Savills World Research

Spotlight Real estate investment market: Review of 2012 and outlook for 2013 February 2013

savills.com.jp/research Spotlight | Real estate investment market: Review of 2012 and outlook for 2013 February 2013

Savills World Research Japan

Spotlight Real estate investment market: Review of 2012 Spotlight and outlook for 2013 February 2013 Real estate investment market: Review of 2012 and outlook for 2013 savills.com.jp/research

“Investment volume remained stifl ed by a lack of sell-side momentum in 2012, belying SUMMARY the strength of investor appetite through the Based on reported pricing, property investment year. Liquidity in the capital and debt markets in Japan totalled an estimated JPY2.1 trillion (US$26.1 billion) in 2012, down approximately 10% improved along with sentiment, while Japan’s year-on-year (YoY) due to a lack of purchasing low position in the rent cycle relative to certain opportunities in the offi ce sector. regional hubs has spurred increased cross- Driven by initial public offerings (IPOs), property purchases conducted by J-REITs totalled border interest.” approximately JPY736 billion (US$9.2 billion), up by around 8% YoY.

Four new J-REITs were successfully listed in Introduction retail at around 20% and residential 2012 – the fi rst in as many years – demonstrating The regionally-unrivalled depth of at just over 16%. The share attributed renewed willingness in the capital markets to fi nance Japan’s real estate market was to logistics properties was close to property acquisitions. highlighted in 2012 as deal fl ow 13% – stable from the previous year Improved access to debt fi nance was reported shifted away from an offi ce sector but twice that of 2010 on the back through the year, with eased lending criteria constrained by a lack of purchasing of heightened investor interest in this 2 contributing to heightened investor appetite across opportunities to alternative asset sector. the core asset classes. classes, most notably retail and logistics. Increased liquidity in the The indicative total investment volume Overseas investors were notably more active, capital markets was demonstrated for 2012 across all sectors was with a number of well-known global names by the structuring of four new listed approximately 10% lower than that completing sizable property acquisitions in locations nationwide. J-REITs – the fi rst in as many years of 2011, led by a decline in the offi ce sector equivalent to around 25% YoY. – as well as new private placement Investment volume across all property sectors The total value of property purchases  REITs affi liated with blue-chip is expected to increase in 2013, driven by continued names such as Goldman Sachs and conducted by J-REITs, however, rose growth in the REIT market and strengthened investor . In addition by about 8% YoY. With acquisitions sentiment. to expansion in the REIT market, totalling approximately JPY736 billion overseas funds seeking stable, long- (US$9.2 billion), the J-REIT market term returns refocused their attention accounted for around 36% of total on Tokyo and the country’s key real estate investment in Japan in In terms of individual assets, just over regional cities. The resulting broad- 2012, based on reported transaction half of acquisitions conducted by 3 based competition for quality assets pricing. This share is up from 30% in J-REITs comprised property transfers maintained downward pressure on 2011, and approximately 12% in both from a related party, predominantly cap rates across the core market 2010 and 2009. investment vehicles of sponsor sectors. companies. Nonetheless, J-REITs Mirroring the market as a whole, were active purchasers on the open Investment volume the volume of offi ce acquisitions by market, concluding approximately Preliminary fi gures compiled by Real J-REITs fell approximately 26% YoY in 45% of their deals through third-party Capital Analytics (RCA) suggest that terms of purchase price, with the retail vendors. approximately JPY2.1 trillion (US$26.1 and logistics sectors rising to fi ll the billion) of property was transacted gap. The share of J-REIT acquisitions Drivers of investment in reported deals in Japan during occupied by the retail sector rose Investment activity in 2012 was 2012.1 An estimated 77% of these to approximately 27% from 13% in supported by heightened liquidity in comprised asset purchases in Greater 2011, while logistics accounted for a the capital and debt markets. Tokyo. Proportionally, the offi ce sector 19% share, up from less than 2% the accounted for about 43% of Japan’s previous year. New REIT offerings – listed total acquisition value, followed by 2 Logistics includes distribution and Backstopped by the Bank of Japan’s other industrial-type units. 1 RCA based on independent reports 3 Savills Research & Consultancy based (BOJ) Asset Purchase Programme, of properties and portfolios of US$10 million and on J-REIT press releases and scheduled acquisition which invested some JPY40.6 billion greater. dates.

