Investment volume declines driven by lack of large deals in 2021
Global property consultant CBRE reports that commercial real estate investment volume fell by 37% year-over-year to JPY 512.0 billion in Q2 2021.
The most significant factor behind this decline was due to fewer large transactions in comparison to the same quarter of the previous year, during which several large deals in excess of JPY 50 billion were completed, mostly by overseas investors.
While J-REIT transaction volume rose by 94% in Q2 2021 to reach JPY 210.6 billion, investment by overseas investors and non-J-REIT domestic investors dropped by 66% and 39%, respectively. By asset type, transactions for retail properties surged by 584%, and the logistics sector recorded a 5% increase. The other major asset types (offices, residential, hotels) all recorded y-o-y decreases in transaction volume.
During the quarter, the Japanese government declared its third state of emergency on April 25, 2021, which was subsequently lifted on June 20. While investment volume for the quarter declined from the same period of the previous year, the number of transactions actually increased, suggesting that the state of emergency had little impact on real estate investment activity itself.
EQUITY FUND RAISED BY J-REIT UP 11% Y-O-Y
Capital raised through public equity offerings by J-REITs in Q2 2021 totalled JPY 52.8 billion, an increase of 11% y-o-y. The period saw four new offerings (vs. three in Q2 2020). While the stock market as a whole softened, the rise in J-REIT stock prices was the underlying factor behind this increase in capital. The TSE REIT Index rose above 2,000 at the start of Q2 2021 before rising as high as 2,151 on June 30th, representing a 6.8% increase over the course of the quarter, and getting close to its pre-pandemic level of 2,251 (the highest during February 2020).
On April 2, the Tender Offer Bid (TOB) for Invesco Office J-REIT(IOJ) by U.S.-based Starwood Capital Group was announced. IOJ's sponsor, Invesco Group, also responded by announcing a TOB, and as a result, IOJ will be delisted due to the TOB by the sponsor. The purchase price is JPY 22,750 per unit, which implies a price/NAV ratio of 1.28x (based on the April 2021 accounts). The TOB, which occurred amid concerns about declining demand for office space, is evidence of the continuing high level of investment appetite for offices among real estate investors.
EXPECTED YIELDS FOR LOGISTICS FALL TO NEW LOW WHILE OFFICE YIELDS MAINTAIN RECORD LOW
CBRE's latest quarterly cap rate survey showed that expected yields in Tokyo fell q-o-q for logistics (Tokyo bay area) and retail (Ginza Chuo-dori); remained unchanged q-o-q for offices (Otemachi), studio-type apartments, and hotels (management contract); and rose q-o-q for multi-room apartments. For logistics, expected yields fell to a new all-time low since the survey began in 2009, while offices and studio-type apartments remained at their current all-time low levels.
CBRE's latest Tankan Survey revealed that the diffusion index for Tokyo Grade A office buildings improved from the previous quarter in four of six categories. The most significant improvement was observed in the sales prices DI, which was up 14 points q-o-q, largely because of 11 points fall in those who responded that prices would drop. For the DI for Greater Tokyo logistics facilities, five of seven categories showed an improvement. The largest improvement was in stance on investment and loans, whose DI rose by nine points on the back of a six-point increase in the number of respondents who replied that they planned to accelerate investment. However, DI for vacancy rate worsened for the third consecutive quarter, while the DI for expected yield deteriorated for the first time in five quarters.
OFFICE YIELDS FALL IN CENTRAL TOKYO AND MAINTAIN LOW LEVELS IN REGIONS
During Q2 2021, an office building in Central Tokyo was sold at a lower yield than those seen prior to the pandemic. The investment market is currently seeing a decline in transactional yields for relatively large buildings in Central Tokyo properties with stable cash flow outlook (e.g. owing to long-term fixed leases, etc). As investors are wary of potential decline in mid-to-long term demand for office space, they are increasingly focusing on CBD properties from which they expect relatively stable returns. At the same time, expected yields are also remaining low for large office buildings in regional cities. Investors anticipate that any loosening of the supply demand balance will be less severe in the regional cities compared to Tokyo. The investor survey shows that expected yields for Osaka continue to maintain their record low levels of the previous quarter, while those for Nagoya fell to a new record low. While no notable transactions were recorded for either city this quarter, the number of tenders submitted indicates that investor appetite is strong in both markets. In regional cities such as Osaka, with a relatively high number of transactions, there will likely be deals that would imply low transactional yields.
LOGISTICS TRANSACTION VOLUME RISES BUT SOME INVESTORS ARE WARY OF RISING VACANCIES
Transaction volume in the logistics sector increased by 5.3 % y-o-y to JPY 133.0 billion in Q2 2021, making it the second largest sector in terms of investment behind offices (JPY 163.0 billion). J-REITs accounted for 69% of total transaction volume in the logistics sector, with overseas investors making up 22%. At the same time, however, an increasing number of investors are wary of loosening the supply demand balance in the Greater Tokyo market. CBRE's Tankan Survey for LMT facilities in Greater Tokyo revealed that 29% of investors expect the vacancy rate to rise over the next two years, an increase of 13 points from last quarter. Increase in new supply and the prospect of rise in vacancy rates is believed to have affected investors' answers.
SIGNIFICANT BOOST IN RETAIL TRANSACTION VOLUME
Transaction volume in the retail sector increased by 584% y-o-y to JPY 107.0 billion this quarter, exceeding the level recorded in Q2 2019. J-REITs accounted for 53% of total retail investment volume, with non-J-REIT domestic investors comprising 26%, and foreign investors 21%. While most transactions involved community based facilities in suburban locations, which have generally been more resilient to the effects of the pandemic than other types of retail property, one large facility in a high street area of Osaka was acquired by an overseas investor. The yield for this transaction is estimated to have been at pre-pandemic levels.
According to the results of CBRE's 2021 Japan Investor Intentions Survey carried out in January of this year, 51% of all investors plan to invest in the retail sector as part of their investment strategy for 2021. In terms of investment area, 53% of surveyed investors are primarily targeting Central Tokyo, with a further 12% focused on Central Osaka. While properties in Central Tokyo, particularly in high street areas, remain tightly held, the aforementioned transaction in Osaka completed this quarter demonstrates the continued robust investor interest in these properties.