Savills World Research Japan

Spotlight Japan retail November 2017

savills.com.jp/research Spotlight | Japan retail November 2017

Savills World Research Japan

Spotlight Japan retail November 2017 Spotlight Japan retail

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“Ginza, Omotesando, , and are seeing redevelopment and expansion. Retail SUMMARY sales, wages, and consumer confi dence are all ’s average 1F retail rent has generally mildly positive. Investment volumes appear on remained stable since 2016. There have been notable track to exceed 2016 totals, though tight yields variations across submarkets, however. are still making buyers cautious.” Non-1F rents continue their slow but steady trend upward. Omotesando and Shibuya are up Tokyo submarket rents Prime street locations in , Omotesando, 6% and 14% over the same period.  Tokyo’s retail rents have on average Shibuya, and Shinjuku continue to see high rents and Although small sample sizes typically held fairly steady since 2016. 1F almost no vacancy. averages, especially in Ginza, are make 1F rents quite volatile, and short- term movements should be taken continuing to moderate from 2014- Rapid development and expansion in some areas with a grain of salt, this divergence 2015 highs as the last of the fervour is shifting attention toward new, up-and-coming could refl ect the recent trendiness of over tourist shopping sprees subsides. neighbourhoods. Prime street locations remain as in- Tokyo’s southwestern submarkets. The shrinking sample size indicates low demand as ever, though, and top rents Drugstore and daily goods stores continue to have barely budged. Non-1F rents availability, increasing data volatility. outperform luxury, and are leading leasing demand. continue their slow but steady march upward. Non-1F rents continue to grow at a Investment volumes in retail have increased to steady pace. The average non-1F rent JPY468 billion YTD and are on track to beat 2016’s 1F rents across Ginza, Omotesando, across Ginza, Omotesando, Shibuya, volumes but still fall short of 2013-2015 highs. Shibuya, and Shinjuku averaged and Shinjuku stood at JPY26,650 per JPY41,500 per tsubo in 1H/2017, tsubo in 1H/2017, up 3.3% over a Retail sales and consumer confi dence are the down 1.0% year-on-year (YoY). year earlier. This growth was driven by highest in years. This calm masks fairly signifi cant Shibuya and Ginza, which saw YoY movements at the submarket level. increases of 9% and 11% respectively. YTD tourist spending is up 15% from 2016 and Ginza and Shinjuku are down 6% Omotesando non-1F rents declined has set a new all-time record. and 12% respectively YoY, while 6% while Shinjuku was largely fl at.

GRAPH 1 GRAPH 2 Tokyo 1F rents, 2008–1H/2017 Tokyo non-1F rents, 2008–1H/2017

Ginza 1F Omotesando 1F Shinjuku 1F Shibuya 1F Average asking rent: 1F Ginza Non-1F Omotesando Non-1F 90 Shinjuku Non-1F Shibuya Non-1F Average asking rent: Non-1F 80 45

40 70 35 60 30 50 25 40 20 30

Thousand JPY / tsuboThousand JPY 15 Thousand JPY / tsubo 20 10

10 5

0 0 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2008 2009 2010 2011 2012 2013 2014 2015 2016 17 2008 2009 2010 2011 2012 2013 2014 2015 2016 17

Source: REEI, BAC Urban Projects, Savills Research & Consultancy Source: REEI, BAC Urban Projects, Savills Research & Consultancy

