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Spotlight Japan retail October 2016

savills.com.jp/research Spotlight | Japan retail October 2016

Savills World Research Japan

Spotlight Japan retail October 2016 Spotlight Japan retail

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“Stable rental trends from last year have continued through mid-2016. Slight moderations SUMMARY in 1/F rents are offset by growth in non-1/F rents, Average all-fl oor rents changed very resulting in little overall movement. A late uptick little from 2015, moderating about 0.4% through in consumer confi dence and retail sales may mid 2016. Ginza 1/F rents remain the highest in the city, followed by , which competes with hint at mild increases ahead. Chinese "bakugai" Omotesando for second place. appears to have fallen off due to new import Retail “bakugai” spending by Chinese tourists, duties in China, but the long-term trend for one of the major stories of 2015, appears to have tourist spending is still positive.” dropped off as suddenly as it appeared. Total aggregate spending by overseas visitors nevertheless continues to trend upward. Rents have moved 1H/2016. This is a 0.7% increase over minimally in 1H/2016 the previous period. Some important macro indicators are showing signs of life. Retail sales fi nally saw an uptick in July Retail rents in Tokyo grew steadily from after decreasing for twelve months. More decisively, 2011 to early 2015, but have since Ginza 1/F rents sit at JPY50,200 consumer confi dence has climbed to its highest paused. Ginza 1/F rents experienced per tsubo, still comfortably up 38% level since before the 2014 consumption tax hike, a correction in 2H/2015 after three from their 2012 trough. According to and real wages have increased marginally for seven periods of double-digit growth, the Japan Real Estate Institute, very consecutive months. offsetting smaller gains in Shinjuku and limited vacancy data for fi rst-fl oor Omotesando. The situation changed lease contracts means that Ginza 1/F’s Total 1H/2016 investment volumes in Japan little over 1H/2016 as 1/F rents in growth and subsequent contraction in have amounted to just 34% of volumes in 1H/2015, Tokyo’s major retail districts (defi ned 2014 and 2015 was partially driven by as excess liquidity chases few opportunities. The as Ginza, Omotesando, Shinjuku, a few high-price vacancies, later fi lled. pullback is mainly from J-REITs, while overseas and Shibuya) further moderated to There may be additional short-term buyers continue to invest at the same rate. JPY41,925 per tsubo, a decrease of softness ahead as the Matsuzakaya 2.9% since 2015. Non-1/F rents have G6 project opens in April 2017 with Developers have announced multiple new meanwhile continued their slow but approximately 250 high-end retail projects both in Tokyo and beyond, such as steady climb, reaching JPY25,800 in tenants. This infl ux of new supply may Yodobashi Camera’s new mixed-use tower complex near Station. GRAPH 1 1/F rents in major Tokyo retail districts, 2008–1H/2016 cause some secondary vacancies Ginza 1F Omotesando 1F Shinjuku 1F Shibuya 1F Average asking rent: 1F around the Ginza submarket as some 90 brands take up prime space in the

80 new shopping complex. Some believe that recently growing land prices in 70 Ginza may also look overheated. The

60 long-term trend is still stable, however, especially toward the Olympics. 50

40 Despite their recent moderation, 1/F rents in Ginza are still higher than in 30 Shinjuku and Omotesando, which Thousand JPY / tsuboThousand JPY 20 typically vie for second place. Both districts also experienced a small 10 slowdown in 1H/2016 and now sit at 0 JPY45,200 and JPY40,500 per tsubo 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 16 respectively. 1/F rents in Shibuya are still noticeably lower than in other Source: Japan Real Estate Institute, BAC Urban Projects, Savills Research & Consultancy prime retail districts, partially due to

savills.com.jp/research 02 Spotlight | Japan retail October 2016

GRAPH 2 large redevelopment projects ongoing Non-1/F rents in major Tokyo retail districts, 2008– around Shibuya Station. 1/F rents in Shibuya averaged JPY31,800 in 1H/2016 1H/2016. Ginza Non-1F Omotesando Non-1F Shinjuku Non-1F Shibuya Non-1F Average asking rent: Non-1F 45 Non-1/F rents paint a much steadier growth picture. Average non-1/F rents 40 in major retail districts have remained 35 fl at or posted small, single-digit growth 30 almost every year since 2011, with little

25 variation between districts. The one exception is Omotesando, which has 20 grown 27% since 2011, signifi cantly 15 outpacing the 17% average, and Thousand JPY / tsuboThousand JPY 10 currently sits higher than even Ginza

5 non-1/F rents at JPY29,400 per tsubo. As discussed in the previous report, 0 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H this is largely due to the relatively small, 2008 2009 2010 2011 2012 2013 2014 2015 16 boutique-style frontage and low total GFA of buildings in Omotesando, Source: Japan Real Estate Institute, BAC Urban Projects, Savills Research & Consultancy where 2/F and 3/F tenants enjoy relatively higher visibility than in other GRAPH 3 districts, and as such upper level rents 1/F rents in retail districts of regional cities, 2008– are more highly correlated with 1/F 1H/2016 rents.

