- May 2019 Real Estate: SPOTLIGHT Savills Research Rebirth Of A Market Osaka Real Estate: Rebirth Of A Market

Stars aligned for Osaka revival

INTRODUCTION compass to steer it in the right direction. The advent of the Abe administration has Summary Supported by sound fundamentals, Japan’s real estate market is growing strongly and showing triggered Japan’s longest economic recovery • In a world burdened with much resilience to the shifting global climate. Not recorded since World War II. Though this uncertainty, Japan has seen an so long ago, Japan was a laggard in the rapidly economic growth has been mild, corporate improvement in its economic emerging Asia Pacific region as its economy performance is constantly improving and prospects, especially relative to faced a protracted stagnation through profits are rising to an unprecedented level. its global peers. the 1990s, compounded by deteriorating Demographic factors such as urbanisation, a demographic prospects. Japan’s recovery was growing workforce in the face of a declining • Osaka will see multiple catalysts cut short by the Financial Crisis in 2008, and and ageing population, and improved fertility including the massive Umekita disrupted once again in 2011 by the East Japan rates have also contributed positively to Project as well as infrastructure Earthquake. Frequent changes in political Japan’s medium-term prospects. The nation’s improvements, while a potential leadership also exacerbated the confusion GDP per capita has recently shown stronger IR development and the World of the time: every year between 2006 and growth than before, especially over the last Expo 2025 are also expected to 2012, the country was led by a different ten years, and is now in line with Western provide tailwinds. prime minister. As a result, Japan Inc. had no counterparts. Japan’s status as the world’s

• Osaka’s economy is recovering GRAPH 1: GDP Per Capita Growth By Country, 2000 to 2017 after a long period of stagnation, buoying real estate demand. Japan United States Germany United Kingdom • Urbanisation continues to France Italy Canada 10% support population growth in the city centre, firming up market 8% fundamentals. 6%

• External shocks from overseas, 4% possible interest rate hikes, and a 2% shift in the extended cycle might 0% pose a risk to Osaka’s outlook. -2%

-4%

-6%

-8%

Source OECD, Savills Research & Consultancy

GRAPH 2: Fertility Rate By Country, 2000 to 2017

Japan China Taiwan South Korea Singapore Italy 2.0

1.8

1.6

1.4

FERTILITY RATE FERTILITY 1.2

1.0

0.8 2000 2005 2010 2017

Source Central Intelligence Agency, Statistics Korea, Ministry of Health, Labour and Welfare, Savills Research & Consultancy *The latest figure exhibited for South Korea is for 2018.

savills.co.jp/research 2 Osaka Real Estate: Rebirth Of A Market

largest creditor for almost three decades, with international investment income equivalent to 3% to 4% of GDP, supports its As economic and political uncertainty economic and currency stability. With these positive forces at play, Japan Inc. has started remains elevated in many parts of the to show its potential and international investors are taking a renewed interest. world, Japan stands firm. The nation’s Notably, as other major economies have political and economic conditions have begun looking inward, Japan has become one of the major champions of free trade, improved over the past ten years and demonstrating its role as a global leader in some areas. fundamentals are especially strong To be sure, Japan’s recent pace of growth in major cities. With a series of high- is by no means spectacular. Its population is ageing and declining, though at a more profile events in the pipeline, Osaka is moderate pace than originally expected. Even so, the nation’s political and economic in a unique position to take advantage stability appears to have drawn investor interest in an increasingly uncertain world. of increasing investor interest. In recent years especially, major Western

economies have faced political or economic GRAPH 3: Total And Youth Unemployment Rates By Country, 2018 difficulties, while some neighbouring countries in Asia have experienced slowing Youth Unemployment Unemployment growth rates, rapidly ageing populations 35 combined with lower fertility rates than Japan, and high youth unemployment. This 30 shifting landscape may be an opportunity for Japan as its conditions look more attractive 25 compared to ten years ago. As many perceive

