Two-Year Wait Ahead for Japan’s Recovery: RREEF Research

Though it continues to lead East Asia’s commercial real estate investment market, Japan will take a hit from sluggish capital flows and the global recession for another two years, according to projections by RREEF Research. Nationwide transaction volume in Japan declined 46 percent to $19 billion last year, and another decline is in store for 2009, according to RREEF Research, which is part of Deutsche Bank Group. Returns, too, are destined to continue dropping steeply from the 13.8 percent peak attained in 2006. Last year the market mustered a return of just 3.4 percent. Nevertheless, Japan still accounts for 42 percent of all investment sales in the Asia-Pacific region. Since mid-2007, lenders have gravitated increasingly to the Japan’s eight largest developers, and that trend is squeezing capital sources for the rest of the field. Banks have increased loan volume to the top players by 2 trillion yen during that time while cutting lending to all other developers by a comparable amount. The difficulty of obtaining debt increases the chance of bankruptcy because of the three- to five-year terms typical of commercial real estate lending in Japan. That, in turn, heightens refinancing risk as that short-term paper comes due. Regarding the office market, Japan shares the problem of rising vacancy and falling rents affecting the United States and other developed nations. By January, vacancy had hit 12.8 percent in Fukuoka, 9.8 percent in Sapporo and 8.9 percent in Nagoya, RREEF Research noted. Not even Tokyo, one of the world’s tightest major office markets, is immune. Although vacancy in Central Tokyo stood at only 4.9 percent in January, that result still represents a jump of more than 200 basis points from the 2.7 percent recorded in December 2007. New office product is bearing the brunt of the problem; for Central Tokyo buildings completed in the past 12 months, vacancy hit 26.5 percent in January. Despite its struggles, Tokyo led the world in office building transaction volume last year, edging out New York City and London with some $16 billion in trades. RREEF Research’s analysts expect Japan’s economic slump will continue to hamper real estate investment, leasing and development for at least two more years. This year Japan’s gross domestic product will shrink 7.6 percent, followed by a 1.9 decline in 2010 before recovery starts in 2011. A leading cause is the rising strength of the yen against other currencies, a trend that has taken a huge toll on Japan’s export-dependent economy. Exports in January were down 45 percent compared to January 2008 figures. Other mature East Asian economies will experience shrinkage this year. Another RREEF Research report published last week notes that real GDP for both South Korea and Hong Kong could contract about 3 percent in 2009.