Shinsaibashi 1F Sakae 1F 1F Tenjin 1F 1F Average asking rent 1F Finally, non-1/F retail rents are 35 understandably more uniform across Tokyo than are 1/F rents. The gap 30 between Ginza and Shibuya 1/F rents 25 was JPY18,400 in 1H/2016; the gap was only JPY4,300 when considering 20 non-1/F leases.

15 A survey of 1/F rents in other major 10 Thousand JPY / tsuboThousand JPY cities across Japan reveals more

5 sporadic trends. After a correction in late 2014 and early 2015, the average 0 1/F rent in major retail districts of 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 16 Osaka, Nagoya, Fukuoka, Sendai, and Sapporo began to rise again Source: Japan Real Estate Institute, BAC Urban Projects, Savills Research & Consultancy in 1H/2016, reaching JPY20,040. This represents an increase of 1.3% over 2H/2015. 1/F rents in Osaka’s GRAPH 4 Shinsaibashi district have averaged Average shopping expenditure per visitor, 2011– between JPY25,000 and JPY30,000 1H/2016 over the past few years, putting them on part with non-1/F rents in prime 2011 2012 2013 2014 2015 1H/2016 Tokyo districts. 1/F rents in Fukuoka’s Tenjin district appeared to be on track for six periods of consecutive gains until they fell back to JPY17,900 in 1H/2016, likely partially due to the Kumamoto earthquake earlier this year. The rise and fall of JPY / visitor Chinese retail spending Up through early 2016, the market was abuzz with news of Chinese “bakugai” (literally, “explosive buying”) and its potential positive impact on the

China Average Japanese retail sector. News reports (All visitors) characterized Chinese tour groups as swarms of hungry consumers, Source: Ministry of Land, Infrastructure, Transport, and Tourism, Savills Research & Consultancy descending upon major retail centres

savills.com.jp/research 03 Spotlight | Japan retail October 2016

and purchasing mountains of both short-term phenomenon. These start to the year. In July, retail sales luxury and household merchandise in new import tariffs, however, have fi gures reversed a decline that began a single visit. Data from the Ministry of accelerated the decline in buying as in mid 2015, hopefully signalling Land, Transport, and Tourism indicated the Chinese government attempts to more improvement ahead. Consumer that the average shopping expenditure capture some of the surplus. confi dence likewise climbed in the per tourist in Japan increased 75% third quarter to reach its highest level from 2011 to 2015, mainly driven by The long-term trend for overseas since the 2014 consumption tax hike. an 87% increase in expenditure by tourism spending in Japan Chinese tourists specifi cally. Chinese nevertheless remains positive. Even Though long-term prospects for consumers themselves cited the though each individual tourist is Japan’s retail sector are stable to relative affordability and high quality of spending less on average, the overall strong in light of the upcoming Tokyo Japanese products as a major driver number of tourists continues to post Olympics and increased tourism, for these shopping sprees. Some record-breaking growth and aggregate it may take more time for these Chinese travellers arrive or even live shopping expenditure is consequently infl uences to feed through to further in Japan as “daigou”, or professional still increasing. rental increases. shoppers, purchasing goods in bulk for clients back home. International arrivals to Japan totalled Large-scale department store and 18.0 million YTD as of September supermarket retail sales fi gures for Unfortunately, the bakugai trend 2016, a 24% increase over the same July totalled JPY1.72 trillion, a JPY14 appears to be vanishing almost as period in the previous year. This billion or 0.8% increase over July fast as it appeared. Government data increase comes despite a 16% rise in 2015. The 12 month moving average shows a 20% decrease in average the value of the yen vs the US dollar rose just 0.1% from June 2016 to July retail spending per Chinese tourist in and an 18% rise vs the yuan since 2016, but this was the fi rst increase in 2016, down to JPY140,000 per visitor January 1, alleviating concerns that from a 2015 high of JPY173,000. The Japan’s exploding tourism would major immediate driver of this decrease cool down if the yen strengthens. As GRAPH 5 appears to be a new tax law passed by of October, it appears that exchange International arrivals to Japan, 2003– the Chinese government effective April rate movements have had little visible 2016, which severely increased import impact on the number of arrivals in Sep 2016 duties on cross-border retail goods Japan, though it has likely contributed Total Of which China 45 and also stepped up penalties for to some of the slowdown in their per Target false customs declarations. Duties on capita retail spending. 40 alcohol and luxuries specifi cally rose to 35 60%, in some cases doubling, making The government has set a target of large purchases prohibitively expensive. 40 million visitors by 2020, and we 30 Forecast Tariffs on even relatively mundane believe that it can succeed provided 25 products such as books and food now that it continues to prioritise tourist- sit at 15%. A 15-20% rise in the yen friendly programmes and that other 20 against the yuan since January also Asian economies maintain reasonable Million visitors 15 likely blunted Chinese shopping sprees. growth. 10