20 that the current cycle is well-extended and seek downside protection, the country’s 15 resilience and defensive nature appeals to a large cohort of investors, particularly those 10 interested in core-type investments. UNEMPLOYMENT (%) Osaka in particular is in a unique position 5 to leverage the nation’s ongoing growth as a series of events including the Rugby World 0 Cup 2019, a potential integrated resort (IR) development, and the World Expo 2025 could provide strong tailwinds for inbound tourism - a key driver of Osaka’s recovery. In Source World Bank, Savills Research & Consultancy just the last six years, the number of inbound visitors to has surged from 2 million to 12 million1. Exponential growth GRAPH 4: Trailing-four-quarter Corporate Profits, Investment, And Cash Holdings, in tourist numbers and their spending has 1986 to 2018 resulted in strong retail performance and Cash Holdings Profits Investment rapid hotel development. Bubble Abe More recently, this tourism-led momentum 25 300 appears to be spreading further into other sectors of the region’s real estate market. 250 20 Developments at the station front and in CASH (JPYTRILLION) the bay area are creating new landmarks, 200 which should facilitate various commercial 15 activities. Corporate demand for office space is strengthening, driving extremely tight 150 vacancy and robust rental growth. Moreover, 10 as represented by the recent sale of the most 100 expensive condo in Kansai since 2001, as well as slated openings of luxury international 5 50 hotels in Osaka and neighbouring prefectures, a positive economic environment

PROFITS AND INVESTMENT (JPY TRILLION) (JPY INVESTMENT AND PROFITS appears to be facilitating the emergence 0 0 1986 1990 1994 1998 2002 2006 2010 2014 2018 of upscale markets in the residential and hospitality sectors. As Japan transitions Source Ministry of Finance, Savills Research & Consultancy from Heisei to Reiwa, the beginning of a new

1 As of the report date, the estimate for 2018 ranges from 11.6 to 12 million visitors.

3 Osaka Real Estate: Rebirth Of A Market

GRAPH 5: Greater Osaka Transactions By Sector And Investor, 2016 to 2018 development continues to fuel the evolution of the highly-concentrated station-front district, preparations for a potential IR Seniors Housing User/Other development and the World Expo 2025 Unknown & Care 3% are creating new opportunities in the bay Industrial 1% 4% 6% Institutional area. Furthermore, the improvement of 5% transportation infrastructure will enhance connectivity within the city and should have Hotel a positive impact on property performance. 12% Umekita Phase II, slated for completion Private in 2023, is expected to feature towers with 19% Listed/REITs office, retail, and residential components Retail Office 44% developed across 140,000 sq m of land. 14% 53% Despite the site’s prime location, it is currently vacant and therefore presents a massive opportunity for growth. Umeda’s Residential station-front area is already an established 14% Cross-Border retail centre with Umeda, a 25% department store that boasts the second largest revenue in Japan after Isetan Source RCA, Savills Research & Consultancy Shinjuku, and other major stores generating revenues of approximately JPY500 billion a year in the compact district (Map 1). Phase GRAPH 6: J-REIT Transaction Cap Rates For Office And Residential Assets, I of the Umekita Project - “Grand Front 2016 to 2018 Osaka” - the latest addition to the Umeda area, has increased sales since its opening in 2013 and recorded JPY47 billion in revenue for the 2018 fiscal year. Considering