 wards and situated within a ten-minute walk of the nearest station.

In contrast to the luxury residential market, advertised or “asking” rents for mid-market units fitting the above criteria are typically non-negotiable and are not subject to incentives such as rent-free periods. Savills mid-market rental indices are therefore considered to closely reflect movements in contract rents for the Tokyo market.

OVERALL RESULTS

After achieving record highs in Q1/2020, both the 23W at large and the C5W submarket saw a slight decline in average rents – an outcome that was not unexpected given the circumstances. Indeed, even without factoring in the global pandemic, the multi-family leasing market tends to experience pullbacks after periods of strong rental growth. For now at least, average rents in both the 23W and C5W remain above their four-period moving averages, providing some comfort that the market has yet to enter a downturn (Graph 1).

To be sure, as the impacts of COVID-19 continue to reverberate through Japan’s economy, this mild pullback could be the initial blow of a bearish multi-family leasing market. While Japan has a more stable labour market compared to other major economies, personal incomes will invariably be dragged down, with part-time and contract employees in the retail and hospitality sectors in particular bearing the brunt. Further, the pandemic came after Japan had already suffered an economic contraction in Q4/2019 as a result of the consumption tax hike implemented in October.

The impact of this slowdown will not be uniform across the sector, however. For instance, smaller units (15-20 sq m) in the outer wards could take a hit, though such units account for less than 5% of our samples. That being said, the typical tenant for units in our monitored residential sample set – which comprises newer, better-located units – tends to have a more stable income, and therefore the mid-market segment should remain fairly stable.

With the drop in rents less pronounced for the 23W as a whole, the C5W’s premium has narrowed by around 1.2 ppts to 17.4%. In fact, five of the seven submarkets in our survey saw average rents grow on a quarterly basis, with the Outer East submarket leading the pack at 2.3%. Only the C5W and Outer North submarkets experienced quarterly declines.

Overall, we have observed a substantial increase in the number of residential listings, indicating that some landlords appear to be having difficulty leasing out space. This is further corroborated by the decline in occupancy measured this quarter. Indeed, most leasing activity was suspended during Tokyo’s state of emergency in April and May. As such, the leasing market will naturally take more time to recover, though this should lead to some pent-up demand coming to the foreground in Q3.
 

Click here for the full report.

Photo courtesy of Savills