September 2016 RESIDENTIAL MARKET REPORT

Transcription

1 September 2016 RESIDENTIAL MARKET REPORT

2 The real estate investment market in Japan has had an abundance of capital (both domestic & foreign) over the past couple of years. This, along with the low (now negative) interest rate environment as resulted in cap rate compression (100 to 200 bps). Rental growth has been moderate and driven more by supply and demand than by economic growth. We anticipate increase in wages in the near and mid-term which will provide sustainable rent growth. Positive net migration into Tokyo, Osaka, Fukuoka and Nagoya continues to provide strong demand for rental units. Supply of new rental units has remained stable and is not expected to increase as a result of increasing land values and high construction costs. There is currently NO downward pressure on residential rents nor do we anticipate any declining rents over the foreseeable future. Long-term, fixed rate financing will continue to be available for coreplus/value-add investments to provide stable income to investor with actuarial needs. Current cost of long-term debt is sub-100 bps all-in. Negative interest rate environment will continue to see an increased desire for real estate investment products by Japanese institutional investors thereby further compressing yields in the near-term. The current dynamics in the residential investment market remain conducive for core-plus and value-add investment strategies. 1

3 The residential investment market has experienced substantial cap rate compression over the past 2 year between 100 to 200 bps depending upon the location and quality of asset. An overabundance of capital both equity and debt has helped drive prices up. We have competed with opportunity funds for core assets with the funds utilizing high leverage to enhance the returns. Residential assets have also experienced moderate rental rate growth over the past year (averaging 1% to 3%) as a result of the lack of new supply as opposed to wage increases. We do anticipate wage growth in the near and mid-term. Positive net-migration into Tokyo, Osaka, Fukuoka and Nagoya has been driving tenant demand and will continue for the foreseeable future. Tokyo Mid-Market Apartment Rental Index Q Q Residential Rents in Major Cities 2

4 Tokyo Kantei, a residential research company recently released its August 2016 average rental rates for various markets in Japan. (Note: rental rates are quoted in sq. meters). Tokyo 23-wards: 2.0% increase month on month and 1.8% year on year. Osaka City: 1.6% decrease month on month and 13.3% increase year on year. Nagoya City: 0.1% decrease month on month and 3.1% increase year on year. Yokohama: 0.7% decrease month on month and 0.2% increase year on year. Fukuoka: Not covered by Tokyo Kantei. Average Apartment Rental Rates across Japan (August 2016) 3

5 New construction of residential assets has remained stable over the past 10 years in terms of total number of rental units. However, it should be noted that this data includes rental units constructed for inheritance tax purposes whereby the land costs are essentially zero. Newly Constructed Housing Units Tokyo Metropolitan Area by Use The majority of new construction for large-scale residential projects has been limited to for-sale bunjyo projects as land values and construction costs will not support the development of rental projects at the current market rents. Should wages increase, we anticipate that rents will grow at a higher rate and construction of new rental properties will be supportable. During the 4th quarter of 2015, we saw a substantial increase to the number of forward commitment opportunities were available. Developers started looking to sell off the projects upon completion en bloc to an investor that would presumably lease out the units. Average Bunjyo Prices in Tokyo 23 Wards Q Q The pricing for most of these opportunities reflects full bunjyo pricing on a per tsubo basis whereby current rents will not provide an adequate return for core-plus investors. It will be interesting to see what happens to these projects over the next year; whether the developer will go back and sell individual units or lower the price for an en bloc sale. This decision will likely be driven by the developer s bank as it was in 2004 /

6 The residential for-sale condominium (bunjyo) market in Tokyo's 23-ward area have increased steadily over the last five years, growing at an average rate of 1.5% each quarter. As of Q2/2016, the average bunjyo price was JPY3.155 million per tsubo for a unit in the Tokyo 23-ward area, representing a 5.0% increase over Q2/2015. Growth in bunjyo prices has significantly outpaced rental growth in recent years, despite a slight moderation in early However, the number of bunjyo units sold in Tokyo has started to slow with decrease of almost 20% year-on-year for the first half 2016, the lowest number in 24 years. The high prices have increased inventory and lowered the closing rate for new units. New Bunjyo Units Sold in Tokyo Metropolitan Area New Bunjyo Unit Inventory and Closing Rate Tokyo Metro With bunjyo prices remaining high and slowing sales, along with tight vacancy conditions for rental property, we anticipate upward pressure on rental rates.. Real wage increases, however, are key for meaningful rental growth. 5

7 Yield Compression Tokyo Grade A Office Cap Rates 1Q 2001 Q Cap rates have compressed steadily since 2012 as illustrated in the office cap rate chart on the right. Low debt costs have kept the yield spread wide even as cap rates have compressed. Yield spreads were tighter than they are currently suggesting that there is further room for cap rates to compress. The residential chart is more for illustration purposes as the data was obtained from JREI that includes all residential transaction regardless of size or age in the greater Tokyo area. As such, the data is not consistent with the high grade, well located assets that ResCap acquires. Tokyo Metro Cap Rates 2H H 2016 However, the overall trend reflected is accurate and the office yield spread is essentially the same for residential at the current time 3.5%. 6

