Savills World Research Japan

Spotlight Japan retail May 2018

savills.com.jp/research Spotlight | Japan retail May 2018

Savills World Research Japan

Spotlight Japan retail May 2018 Spotlight Japan retail

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“Positive macro conditions such as growing tourism and a mild uptick in consumer SUMMARY confidence appear to be improving retail rents in some submarkets. Investment interest,  Tokyo’s average 1F retail rent has generally remained stable since 2016. notably in Japanese prime retail assets as core assets, remains strong, leading to further cap  Non-1F rents continue their steady trend upward. rate compression.”  1F rents have improved 14.1% YoY, Tokyo submarket rents Ginza 1F rents sat at JPY58,100 possibly due to increasing overseas tourist expenditures and positive luxury product sales. According to a semi-annual survey per tsubo, remaining the highest by Japan Real Estate Institute (JREI) among the surveyed submarkets. 1F rents in Ginza grew 14.1% YoY  Consumer confidence is mildly improving and BAC Urban Projects, Tokyo’s while non-1F rents fell 1.0% YoY. 1F with high-income households seeing the largest retail rents have on average held rents in Ginza had been declining improvement. fairly steady since 2016. Non-1F since 1H/2015, concurrent with a rents continue their steady march decrease in average spending per  Drugstores and daily goods stores sales upward as 1F rents edged up year- overseas tourist. As discussed later continued to increase in 2017, growing 5.8% YoY. on-year (YoY), although with diverged in this report, the spending decline performance between submarkets. has halted and total shopping  Investment volumes in retail have increased to The largest growth was seen in expenditures by overseas tourists JPY771 billion in 2017. Q1/2018 has not seen many Ginza, which could be resulting have been increasing due to the transactions because of limited opportunities, but from consistently strong tourism growing number of visitors. Luxury investment interest appears to remain sound. and improving luxury retail sales. retail sales are also on the rise, which The opening of Ginza Six is also may have contributed to the rental increasing footfall in the submarket. increases. Furthermore, Ginza Six On the other hand, a slowdown of appears to have had a solid first year, fast fashion might have led to store and it is expected to reach its goals, closures in some submarkets. namely 20 million visitors and JPY60

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

Ginza 1F Omotesando 1F Shinjuku 1F 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