savills.com.jp/research 02 Spotlight | Japan retail November 2017

Submarket development Omotesando traffi c. Earlier this year Prada Holdings A slew of high-profi le redevelopment Omotesando is seeing continuous acquired the MM Aoyama Building, and expansion is gradually redefi ning store openings as it solidifi es its which houses Miu Miu, the group’s the structure of Tokyo’s major districts. position as perhaps Tokyo’s trendiest casual brand. The Nikkei reported 1F high-street district among the 20-30 rents in the building to be JPY240,000 Ginza crowd. Omotesando 1F rents overtook per tsubo per month. Ginza Six opened to shoppers in April Shinjuku 1F rents in late 2016 and and is operating full-swing. J Front remain elevated as new pop-up shops The north-south stretch of Meiji- Retailing disclosed that the facility and onetime events compete for space. dori connecting the and generated 22 billion yen in sales Shibuya submarkets is one of revenue and attracted seven million Redevelopment continues apace Tokyo’s most rapidly developing retail visitors during the fi rst four months around the district’s western hub neighbourhoods. Popular apparel, of its operation. This puts it on track intersection of the main boulevard and F&B, and sundry goods stores are to meet its fi rst-year targets. Though Meiji-dori. Parco’s Harajuku Zero Gate creeping further and further south from luxury consumption may have cooled, is scheduled to open in winter. The Harajuku and north from Shibuya’s the facility’s status as a prestige Jingumae Tower Building, the area’s Jinnan neighbourhood. It is gradually location and a tourist attraction should fi rst Grade A offi ce tower, opened in becoming diffi cult to identify the border keep it popular with tenants. September and is already over 90% between the two submarkets. occupied. Tenants are mainly apparel Ginza Six appears to have contributed and music companies, and offi ce rents A report by the Real Estate Economic to Ginza area sales, and has also stand in the mid- to high-JPY30,000 Institute (REEI) and BAC Urban drawn additional crowds of tourists. per tsubo range. This is higher than Projects states that 1F asking rents The district is in the middle of a the Shibuya ward average, despite in Jingumae 6-chome, Harajuku’s hotel boom – over 2,000 rooms are the absence of other Grade A offi ce southernmost district, have averaged scheduled to complete between buildings nearby. JPY63,000 per tsubo over the past now and 2019. The resulting infl ux of fi ve years. This has been dramatically tourists should generate more revenue Omotesando’s eastern Miyuki-dori pulled up over the past three halves, for the area and help keep retail area appears to be developing however – 1F rents reached JPY77,000 tenants healthy. somewhat less quickly, perhaps due to in 1H/2016, JPY94,000 in 2H/2016, its more homogeneous concentration and now JPY140,000 in 1H/2017 Ginza’s neighbourhoods are of luxury apparel stores. Nevertheless (Map 1). The report notes that a recent undergoing a moderate change in it continues to attract signifi cant foot small sample size is also a factor, but character. More than any other district in Tokyo, Ginza has been historically notable for its high concentration of MAP 1 top-class apparel and luxury good Convergence of Shibuya and Harajuku stores. Ginza’s tenant mix appears to be gradually diversifying, however, as luxury brands grow more cautious Meiji-Jingumae and sporting goods stores and Station other miscellaneous retailers seek to capitalise on the area’s prestige and Jingumae popularity with tourists. Sundry goods 6-chome store Loft relocated its Yurakucho location to a three-storey space in Mitsui’s newly refurbished Velvia-kan. Its prior space was absorbed by a Sports Authority and Muji, its previous Cat Street upstairs neighbour.

Tokyo Midtown , Mitsui’s Meiji-dori Jingumae 6-chome 1F asking rents new premium-grade, mixed-use Jinnan development near Hibiya Station, is 1-chome Period JPY / tsubo / month Sample size scheduled to open in March 2018 with 1H/2017 ¥140,323 1 18,000 sq m of retail space, including 2H/2016 ¥94,441 2 an 11-screen cinema. Though it is 1H/2016 ¥76,719 4 located beyond the Ginza submarket, 2H/2015 ¥50,126 21 the development could attract more attention to Ginza’s western periphery. 1H/2015 ¥50,613 10 Western Ginza has seen some high- profi le development in recent years, such as the opening of Tokyu Plaza Ginza in 2016, but it is still not as Shibuya Station popular as Ginza’s central districts between Chuo-dori and Namiki-dori. Source: REEI, BAC Urban Projects, Savills Research & Consultancy

savills.com.jp/research 03 Spotlight | Japan retail November 2017

this could be another indication of the GRAPH 3 area’s rising popularity and declining 1F rents in retail districts of regional cities, 2008– availability. 1H/2017 Shibuya’s Jinnan area, situated 1F Nagoya Sakae 1F Sendai 1F across the train tracks from Jingumae Fukuoka Tenjin 1F Sapporo 1F Average asking rent 1F 35 6-chome, is not developing as quickly, perhaps partially due to a 30 shift in attention to the back streets of Harajuku. 25