8 Domestic lenders have reigned in their real estate lending over the past 6 months. Whilst there remains an abundance of available debt, the Japanese banks are no longer willing to provide high leverage financing as they were a year or two ago. We anticipate that moderate leverage (50% to 65%) long-term (7 to 10 years), fixed-rate non recourse financing will remain available thereby facilitating our investment strategy. To date, this space has been filled by foreign life companies with substantial Yen denominated general accounts, namely Prudential and MetLife Alico. It is likely that domestic life companies will start to lend to non-japanese as demand for longer term financing increases. Real Estate Lending by Japanese Banks Forecast of Interest Rate and CPI 7

9 Rent levels in Osaka City still have plenty of room to grow. At Q1/2007, average rents in Osaka stood at JPY 8,552 per tsubo per month. Rents declined after global financial crisis and continued to fall over the following years, hitting a low of JPY 7,704 in Q4/2012 one year after Tokyo hit its own trough in Q4/2011. Since 2012, Osaka rents have begun to bounce back, reaching JPY 8,085 per tsubo per month in Q4/2015. Residential Rents in Osaka from 1Q 2007 to 4Q 2015 Rents in Nagoya peaked in 2008 and subsequently fell, bottoming out in late Rents are now recovering gradually, having posted marginal gains every year since and still a few percentage points below their pre-crisis peaks. We expect this trend of gradual increases to continue over the near term, fueled by tight occupancy and strong demand. Residential Rents in Nagoya from 1Q 2007 to 2Q 2016 Source: J-REITs, Savills Research & Consultancy 8

10 Rent levels in Fukuoka City have increased substantially since the low in 2012 and are now at 98.4% of the pre-gfc high. At Q2/2006 average rents in Fukuoka stood at JPY 6,638 per tsubo per month. Rents declined after global financial crisis and continued to fall over the following years, hitting a low of JPY 6,125 in Q2/2012 one year after Tokyo hit its own trough in Q4/2011. Since 2012, Fukuoka rents have begun to bounce back, reaching JPY 6,545 per tsubo per month in Q1/2016. Residential Rents in Fukuoka from 1Q 2007 to 1Q 2016 Source: J-REITs, Savills Research & Consultancy Whilst the rental rates in Fukuoka and Nagoya are near the pre-gfc high, it should be noted that both Nagoya and Fukuoka economic base has expanded since the GFC. Notably, Nagoya has gone from a single economic driver with Toyota Motors to a multi-industrial base with aircraft design and manufacturing; medical equipment manufacturing and the advanced manufacturing technologies that are being exported. Fukuoka has been very proactive in attracting semi-conductor manufacturers to add to its economic base as well as expanding its higher education facilities to provide skilled workers to the labor force. In addition, Fukuoka has been the country leader in clean energy production. Tokyo provides the highest percentage of the country s GDP but Osaka, Nagoya and Fukuoka are significant contributors to GDP with them all above the national average. 9

11 Residential Rental Affordability by Market as of December

12 Investment Activity in Regional Cities One of the major concerns when acquiring assets outside of Tokyo, even in other major cities such as Osaka, Fukuoka and Nagoya is liquidity. Whilst the majority of investment activity does occur in Tokyo there has been an increase of deals by a variety of investors in the other markets boding well for liquidity. Given that the low interest rate / low yield environment is expected to remain in the nearterm, it is not surprising investors, including ResCap are active in the other markets. When you consider the overall size of the Tokyo in comparison with the other markets, these percentages are even more illustrative of a trend that will continue for the foreseeable future particularly with the positive demographic trends and rent growth coming off a lower basis. Sources: Savills Japan, RCA and DB REIT 11

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14 We anticipate that the residential investment will be subject to judicious yield compression and moderate rent growth in the nearterm. Wage growth over the mid-term will further drive rent growth. Rental rates in Tokyo s 23 ward and central five ward rents have gradually recovered, but are still about 8% to 9% below the 2008 average. Rental rates in Osaka, Fukuoka and Nagoya have also recovered but are on average 10% to 20% below pre-gfc highs. Demand will remain strong and occupancy levels high for the foreseeable future as a result of positive net migration and a stable supply of new units. Investment volume may increase as a result of the deleveraging risk for a number of high leverage loans extended to opportunity funds over the past 3 years. The negative interest rate environment has kept pace with yield compression providing a 300+ bps yield gap. The stability, rental growth potential and strong demographics are all conducive to ResCap s investment thesis for core-plus and value added investments in the Japan residential sector. 13

15 Contact Info FOR FURTHER INFORMATION, PLEASE CONTACT: Nippon ResCap Investors K.K. Azabu West Building, 2F Nishi Azabu, Minato-ku Tokyo Japan Tel: +81 (0) Fax: +81 (0)