the scale of Phase II compared to that of Phase I, total revenue of the whole Umekita project could eventually exceed JPY70 billion2. In the case of Grand Front Osaka, diverging leasing strategies among the twelve-company consortium made it difficult to adequately pre-lease space by initial launch. Vacancy in Umeda subsequently rose to almost 10% as the project came online. However, Phase II stakeholders appear to be adopting a more united leasing strategy which, along with the current favourable market, is alleviating concerns of a similarly haphazard start. Facilities such as Hanshin Umeda and Yodobashi Umeda are also undergoing large- J-REIT disclosures, Savills Research & Consultancy Source scale changes. Development is not limited to Umekita. imperial era could mark Osaka’s departure the market size of Greater Osaka is still about Yumeshima Island, an artificial island that from its past and open a new chapter in the 1.7 times larger than the combined total of started being reclaimed in 1977 with the city’s growth story. Greater Nagoya and Greater Fukuoka, which audacious aim of creating a new urban are the third and fourth largest markets, hub, is the proposed site of a possible IR Osaka Investment Overview respectively. development and will host the World Expo in In light of sound fundamentals combined The office sector makes up more than 50% 2025. As the initial development project for with limited acquisition opportunities in of all transactions in Greater Osaka while the the reclaimed land was stalled after the asset Tokyo, Osaka attracts investor interest from residential and retail sectors each account bubble burst, the island came to represent both domestic and international players. The for 14%. Although domestic investors such as Japan’s lost decades. With its new role as a latest Urban Land Institute investor survey J-REITs dominate, overseas investors are also stage for world-class developments, however, indicates that Osaka, along with Tokyo, active in the market. To list a few examples the island is becoming a symbol of Osaka’s is now among the top five markets in Asia from 2018, Blackstone Group acquired the revival. An extension of the subway line Pacific for real estate investment. On top of Edobori Center Building for a rumoured between Yumeshima Island and Cosmo Square Japan’s attractive yield spread owing to low JPY15 billion while LaSalle Investment is also back on the table after the project was borrowing costs, Osaka’s yield premium over Management acquired Midosuji Front Tower called off following Osaka’s unsuccessful Tokyo makes the city even more enticing for for JPY14 billion. GreenOak Real Estate also campaign to host the 2008 Olympics. There is currently no train station in Yumeshima; many investors. acquired Takeda’s headquarters in Osaka as as such, planned extensions of train lines Based on data provided by Real Capital part of a 21-property portfolio. Analytics (RCA), transaction volume in to the island are essential for successful development of the bay market (Map 1). Greater Osaka between 2016 and 2018 Development Trends registered at JPY1.3 trillion or about 10% of Multiple development projects are taking 2 Retail revenue of Grand Front Osaka was about JPY586,000 per sq m in 2017/2018. Assuming that total retail total transaction volumes in Japan. Although place across Osaka and revitalising the space of Umekita Project amounts to about 122,000 sq m Greater Tokyo claims the lion’s share at 68%, after the completion of Phase II, total revenue is estimated to local real estate market. While the Umekita be JPY71.5 billion.