20 Shinjuku Shinjuku, meanwhile, possesses an 15 eclectic mix of tenants and extremely 10 high commuter traffi c, making it / tsuboThousand JPY a continuously competitive retail 5 submarket. Redevelopment projects 0 are proceeding along the area’s central 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H Shinjuku-dori street, where 1F rents 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 frequently reach JPY150-200,000 per tsubo. Source: REEI, BAC Urban Projects, Savills Research & Consultancy

Mitsui’s mixed-use Shinjuku At the submarket level, however, there by more than 3% over the quarter. 3-chome Project due in early 2018 is reason to be optimistic. 1F rents in Central districts in Osaka, Nagoya, and Mitsubishi Estate’s Sapporo’s Odori district, which has Fukuoka, Sapporo, and Sendai, 5-chome Project due in 2019 are frequently dragged down the average, however, all increased between 3% two of the area’s most high-profi le have risen 15% since 2012 and are and 6% over Q1/2017. construction projects. Shinjuku’s most now at their highest level since then. signifi cant improvement, however, Nagoya’s Sakae area also appears to Macro indicators will come in 2020 when a passage have recovered from 2015 weakness The government’s Consumer connecting the east and west sides of and has seen YoY growth of 6%. Confi dence index has hovered near Shinjuku Station opens. recent highs for virtually all of 2017. The MLIT’s Land Value LOOK The index stood at a reading of 43.9 Regional cities Report for Q2/2017 indicated points as of September, up almost Taken as a whole, regional 1F rents continued strong commercial land seven points from its trough of 37.0 have been struggling. The average 1F price growth in Japan’s major urban following the 2014 consumption rent across prime districts outside of centres, especially in regional cities. tax hike. Consumer sentiment has Tokyo sat at JPY19,850 in 1H/2017, Commercial land prices increased remained close to this high throughout down 1.7% YoY and the softest in 86 surveyed districts nationwide, the year. reading since 2008. Regional retail remained fl at in 14 districts, and no rents saw upward momentum in 2013 districts declined. Increases were more Wages are slowly growing. The to 2014, but have cooled in recent pronounced in regional cities than Ministry of Health, Labour, and years as Osaka and Fukuoka trends in Tokyo. Though central Tokyo saw Welfare’s most recent monthly labour weakened. growth, no commercial site increased survey indicates that August wages

TABLE 1 Commercial land value increases, Q1/2017–Q2/2017

City Area +QoQ value growth

Tokyo Ginza / Omotesando / Shibuya / Shinjuku 0%-3%

Osaka Shinsaibashi 3%-6%

Osaka Namba 3%-6%

Nagoya Meieki 3%-6%

Nagoya Sakae 0%-3%

Fukuoka Hakata Station 3%-6%

Sapporo Sapporo Station 3%-6%

Sendai Chuo 3%-6%

Source: MLIT, Savills Research & Consultancy

savills.com.jp/research 04 Spotlight | Japan retail November 2017

were up 0.9% YoY, the highest increase GRAPH 4 in the last 12 months. Earlier, in May, Japan consumer confi dence, 2013–Sep 2017 the survey reported that base pay notched 0.7% growth YoY, tied for the highest YoY increase since 1998. The Consumer Confidence Index Willingness to buy durable goods number of part-time workers as a share 50 Apr-14 Consumption tax hike of the total workforce has also declined slightly, which could result in a stronger 46 and more secure labour market.

E-commerce 42 Market players are understandably concerned about the rapid Index 38 development of online shopping, and its potential impact on Japanese retail tenants. There is no question that the 34 e-commerce industry is growing in Japan, and that retailers must think 30 creatively about in-store experience 2013 2014 2015 2016 2017 and other ways that a brick-and- mortar establishment can add value. Source: Cabinet Offi ce, Savills Research & Consultancy That being said, Japanese retailers are enjoying some insulation from the GRAPH 5 global e-commerce zeitgeist for several Nominal wage growth, 2013–Aug 2017 reasons.