70 40

60 35

30 50 25 40 20 30

Thousand tsubo/ JPY 15

20 Thousand tsubo JPY / 10

10 5

0 0 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

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billion in sales. Considering these YoY to JPY22,200. According to JREI, shopping expenditures by overseas positive factors, the rental growth in reconstruction of existing buildings is tourists increased by JPY214 billion, Q1 could be the beginning of another tightening vacancy, thereby resulting or 15% YoY, to JPY1.6 trillion. While gradual upward trend. in rental increases. Although 1F rents Chinese tourists account for over decreased 29.5% YoY to JPY19,800 50% of the spending, expenditures by 1F rents in Omotesando/ in Shinsaibashi, an abnormally large tourists from other countries also saw rose 7.7% YoY to JPY48,900 per decline in Q3 affected the 2H average. a rapid increase of JPY119 billion yen tsubo while non-1F rents fell 1.7% In Q4, 1F rents rebounded to around or 19% YoY. Notably, Korean tourist YoY to JPY28,700 per tsubo. While JPY24,000, and top rents along spending increased by about JPY40 apparel stores such as Forever 21 Midosuji and Shinsaibashisuji appear billion, or 40% YoY, due to increased and Harajuku’s iconic Spinns closed, to remain stable. It also appears that visitation. new stores continue to open in the the limited sample size is making area. Tenant movements are rapid as the trend look volatile. Although the The shift in tourist spending from many lease spaces for a short period Mikigakki Shinsaibashi Building is luxury goods to daily necessities such of time for advertising purposes. currently closed for reconstruction, as cosmetics and health products For example, after Urban Research it is scheduled to reopen in autumn appears to be responsible for closed its Harajuku store, the 2018 and will house Mikigakki stores decreases in shopping expenditure space was used as a pop-up store and GAP. With the opening of the new per person, as unit prices are low. by Jack & Marie, a lifestyle brand Shinsaibashi Main Tower in newly launched by automotive parts 2019, as well as the opening of Parco company Autobacs. The Harajuku and W , a luxury Marriott hotel, GRAPH 3 Takara Estate Building, which housed planned for 2021, the dynamism of 1F rents in retail districts of regional Forever 21 until October 2017, is the area, which is currently dominated cities, 2008 – 2017 currently under renovation. by drugstore openings, might change. Nikkei has recently reported Louis Shinsaibashi 1F Nagoya Sakae 1F Sendai 1F Fukuoka Tenjin 1F In Shinjuku and Shibuya, 1F rents Vuitton’s plan to build a B1/7F retail Sapporo 1F Average asking rent 1F declined 18.8% to JPY35,400 and building by November 2019 on a 35 4.8% to JPY33,500 YoY, respectively. vacant site next to Prada. 30 However, the rental declines can be largely explained by a decrease Although growing e-commerce 25 in survey samples. Vacancy is tight is a threat especially for regional 20 and there appears to be limited retail stores, as discussed in the availability in high-rent areas. Since previous retail report, the impact 15 these areas are popular destinations from e-commerce appears to have 10 among overseas tourists, expanding been limited due to constraints Thousand tsubo JPY / tourism should benefit the submarkets. such as a labour shortage in the 5 According to a 2016 survey by the logistics industry, a relatively older conservative Japanese population, and 0 Tokyo Metropolitan Government, 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H comparatively low credit card usage. In Shinjuku is the most visited ward in 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Japan, retail space per person is about Tokyo while Shibuya is in fourth place: half of that in the U.S. and Japanese Source: JREI, BAC Urban Projects, Savills Research & Consultancy 57% and 44% of inbound tourists regional malls mainly function as coming to Tokyo visit Shinjuku and supermarkets selling fresh food as GRAPH 4 Shibuya, respectively. Although the opposed to department stores in the Overseas tourist shopping expenditure, old GAP site in Shibuya is yet to find a U.S., which also mitigates the impact 2014 – 2017 tenant, opened a pop-up from growing e-commerce – which store in April that featured Kim Jones’ has had little influence in the fresh China Other Per Person Fall-Winter 2018 Men’s Precollection food sector so far. Enhancing in-store 500 80,000 on the site, highlighting the area’s 450 experience, especially in regions 70,000 Shopping expenditure Shopping per person attractiveness. lacking in entertainment venues, 400 should also help as consumers 60,000 350 Regional cities increasingly value experience over 50,000 Overall, regional 1F rents have not material goods. 300 been performing well. The average 1F 250 40,000 rent across prime districts outside of Inbound tourism 200 30,000 Tokyo sat at JPY19,483 based on the Although a rapid increase of Chinese 150 latest survey, down 8.3% YoY. On the tourist spending due to “bakugai” 20,000 100 other hand, non-1F rents registered (“explosive buying”) abruptly ended billion) Shopping (JPY expenditure 10,000 positive growth of 1.6% YoY to in 2015, expanding tourism continues 50 JPY12,617. to have a large positive impact on 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 the Japanese retail sector as total 2014 2015 2016 2017 At the submarket level, 1F rents in expenditures by overseas tourists Tenjin saw positive growth of 15% are steadily growing. In 2017, total Source: Japan Tourism Agency, Savills Research & Consultancy

savills.com.jp/research 03 Spotlight | Japan retail May 2018

Unlike the short-lived shopping sprees GRAPH 5 surrounding certain electronics and Overseas tourists to Tokyo and Osaka, 2006 – 2017 luxury items, however, the popularity of daily necessities is likely to be more sustainable. According to the Ministry Tokyo Osaka 16,000 of Economy, Trade, and Industry (METI), drugstore sales nationwide in 14,000

2017 have grown 5.8% from 2016. 12,000 Food and cosmetics have led the growth, increasing sales by 8.7% 10,000 and 6.8%, respectively. Additionally, 8,000 according to the Japan Department Store Association (JDSA), duty-free Thousand visitors 6,000 sales at department stores have 4,000 soared to JPY270 billion in 2017, a whopping 46% growth YoY. 2,000 0 Osaka is an especially popular 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Est.) 2017 destination among overseas tourists due to its unique culture, proximity Source: Tokyo Metropolitan Government, Osaka Metropolitan Government, Savills Research & Consultancy to Kyoto, and access to a major international airport with large low GRAPH 6 cost carrier (LCC) capacity. When Luxury item sales at department stores (12-month compared to Tokyo, the area has moving average), 2016 – Feb 2018 more room for growth in tourism. Kansai International Airport was 9.5 30 served by about 18,000 LCC flights in 2016, which made travels from 9.1 20 neighbouring Asian cities affordable. Although the figure is more than the combined number of LCC 8.7 10 YoY (%) flights to Narita and Haneda, Kansai