savills.co.jp/research 4 Osaka Real Estate: Rebirth Of A Market

MAP 1: Osaka Development At A Glance*

Annual retail turnover Tokyo to Umeda 150 mins to 70 mins after maglev

Yodobashi Umeda Tower

Umekita Phase II

Annual turnover JPY500 bn* Naniwasuji Line (+Phase II: JPY24 bn)

Nakanoshima Line

Sakurajima Line

Yumeshima

Kansai International Cosmosquare Airport to Umeda Chuo Line 70 mins to 40 mins

IR:JPY760 bn (annual revenue in Kansai) Expo: JPY1.1 tn (One-time direct impact)

Source Corporate disclosures, news articles, Osaka Prefecture, METI, Savills Research & Consultancy *Sales of major retail shops including Hankyu Umeda, Daimaru Umeda, Hanshin Umeda, Grand Front Osaka, and Lucua Osaka. Hankyu Umeda, Daimaru Umeda, Hanshin Umeda, and Grand Front Osaka are for FY2018. Sales of Lucua Osaka is for FY2016. Hanshin Umeda is undergoing reconstruction in phases: Phase I started operation in June 2018 and aims to have sales of 42 billion yen in the first year.

Likewise, the improvement of MAP 2: Roppongi Hills Vs Umekita transportation infrastructure should vitalise Osaka and its surrounding prefectures. Completion of the new Umekita Station in 2023 and of the Naniwasuji Line in 2031 is expected to shorten the travel time between Osaka Station and Kansai International 六本木ヒルズ森タワー けやき坂テラスAirport by as much as 30 minutes. Further 六本木ヒルズレジデンスout, the new maglevA bullet train will 六本木ヒルズレジデンスsignificantly improveB connectivity between 六本木ヒルズレジデンスOsaka and TokyoC and create an enormous 六本木ヒルズレジデンスD グランドcommuter ハイアット belt. 東京 けやき坂コンプレックス ハリウッドビューティープラザMACRO ECONOMY Roppongi テレビ朝日 Umekita A recovery in economic conditions is one Hills 六本木ヒルズゲートタワー of the factors driving development across the city and improving market dynamics. In recent years, Osaka’s economy has enjoyed - Officeand will likely continue to enjoy - a windfall Hotel Retail from rising inbound tourism (Graph 7), Resi owing to the city’s proximity to other parts of Core functionAsia and an abundance of tourist attractions including those in neighbouring prefectures Umekia Phase I like Kyoto and Nara. Significant growth in the 1,056,700 number of low cost carrier routes is another Phase II Towers factor. Unlike Narita and Haneda, which are Land: 110,000 sq m Land: 240,000 sq m (Phase I + II) close to full capacity, Kansai International GFA: 730,000 sq m GFA: 560,000 sq m (Phase I) 500,000 sq m (Phase II) Airport’s flight traffic is still at about 80% of its capacity (230,000 departures/arrivals), Source Savills Research & Consultancy thereby leaving room for increases in visitation. Furthermore, notwithstanding natural disasters in 2018, the Osaka market

5 Osaka Real Estate: Rebirth Of A Market

GRAPH 7: Number Of Inbound Tourists To Osaka And Their Spending, 2006 to 2018* of new, high-tech facilities. For instance, the redevelopment project in Inbound Tourists Spending (JPY billion) consists of a 200,000 sq m medical tower 14 1,400 and a 300,000 sq m R&D tower, which should enable smooth collaboration between 12 1,200 research and practice, while the Umekita SPENDING (JPYBILLION) Project should also facilitate the further 10 1,000 concentration of medical companies and research institutions in the area. Considering 8 800 the growth potential of this field and total support from the government, life sciences 6 600 are likely to play a major role in the future

MILLION VISITORS MILLION growth of the Osaka economy. 4 400 Economic strength has a direct impact on real estate market performance, as evidenced 2 200 by the correlation between Osaka City’s GDP and Umeda’s office trends. According to the 0 0 Osaka City Government, the city’s real GDP 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Est. has generally been growing since FY2009, 2018 and preliminary estimates for FY2016 and Source Osaka Prefectural Government, Savills Research & Consultancy *The spending figure in 2018 was estimated based on spending per person in 2017 and the FY2017 show sound growth of 1.6% and estimated number of inbound tourists in 2018. 1.9%, respectively. Average office rents in the Umeda submarket have recorded growth GRAPH 8: Umeda Office Performance vs Osaka City GDP, 2000 to 2019E* since 2014, generally tracking the city’s GDP growth trend with a two-year lag. Although other submarkets appear slower to respond Vacancy Rent GDP (2yrs forward) Regression 1.2 20 to the economic recovery, rental growth is spreading beyond the top submarket to a wider area in recent years (please see the April 2019 Regional Japanese Office 1 15 Markets spotlight). If economic growth and development continue to evolve in tandem, VACANCY as envisioned by the Osaka government and 0.8 10 Osaka Inc., the real estate market could further benefit, thereby possibly extending

INDEX (2000=1) the investment window.