First, the logistics industry is facing Cash earnings Base pay several challenges, including labour 1.0% shortages, cost increases, and last- mile bottlenecks (see our September 0.5% 2017 Logistics Spotlight). These issues are starting to weigh on the expansion plans of large logistics companies. 0.0%

Second, the Japanese population is relatively older than those of other growth YoY -0.5% countries – the median age is just over 45 – and hence typically more -1.0% conservative. This slows adoption of new, technology-based shopping -1.5% methods. 2013 2014 2015 2016 Aug-17

Finally, credit card usage is still Source: MHLW, Savills Research & Consultancy relatively uncommon, especially outside of Tokyo, making it harder to GRAPH 6 shop online. B2C e-commerce growth, 2015 YoY Drugstores outperforming National retail sales have grown 1.8% 35% YoY as of August. Though mild, this 33.3% fi gure has held fairly steady for the past 30% 28.4% six months, and represents some of the most consistent YoY growth since 25% the impact of the 2014 consumption 19.9% tax hike. 20%

Data from the Ministry of Economy, 15% 13.3% 2015 growth 12.1% Trade, and Industry (METI) indicates 11.0% 10% that drugstore sales nationwide are 7.8% 6.6% up 5.7% YoY as of August, in line 5% with growth for the preceding three years. Drugstores in the Greater Osaka 0% and Greater Nagoya regions scored Russia Japan South US Eurozone Global APAC China Korea 8.7% and 7.1% growth respectively, outperforming the Greater Tokyo area’s Source: Ecommerce Foundation, Savills Research & Consultancy

savills.com.jp/research 05 Spotlight | Japan retail November 2017

4.7%. REEI reports that drugstores Continued low volumes stem in part GRAPH 7 bidding for prime space are now from Japan’s tight cap rates in core Japan drugstore YoY sales growth, often a main driver of 1F rental assets. A semi-annual survey by the Jun 2015–Aug 2017 growth in some of Japan’s major Japan Real Estate Institute (JREI) retail markets. revealed that expected cap rates for Beauty OTC Pharma Toiletries Total sales prime retail property in Ginza and 16%

Sales growth in beauty products Omotesando sat at 3.7% and 3.8% 14% has typically outperformed growth respectively in April 2017, unchanged in most other drugstore goods. from six months prior. This pause in 12%

Overall growth is likely driven both by compression offers core investors little 10% an increase in elderly and health- relief, however, as ticket prices are conscious customers, as well as a still high and core buyers are having 8% switch in tourist spending from luxury diffi culty sourcing acquisitions. 6% goods to daily necessities. Japanese sales growth YoY health products and cosmetics have Actual market cap rates are typically 4% a reputation for quality and safety, much tighter than those in JREI’s 2% especially among visitors from other survey. Two J-REIT acquisitions Asian countries. The especially announced in 2017 have ranged as 0% Jul Jul Jul Apr Apr Oct Oct Jan Jan Jun Jun Jun Feb Feb Sep Sep Mar Mar Nov Nov Aug Dec Aug Dec Aug May May strong increases in Osaka and low as 3.4% on an appraisal NOI 2015 2016 2017 Nagoya could be driven in part by basis. Hulic incorporated 50% of greater tourist travel to regional cities. its new prime Shibuya development Source: METI, Savills Research & Consultancy Hulic &New into its public REIT at a Investment trends cap rate of 3.4% in April. Since this Investment in retail property has was a transaction between related GRAPH 8 picked up since 2016. Total YTD parties, it is reasonable to believe that Retail investment volume by buyer volumes amount to 468 billion yen a third party transaction price would type, 2007–Q3/2017 through Q3/2017, according to be even sharper. Japan Retail Fund, preliminary data from Real Capital meanwhile, has announced that it will Overseas Equity & institutional Listed companies & REITs Private Analytics (RCA). This is up 9% obtain the G-Bldg. Jingumae 07 on 22 Unknown Other compared to YTD Q3/2016. If the November at an appraisal NOI yield 1.4 trend continues, investment will of 3.4%. The seller is an undisclosed 1.2 likely beat 2016 fi gures but still fall domestic party. somewhat short of recent 2013-2015 1.0 highs. Retail transactions in Osaka’s Shinsaibashi neighbourhood are 0.8

