Why concerns over Tokyo’s sudden residential rent contraction are misplaced | Real Estate Asia
, Japan

Why concerns over Tokyo’s sudden residential rent contraction are misplaced

It actually indicates that the market is gearing up for growth.

The Tokyo 23W residential market experienced a noteworthy shift in Q4/2022, and all constituent submarkets experienced some revision in asking rents. 

According to a Savills report, many observers might be concerned by this sudden contraction across the 23W, but this is instead more likely an indication of positive sentiment and a sign that the Tokyo residential market is on track for further growth. Indeed, occupancy has experienced a consecutive quarterly improvement, showing that the market has broad and sound demand. 

Here’s more from Savills:

This rapid fluctuation is grounded in a recent demographic trend, namely an influx in the non-Japanese population in Tokyo triggered by the easing of border restrictions. Most submarkets experienced a population decline throughout the pandemic as many residents sought larger or cheaper space outside the 23W, and foreign nationals were unable to enter Japan. 

However, the tides have changed as most submarkets saw their populations increase between September and November 2022, and the demand for premium units with above average rents appears to have paradoxically put downward pressure on average “listed” asking rents. Hence, the residential market appears to have demonstrated sound demand this quarter. 

In the short-term, the return of foreign nationals will likely lead to further moderate net population growth in the 23W, which should support sound rental demand. However, the 23W still faces competition from outer prefectures that can offer more affordable rents, especially as residents in Japan face heightened costs of living due to inflation. Furthermore, hybrid workstyles are common in Tokyo. 

Therefore, many residents may remain reluctant to move to the 23W for the meantime. That said, the C5W may perform well in spite of the inflationary pressure, given the typically high-income status of residents in these submarkets who will be less affected. 

Overall, economic conditions, wage growth, and demographic changes will primarily dictate the pace of the recovery of the 23W residential market going forward. Indeed, the Japanese economy looks to fare better in 2023 due to its belated opening. Meanwhile, although more companies are expecting greater office attendance, many hybrid work policies are in place, which might slow the recovery of demand in the 23W somewhat. 

Going forward, with the decreasing number of available units in the market, accompanied with the increasing population and consequently, leasing demand, rental levels are expected to pick up again soon.


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