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(US$509 million) in domestic REITs GRAPH 1 during 2012, expansion of the J-REIT Japan real estate investment volume – estimated annual total vs market provided major developers and blue-chip corporations with a J-REIT acquisitions by sector, 2009–2012 natural exit point for stable properties Office Logistics/industrial Retail Apartment Hotel Other held on their balance sheets. 3,500 Investment volumes, particularly in the commercial and logistics sectors, 3,000 were bolstered by willingness in the capital markets to fi nance new REIT 2,500 offerings. Four J-REITs were listed through the year on the Tokyo Stock 2,000 Exchange, with Kenedix Residential Investment Corporation’s successful 1,500 IPO in April marking the fi rst new JPY billion J-REIT in approximately 4.5 years. The Kenedix-sponsored investment 1,000 trust started trading with an initial portfolio of 20 residential assets 500 located across Japan, acquired for a total of JPY30.4 billion (US$360 0 million). Total J-REIT Total J-REIT Total J-REIT Total J-REIT

The listing of Tokyu Land’s Activia 2009 2010 2011 2012*

Properties REIT followed in June, Source: Compiled by Savills Research & Consultancy based on RCA and publicly disclosed J-REIT data with 18 seed assets acquired from its *Preliminary data sponsor for approximately JPY170 billion (US$2.1 billion). Its opening assets under management comprised a mix of high-street and suburban Goldman Sachs Asset Management Tankan survey (Graph 2). This is retail facilities, offi ces and a lease- acquired three core properties considered to be a contributing land asset, located predominantly in in Tokyo to incorporate into its factor behind the noticeable the Greater Tokyo region. Refl ecting newly-structured private REIT increase in purchases of traditionally a price tag of JPY45 billion (US$564 for approximately JPY25 billion alternative asset types through the million) and an NOI yield of 3.9%, (US$312.5 million). The REIT is year by blue-chip domestic and the trophy asset of the portfolio is the fi rst private trust set up by an overseas players. Tokyu Plaza Omotesando Harajuku, a overseas fi nancial institution in Japan prime high-street retail property that and there are plans to eventually Overseas investors becoming opened in central Tokyo in April. increase its asset size to about more active JPY300 billion (US$3.75 billion). Domestic investors have driven In the third J-REIT listing of the Japan’s real estate market after year, REIT used the Separately, DREAM Private REIT credit tightening in the wake of proceeds of its November IPO was structured by Diamond the global fi nancial crisis led to an to part-fund the acquisition of 19 Realty Management, a Mitsubishi exodus of their generally higher- logistics facilities and a shopping Corporation subsidiary, with an initial leveraged overseas counterparts. It centre from its sponsor, Daiwa House JPY31.7 billion (US$402.0 million) is nonetheless important to note that Industry and related companies for investment in three Tokyo assets. A transaction data indicates increased JPY95.05 billion (US$1.2 billion). The fi rst of its kind affi liated to a trading activity by overseas investors in listing had previously been scheduled company, the private placement recent years, with a number of well- for June 2008 but was abandoned REIT focuses largely on top-grade known global names completing due to weakening market conditions. properties in the retail and logistics Japan’s second biggest IPO to date sizable property acquisitions in followed in December with the listing sectors and targets an asset volume locations nationwide in 2012. of GLP Reit. Singapore-based Global of JPY250 billion (US$3.1 billion) in Logistics Properties will initially fi ve years. Signifi cant deals involving overseas contribute 30 logistics properties players included Angelo Gordon and to the REIT in January 2013 with a Improved access to debt fi nance minority partner Orix Real Estate transfer price of JPY208.7 billion Coinciding with increased liquidity Capital’s purchase of ownership (US$2.6 billion). in the capital markets for real estate in the Kioicho Building, an offi ce investment, a gradual easing of property in central Tokyo, for an New REIT offerings – private lending criteria in the debt market estimated JPY24.2 billion (US$293.7 Illustrative of growth in the was noted by property investors – as million). Secured Capital Investment burgeoning non-listed REIT sector, illustrated by the BOJ’s benchmark Management and Aviva Investors’

savills.com.jp/research 03 Spotlight | Real estate investment market: Review of 2012 and outlook for 2013 February 2013

jointly-managed Tokyo Recovery GRAPH 2 Fund also targeted the offi ce sector, Lending attitudes of Japanese fi nancial institutions towards real acquiring its fi rst two assets for an estate, Sep 2005–Dec 2012 unconfi rmed price tag of around JPY15 billion (US$186 million). Large companies Medium companies Mid/small companies 40 Property transactions exceeding 30 JPY5 billion (US$63 million) were Loose also concluded across the offi ce, 20 retail, hospitality and logistics sectors by international groups 10 such as MGPA, RREEF, CapitaMalls Asia, Credit Suisse, SEB Asset 0 Management, S-REIT Ascendas -10 Hospitality Trust, US-REIT W. P. Diffusion index Carey and CBRE Global Investors. -20 Tight Increased liquidity is one aspect -30 behind this apparent refocus of global capital on the Japanese real -40 estate market. Another driving factor