0.6 5 Demographic Trends In addition to improving economic conditions, an inflow of population into 0.4 0 the convenient and accessible city centre is creating a positive market-driving force. This urbanisation trend has become more Source Miki Shoji, Osaka City, Savills Research & Consultancy pronounced since the turn of the century, * The model result for 2019E was computed for illustrative purposes using the 2017 GDP figure and the 2018 vacancy rate. and the population of Osaka’s central six wards (C6W) increased by almost 50% between 2000 and 2018. Continuing showed resiliency and experienced a quick Industry (METI) projecting that the direct population growth shows that the current recovery with a preliminary estimate for the economic impact of the event could be trend is stronger than expected as the year by the Osaka Convention & Tourism about JPY1.1 trillion. Likely reflecting upside National Institute of Population and Social Bureau showing sound growth of inbound potential from planned developments, the Security Research (NIPSR)3 had forecast a tourism from 11 million in 2017 to about 12 recent national land value survey (Chika decline between 2015 and 2020. According million in 2018. Total spending by inbound Koji) indicated that land price growth turned to the United Nations, Greater Osaka, with tourists in Osaka Prefecture exceeded JPY1 positive, and residential development projects a population of 20 million, was the seventh trillion in 2017, having a wide impact on in the area are progressing. largest metropolitan area in the world as of the real estate market, particularly in the Osaka is also promoting the health 2015 and is forecast to remain among the top hospitality and retail sectors. sciences industry as a catalyst for future regions in 2030. According to estimates made by the growth. The Kansai region boasts a high The impact of the urbanisation trend on Osaka Prefectural Government, an IR could concentration of biomedical institutions the residential market becomes apparent draw 25 million people and generate annual and corporations, including the Center when examining condo construction data. spending of JPY760 billion in the Kansai for iPS Cell Research and Application Graph 10 exhibits condo construction region. Major casino operators from around (CiRA) led by Professor Shinya Yamanaka, volumes in Osaka City and its share in the world visit Osaka regularly to explore a Nobel Laureate, and Saito Life Science the Kansai region. Although Osaka City’s avenues for capitalising on this potential Park, a regional medical cluster. The Osaka share was generally stable until 2010, at opportunity, a testament to the very high government is keen on strengthening between 20% and 30%, the figure has since level of expectation. Further, the World Expo its position in this field and is initiating 3 Based on the 2015 national census, NIPSR forecasted a is expected to attract 28 million people, the collaboration of public and private population decline of 1.7% between 2015 and 2020. As of with the Ministry of Economy, Trade and counterparties through the development 2018, Osaka’s population has increased by 1.3% compared to 2015.

savills.co.jp/research 6 Osaka Real Estate: Rebirth Of A Market

MAP 3: Osaka Submarket Map significantly increased, nearing 50% in recent years. This is indicative of strong and resilient residential demand in Osaka City, which has proven less vulnerable to an economic shock than other areas in the region. Demographic growth should also benefit commercial assets, such as retail facilities and offices, as population density tends to improve commercial productivity due to factors such as proximity to clients, high demand density, and efficient labour allocation. According to the 2015 census, daytime population densities in Chuo, Kita, and Nishi were comparable with those of Tokyo’s central wards (Table 1). Indeed, according to the 2016 economic census, retail sales in Osaka City were the second KEY: largest among major cities - even surpassing Central 6 Wards Yokohama, a more populous city (Table 2). South Continuing migration to Osaka combined West with economic growth and development North might open up a new market for real estate East investors. For instance, the aforementioned Umekita Phase II project is also expected to Source Savills Research & Consultancy feature luxury condos targeted at high-net- worth individuals. The recently reported sale of Branz Ashiya The Residence in Hyogo GRAPH 9: Demographic Trend Of Osaka City, C6W, And Tokyo’s 23W, 2000 to 2018 for JPY500 million, the highest price for a new condo sold in Kansai since 2001, might Chuo Nishi Naniwa Fukushima Tennoji indicate a nascent luxury trend for the Kansai Kita Osaka Tokyo 23W Osaka C6W residential market. Average income levels 200 have been improving at a moderate pace in Osaka City since 20114, which could also 180 increase demand for upscale residences.

160 CAVEATS As in Tokyo, real estate performance in 140 regional markets is also influenced by broader macroeconomic conditions. As such, it is 120 important to discuss the current state of the INDEX (2000=100) Japanese and global economy and identify 100 factors that are likely to affect the direction of the Osaka market. 80 First, signs of a global economic slowdown are mounting. The International Monetary Fund has adjusted its outlook for global Source Tokyo Metropolitan Government, Osaka City, Savills Research & Consultancy growth downward to its lowest rate since the Financial Crisis, and the Bank of Japan GRAPH 10: Osaka City’s New Condo Units And Share In The Kansai Region, 2001 to has voiced concerns over the impact of trade 2019F tensions between the US and China on the nation’s regional economies. If the global New Units (LHS) Osaka's Share (RHS) economy truly starts contracting, Osaka 12,000 60% could lose its momentum and the real estate market might reverse its bullish trend. 10,000 50% This is especially concerning considering inbound tourism has partly driven Osaka’s 8,000 40% growth. However, the slowing Chinese economy, which has been weighing on the 6,000 30% global economy, might turn around as fiscal UNITS UNITS stimulus kicks in, providing some breathing 4,000 20% room. Second, in the medium to long term, 2,000 10% interest rates could edge up as there have been indications of tapering, both globally 0 0% and domestically. The side effects of powerful monetary policy are also threatening the