International Airport is still running 8.3 0 around 80% of its capacity, unlike Sales (JPY billion) the two Tokyo airports at almost full capacity. Additionally, visitation to 7.9 -10 Universal Studios Japan (USJ) in FY2016 grew 5% YoY. The number 7.5 -20 Jul Jul Apr Apr Oct Oct Jan Jan Jan Jun Jun Feb Feb Feb Sep Sep Mar Mar Nov Nov Dec Aug Dec Aug May of international visitors to the park is May rapidly growing, doubling the 2014 2016 2017 2018 figure to reach 2 million in CY2017. Source: JDSA, Savills Research & Consultancy In contrast, Tokyo Disney Resort (TDR) experienced a slight increase GRAPH 7 of 0.3% in FY2017, indicating that Japan consumer confidence by income level, 2006 – TDR is reaching full capacity. The pace of growth in visitation to Osaka Apr 2018 is likely to continue to exceed that of Below JPY3 million JPY5.5-7.5 million Over JPY12 million 60 Tokyo, likely resulting in increases in tourist retail spending. According to 55 JDSA, sales in Osaka grew 6.8% YoY 50 in 2017. In Shinsaibashi in particular, Daimaru increased its total sales by 45 14% and duty-free sales by 71% YoY. 40

Department store sales 35 According to JDSA, department

Consumer Confidence Index 30 store sales in ten major cities grew by 1.7% YoY, with Osaka leading the 25 growth at 6.8% YoY. 20

In addition to cosmetics, JDSA reported that sales of luxury items Source: Cabinet Office, Savills Research & Consultancy

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MAP 1 High asset prices should increase Taxable income growth, 2010 – 2017 income levels among high-income households as they typically own multiple assets including equity and real estate, which can generate large capital gains upon sale. Moreover, according to the Ministry of Health, Labour and Welfare, wage growth in Tokyo in 2017 was 1.2% YoY, much higher than the national average of 0.1% growth.

At the store level, some chains appear to be outperforming others. In FY2017, the Hankyu/Hanshin, Takashimaya, and Daimaru/Matsuzakaya chains have increased sales by 5.4%, 2.9% and 2.7% YoY, respectively. Meanwhile, sales of major Sogo/Seibu stores have only marginally increased at 0.4% YoY, and Isetan/Mitsukoshi has registered at -2.7% YoY.

Examining the top performing stores of each chain, overseas tourists are playing a major role in increasing sales, as the top performers are located in popular destinations such Source: MHLW, @OpenStreetMap (www.openstreetmap.org/copyright), Savills Research & Consultancy as Shinsaibashi, Ginza, and Shibuya. GRAPH 8 Daimaru Shinsaibashi registered at Comparison of store sales growth of major the highest growth of 14% YoY in 2017, as a result of actively going after department store chains, FY2017 vs FY2016 inbound tourist demand by setting up two cosmetics spaces, promoting through social networking services, Hankyu and expanding the use of a mobile Hankyu Hanshin billing method. Osaka Takashimaya Takashimaya New projects in 2018 Daimaru Shinsaibashi Tokyo Midtown Hibiya fully opened Daimaru to the public in March 2018. The Matsuzakaya Seibu Shibuya 35-storey mixed-use tower has 60 Sogo Seibu retail stores and 13 movie screens. Ginza Mitsukoshi The new iconic building overlooking Isetan Mitsukoshi the Imperial Palace attracted 100,000 visitors on its opening day. Mitsui Chain total Fudosan, the developer of the tower, -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% is targeting JPY13 billion in revenue YoY for the first year of its operation. The Source: Company disclosures, Savills Research & Consultancy introduction of this new retail venue may change the dynamism of footfall such as art, jewellery, and precious In addition to increasing tourist in the western part of Ginza. metals are on the rise at department spending, mild improvement in stores. Although luxury item sales consumer confidence of domestic Shibuya Stream is slated to open in fall largely declined after the Chinese shoppers, with high-income 2018. The mixed-use tower will have government imposed new tariffs in households recording the largest 3,000-sq-m retail spaces, a multi- 2016, they started posting positive improvement, may be contributing purpose space, a 180-room hotel, and growth in May 2017. 2017 was also a to the growth. Despite slow wage a 14,000-tsubo office component. The strong year for luxury brands such as growth across the nation, taxable retail space will target adult customers, LVMH and Kering, with sales of LVMH income levels in the central five reflecting Shibuya’s transformation and Kering brands in Japan increasing wards, where average household from a pop-culture mecca to a more 12% and 11%, respectively. incomes are high, are increasing. matured city appealing to a wider