is the perception that current pricing Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-05 Dec-05 Sep-06 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12 is at a cyclical low and that capital Source: BOJ Tankan Survey, Savills Research & Consultancy growth, led by a recovery in the offi ce sector, may occur in the short- to medium-term. GRAPH 3 Anticipation of a recovery in Grade A office rental index – Tokyo central five wards, 2003–2012 the offi ce sector failed to bring increased investment volume 110 As a result of sharp rental reductions in 2008 and 2009, and softened 100 cap rate expectations, current 90 pricing in Tokyo’s offi ce market looks comparatively cheap from 80 an historical perspective. In fact, 70 indicative capital values for Grade A space in 2012 were down as 60 much as 60% from their 2007 peak 50 based on mark-to-market NOI (2007=100) assumptions. Rental index 40

30 Complementing the view that the Tokyo market has become ‘good 20 value’, investment appetite has been 10 spurred by growing anticipation of a recovery in offi ce rents – 0 sentiment that 2012 leasing data 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 appears to support. After a bulge in Source: Savills Research & Consultancy speculative Grade A supply, stable tenant demand saw prime vacancy fall back from 7.0% in Q2 to offi ce passing rents in 2012 rose increase in investment volume. This approximately 5.9% in Q4. Declining 1.2% over average 2011 rental is principally attributable to the availability in certain submarkets pricing. limited availability of investment enabled landlords to fi rm-up rental grade properties on offer, a trend expectations for well-positioned Improved sentiment towards the that in part stems from domestic properties, while the addition of Tokyo offi ce sector saw investors vendors’ disinclination to sell on new high-specifi cation buildings actively looking for core and core- the open market given the lack of helped to pull prime market rents plus purchasing opportunities. investment alternatives and their up through the year. The combined Nonetheless, as reported above, generally conservative gearing.  effect was that average Grade A the offi ce sector failed to see an

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TABLE 1 Major investment transactions, 2012

Price Quarter Property Location Buyer Usage Notes (approximate)

Global Logistic JPY122.6 bil/ Joint venture purchase from LaSalle Q1 15-asset portfolio Greater Tokyo, Osaka, etc. Properties and China Logistics US$1.6 bil Investment Management. Investment Corp

Purchase of 38,561-seater home of pro- baseball team Fukuoka SoftBank Hawks by Jigyohama, Chuo Ward, JPY87 bil/ Q1 Fukuoka Yahoo Japan Dome Softbank Corp Sports stadium the team sponsor, telecoms fi rm Softbank Fukuoka US$1.06 bil Corp. Vendor was Singapore sovereign wealth fund GIC.

Acquisition of Morgan Stanley Capital’s Yebisu Garden Place Ebisu, Shibuya Ward, JPY40.5 bil/ Q1 Sapporo Holdings Mixed-use 15% interest in Ebisu Garden Place by the (15% sectional ownership) Tokyo US$500 mil majority stakeholder.

Portfolio of industrial facilities including Industrial & Infrastructure JPY37.3 bil/ Industrial/ logistics, R&D and data-centre units. Q1 6-asset portfolio Greater Tokyo Fund Investment Corp US$471 mil logistics Multiple sellers including entities formed by (J-REIT) Goodman Japan and Mapletree. Compartmentalised ownership in a 62,540- sq m mixed-use property sold by Mori Kioicho Building (approximately Kioicho, Chiyoda Ward, JPY24.2 bil/ Angelo Gordon, Orix Real Offi ce/retail/ Q1 Building. The deal was arranged by Orix 70% of interest) Tokyo US$293.7 mil Estate residential Real Estate, who invested in a minority interest. Transfer of 18 seed assets from developer Tokyu Land to its newly established REIT, Activia Properties. Flagship JPY170.37 bil/ Activia Properties Offi ce/retail/ Q2 18-asset portfolio Greater Tokyo, Osaka, etc. assets included two prime central Tokyo US$2.13 bil (J-REIT) leased land commercial properties, namely Tokyu Plaza Omotesando Harajuku and Shinbashi Place.

Atago Green Hills JPY25.6 bil/ Offi ce/retail/ Property transfer between Mori Hills REIT Q2 Atago, Minato Ward, Tokyo Mori Hills REIT (sectional ownership) US$320.0 mil residential and its sponsor, Mori Building.