Overseas buyers have accounted for rumoured to have approached 3.0% 0.6 a larger share of investment, almost fl at, implying that prime Ginza cap yen Trillion doubling to 31% from a recent 5Y rates could now be in the low-to-mid 0.4 average of around 17% of total 2% range.  0.2 purchases. This is partially due to Blackstone’s acquisition of Croesus 0.0 Retail Trust for SGD901 million, or about 70 billion yen – roughly 15% of all YTD retail investment. Source: RCA, Savills Research & Consultancy

TABLE 2 Selected retail transactions, announced Q2/2017—Q3/2017

GFA Price Announced Property Location NOI cap rate Buyer (sq m) (JPY bn)

5.8% Nomura Real Estate Sep 2017 Morisia Tsudanuma Narashino, Chiba 105,491 18.0 (Appraised) Development

3.8% May 2017 Ito Yokado Shin-Urayasu Urayasu, Chiba 57,621 14.25 Domestic company (Appraised)

6.6% Sep 2017 Aeon Mall Shimotsuma Shimotsuma, Ibaraki 58,403 9.55 Aeon REIT (Appraised)

5.2% Jul 2017 Resona Obu Shopping Terrace Obu, Aichi 24,093 7.91 Hulk Property GK (Appraised)

6.3% Jun 2016 Merad Owada Nishiyodogawa, Osaka 19,848 7.38 Domestic company (Appraised)

Source: RCA, Nikkei RE, Savills Research & Consultancy

savills.com.jp/research 06 Spotlight | Japan retail November 2017

OUTLOOK The prospects for the market

1F rental trends in Tokyo’s major await the impact of long-term, large- Rapidly growing tourism continues retail districts appear to be varying scale development projects. Shibuya to be a bright spot for the retail by submarket. will see continuous openings of new sector. On 18 October, the Japan mixed-use facilities through 2020 and Tourism Agency announced that total Ginza is still on top, but has beyond, adding total GFA rivalling spending by tourists amounted to calmed since 2014 and 2015 that of Hills. Shinjuku, 3.3 trillion yen through Q3/2017, a when tourist shopping sprees meanwhile, should benefi t from 15% increase over the same period were overexciting the market. infrastructure projects that improve in 2016. This is the fi rst time YTD Q3 The opening of Ginza Six has access. spending surpassed 3 trillion yen. consolidated many of the area’s Per capita spending amounted to fl agship luxury brands under one Retail rents in regional cities have not 165,000 yen, with especially high roof and attracted attention from increased overall, but other macro spending by Chinese, Vietnamese, shoppers, tenants, and investors. indicators have exhibited strength. English, and French tourists. Tourism This explosion of high-end retail growth should continue, offering In recent quarters, commercial land tenants may result in slower luxury upside to well-positioned facilities. values in prime regional areas have tenant demand in the market over increased faster than they have in the next few years. Investment volumes have picked Tokyo, and rents in Sapporo and up from 2016’s stale performance, Nagoya appear to be recovering from Omotesando is seeing rapid but tight yields are still weighing store openings, especially along prior weakness. on volumes. As in Tokyo’s offi ce back streets, and rental growth market, there is a great deal of seems relatively resilient. New National consumer confi dence and capital chasing opportunities, but development is centred around the wage growth have both increased high prices are making it diffi cult to Meiji-dori intersection and tenant gradually and are stronger than they source deals in core areas. Ultra- demand is spreading outward. have been in years. Drugstores are low borrowing costs as well as the performing especially well and are stable nature of the market, however, Rents in Shibuya and Shinjuku paying aggressive rents to secure still make Tokyo retail an attractive appear more stable as both areas platforms in popular areas. market.

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