4 According to the National Tax Agency, taxable income per Source Haseko Research Institute, Savills Research & Consultancy tax payer in Osaka City increased by 6% from 2011 to 2017.

7 Osaka Real Estate: Rebirth Of A Market

TABLE 1: Daytime Population Density, 2015 TABLE 2: Retail Sales By City, 2015

AREA DAYTIME POPULATION DENSITY (SQ KM) CITY RETAIL SALES (JPY BILLION)

Chiyoda (Tokyo) 73,162 Tokyo 23W 15,077

Chuo (Tokyo) 59,609 Osaka City 4,578

Chuo (Osaka) 51,246 Yokohama City 4,012

Minato (Tokyo) 46,185 Nagoya City 3,476

Shinjuku (Tokyo) 42,566 Sapporo City 2,290

Kita (Osaka) 39,761 Fukuoka City 2,140

Shibuya (Tokyo) 35,679 Kobe City 1,869

Nishi (Osaka) 33,941 Kyoto City 1,830

Naka (Aichi) 32,284 Sendai City 1,491

Toshima (Tokyo) 32,063 Hiroshima City 1,463

Source National Census, Savills Research & Consultancy Source Economic Census, Savills Research & Consultancy financial sector. In the short term, however, workforce growth, and fertility rates indicate Osaka is the second largest real estate market central banks are taking a cautious view a clear improvement in the nation’s outlook in Japan. As such, the region is unsurprisingly on economic conditions and becoming compared to ten years ago. In the face of attracting interest from both domestic somewhat dovish. Furthermore, the plentiful increasing political and economic uncertainty, and overseas investors, especially now as cash holdings of Japanese companies and Japan may remain a pillar of stability among investment opportunities are extremely households suggest limited demand for global peers. As many investors perceive that limited in Tokyo. As Osaka has come under the additional capital. the global economy is late in the cycle, Japan’s global spotlight, anticipation for the market Third, the planned consumption tax hike sound fundamentals and defensive nature are has risen. With various metrics signalling in October, which will be implemented during now even more appealing. improvement, the city might be gearing up an extended upward phase of the cycle, could Osaka in particular has an abundance of for a phenomenal turnaround from nadir to cause an economic contraction. Considering major growth catalysts over the next half zenith. that the last tax hike severely disrupted the decade. Development opportunities may arise That being said, these positive changes domestic economy, investors cannot be too as the Umekita project transforms the station- have only recently materialised. If economic optimistic about the impact. However, the front market, while an IR development and the fundamentals weaken, the city may not be government intends to implement various World Expo have begun to attract investment able to fully capitalise on the opportunities stimulus measures to reduce the effect on in the bay area. Socio-economic trends discussed in this report. Development in consumption. If economic conditions remain supporting Osaka’s real estate market are well- the bay area might offer growth potential; favorable, the Japanese economy may be able rooted and should drive long-term growth. however, the feasibility and timing of an to push through. Furthermore, the long-awaited improvement IR development is still indefinite and of the local economy is underway and appears any hiccup along the way could cloud OUTLOOK to be creating a favourable environment for investment prospects. Investors should As the Japanese economy maintains its the real estate market. Population growth in adopt a somewhat cautionary approach while steadiness and resiliency, positive trends are the central area is also bolstering property weighing upside potential. appearing across major cities in the country. demand in central Osaka. Metrics such as GDP, corporate profits, In terms of transaction volume, Greater

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