Purchase of the offi ce and retail portion of Japan Real Estate a mixed-use tower from Property TIX Tower Ueno Higashi-Ueno, Taito Ward, JPY22.0 bil/ Q2 Investment Corp Offi ce Development, and Tokyo (sectional ownership) Tokyo US$275.0 mil (J-REIT) Kaihatsu K (a special purpose company [SPC]).

Shinbashi, Minato Ward, JPY25.05 bil/ Seller was utility fi rm Tokyo Electric Power Q3 Toshin Building NTT Urban Development Offi ce Tokyo US$320.4 mil Company (TEPCO).

Two offi ce assets and one residential property acquired for incorporation into JPY25.0 bil/ Goldman Sachs Asset Q3 3 properties Central Tokyo Offi ce/residential Japan Private REIT, the fi rst private trust US$316.2 mil Management set up by an overseas fi nancial institution in Japan.

Purchase of retail element of Olinas, a Kinshicho Olinas JPY22.8 bil/ Q3 Taihei, Sumida Ward, Tokyo CapitaMalls Asia Retail mixed-use facility in Tokyo, from an SPC of (Olinas Mall, Olinas Core) US$288.4 mil Invesco Global Real Estate Asia Pacifi c.

Acquired properties are located in Tokyo, Aichi, Osaka, Hyogo and Shiga prefectures. The vendor was Rhodia Godo Kaisha Greater Tokyo, Nagoya JPY14.04 bil/ Invincible Investment Q3 24-property portfolio Residential an SPC that has received anonymous and Kansai areas US$179.6 mil Corp (J-REIT) association investment through a fund affi liated with Calliope, a sponsor of the REIT.

Transfer of 19 logistics facilities and one JPY95.1 bil/ Logistics/ commercial mall to the newly-listed REIT Q4 20-asset portfolio Nationwide Daiwa House REIT US$1.2 bil commercial from its sponsor, Daiwa House Industry and related companies.

The vendor is a fund established by the Kenedix, Tokyu Land and Morgan Stanley Group. Kenedix, Tokyu Former HQ Uchisaiwaicho, JPY51.0 bil/ Q4 the Development Bank Offi ce Land and DBJ plan to reconstruct the Building Chiyoda Ward, Tokyo US$609.8 mil of Japan (DBJ) building into a new large-scale rental offi ce property.

Diamond Realty Management Inc (DREAM), JPY31.7 bil/ Logistics/ a Mitsubishi Corporation Group company, Q4 3-asset portfolio Greater Tokyo DREAM Private REIT US$402.0 mil commercial invested in three Tokyo properties for its newly-structured private REIT.

50% co-ownership investment in a 233,606- sq m shopping centre. Part of a JPY52.2 Futakata-cho, Nishi Ward, JPY26.8 bil/ Japan Retail Fund billion (US$671.7 million), seven-asset Q4 Mozo Wonder City Retail Nagoya US$342.1 mil (J-REIT) commerical property portfolio acquisition by the Mitsubishi Corporation and UBS- sponsored J-REIT.

Source: Savills Research & Consultancy

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Outlook for 2013 Prospects for the market

Investment volume across all The recovery in Tokyo’s prime return of the European open-ended real estate sectors is expected offi ce leasing market is expected funds, as they hunt for durable to increase in 2013, driven by to see modest rental growth yields in the region and reallocate continued growth in the REIT continue through 2013, driven away from certain markets which market and improved investor by strengthened economic enjoyed signifi cant attention over the sentiment. Currently, as many fundamentals and a signifi cant past three years, namely Singapore as four new J-REIT listings are reduction in new offi ce supply. New and Australia. This may result in: earmarked to take place in the opportunities to acquire large-scale 1) moderate cap rate compression short term, including Nippon Tokyo offi ce properties may present across sectors for core assets Prologis REIT and Comforia themselves as several Japanese throughout 2013; and 2) increased Residential REIT, which are set corporations consider selling-off appetite for certain asset classes to IPO in February, and those non-core assets in an effort to free- outside Greater Tokyo, as investors planned by retail giant Aeon up capital. Such assets are reported expand their geographical sphere and property company Hulic. to include the headquarters facilities in order to secure required returns. The private REIT market is of major electronics groups , Aside from well-positioned residential also expected to see further and Sharp, and leading and logistics assets located in and expansion, exemplifi ed by the beverage manufacturer Kirin. around Japan’s major regional cities, anticipated launch of Japan’s fi rst commercial and offi ce properties in open-ended unlisted residential The weight of capital chasing Kansai as well as high-street retail REIT by Daiwa Real Estate Asset investment opportunities should in Fukuoka appear to generate Management in March 2013. increase slightly from 2012. signifi cant interest.  Additionally, 2013 may see a

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