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range of clientele. Additionally, GRAPH 9 Google is leasing the entirety of the Retail property investment volume by buyer type, office space in Shibuya Stream. More 2007 – Q1/2018 high-earning office workers in the area should result in growing footfall Overseas Equity & Institutional Listed Companies & REITs Private Unknown Other and will likely have a positive impact 1.4 on retail sales. 1.2

Investment trends 1.0 In 2017, investment in retail property picked up compared to 2016. Total 0.8 volumes amounted to JPY771 0.6 billion through 2017 according to yen Trillion preliminary data from Real Capital 0.4 Analytics (RCA). This is up 45% compared to 2016, mainly due to 0.2 two large portfolio transactions by 0.0 Blackstone and Norges Bank. In Q1/2018, transaction volumes have significantly decreased compared to the same period in 2017. However, Source: RCA, Savills Research & Consultancy investment interest in the Japanese retail market appears to remain 3.7%, respectively, in October 2017, cities. In Nagoya and Osaka, retail sound, as illustrated by Norges a tightening of 10 basis points from six buildings housing international Bank and Tokyu Land Corporation’s months prior. Actual transaction cap fashion brands such as Prada, acquisition of five prime retail assets rates appear much tighter, however. Dolce & Gabbana, and Zara in Tokyo. In Ginza and Shinsaibashi, cap rates were transacted. Prime Square could now be in the mid 2% to 3% Shinsaibashi was reportedly sold for A semi-annual survey by JREI range. JPY22 billion by Elliott Management, revealed that expected cap rates about 70% appreciation from the for prime retail property in Ginza In Q4/2017 and Q1/2018, large price the seller paid to acquire the and Omotesando sat at 3.6% and transactions were seen in regional building in 2014. 

TABLE 2 Selected retail transactions, announced Q4/2017—Q1/2018

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

Dec 2017 Prime Square Shinsaibashi Chuo, Osaka 9,414 Approx 22.0 NA Marubeni

3.3% Nov 2017 G Bldg Midosuji 02 Chuo, Osaka 1,390 15.0 Japan Retail Fund (Appraised)

3.7% Mar 2018 Sakae Globe (60%) Sakae, Aichi 4,596 9.3 Frontier REIT (Appraised)

4.4% Nov 2017 Summit Store Mukodaicho Nishi Tokyo, Tokyo 10,660 5.1 Nomura Master Fund (Appraised)

Costco Wholesale Sapporo 4.5% Mar 2018 Sapporo City, Hokkaido 24,000 4.2 Kenedix Retail REIT Warehouse (Appraised)

Source: RCA, Nikkei RE, Savills Research & Consultancy

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OUTLOOK The prospects for the market

Retail rents are broadly flat at As the line between winners and available in regional cities, investment high levels, though they look to losers materialises, it is increasingly volumes in such areas may increase be fluctuating because of small important to gain a competitive as investors look outside of Tokyo sample sizes resulting from advantage through capturing in search of new opportunities and limited available space. The inbound tourist demand, identifying better yields. overall steady trend appears to advantageous locations, and continue while increasing inbound enhancing in-store experience. tourism encourages increases in average rents, especially in areas Investment volumes in 2017 have popular among visitors. picked up from 2016. Although volumes in Q1/2018 declined Consumer confidence has been improving with high-income compared to the prior-year period, households seeing the largest small transaction volumes are due uptick. Although wage growth to limited availability. Investment is limited across Japan, income interest, especially for prime retail levels have steadily increased in property, remains strong as illustrated the Tokyo central five wards and by acquisitions made by Norges major regional cities in recent Bank and Tokyu Land Corporation. years. With more acquisition opportunities

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