Because the price and quality Domestic macro 5 differential between Japanese and indicators showing signs 0 Chinese goods is largely an arbitrage of life opportunity, the bakugai trend was Two key macroeconomic indicators always destined to be a relatively are showing signs of life after a choppy Source: Japan National Tourism Organization, Savills Research & Consultancy

TABLE 1 New import duties on products in China, Apr 2016

Category Products Tariff

Books and newspapers, publications, audio and video materials for educational use; computers, Category I video cameras, digital cameras and other IT products; food and beverages; gold and silver; 15% furniture; toys, gaming products, and festive and other recreational products

Sporting goods (excluding golf balls and clubs), fi shing tools; textiles and their manufactured Category II goods; TV cameras and other electrical appliances; bicycles; other goods not included in Category 30% I and III

Alcohol and tobacco; valuable accessories, jewelry and gemstones; golf balls and clubs; luxury Category III 60% watches; cosmetics

Source: KPMG, Savills Research & Consultancy

savills.com.jp/research 04 Spotlight | Japan retail October 2016

a year, possibly signalling a change in In May Mitsui Fudosan commenced GRAPH 6 momentum. work on its OH-1 redevelopment Japan retail sales trend (12m moving project in Otemachi. The project Offi cial surveys show a marked consists of two planned offi ce towers average), Jan 2013–Jul 2016 increase in Japan’s consumer and a 6,000 sq m green area adjacent YoY% (RHS) Retail sales, 12mma (LHS) confi dence, rising 1.2 points or to the Imperial Palace. Though the 1.70 20% 2.9% over the third quarter to reach property will primarily consist of offi ce 1.68 its highest level since before the space, it will also harbour multiple 1.66 consumption tax hike in April 2014. fl oors of retail space, a luxury hotel, 10% Some of this boost may be due to the and high-tech conference facilities. 1.64 strong outcome of summer elections, 1.62 in which the Abe administration won a Electronics retailer Yodobashi Camera YoY% 1.60 0% solid mandate to continue its economic announced in August that it will policy and Tokyo elected a new construct a new mixed-use B4/34F JPY Trillion 1.58 governor in a highly publicised contest. tower near the north exit of Osaka 1.56 Real wages have also risen marginally Station, tentatively titled Yodobashi -10% for seven consecutive months. Umeda Tower. The fi rst eight fl oors of 1.54 the facility will house retail space, while 1.52 Development projects fl oors 9 through 34 will house a 1,000- 1.50 -20% underway in Tokyo and room hotel. Yodobashi Camera says Jan-13 Jan-14 Jan-15 Jan-16 beyond that it does not intend to house its own Data includes department stores and supermarkets Recent regional competition and store in the retail space, and tenants Source: METI, Savills Research & Consultancy continued urbanisation have led some have yet to be decided. A sightseeing GRAPH 7 department store operators to close bus terminal will occupy part of the fi rst extraneous stores in more distant fl oor, which the company hopes will Japan consumer confi dence, 2013– areas. Sogo & Seibu Co announced attract tourists. Sep 2016 that it is closing its outlet store in Kashiwa, Prefecture, as well Investment volumes and Consumer Confidence Index Willingness to buy durable goods 50 as a branch in Asahikawa, major transactions Apr-14 Consumption tax hike Prefecture. Isetan Mitsukoshi and The market appears to be taking Hankyu have announced similar plans a breather after four consecutive 46 for outlets in suburban Kanto and annual increases in retail transaction Kansai areas. volumes from 2011 to 2015. 1H/2016 investment in Japan retail property 42 Department store operators cite totalled JPY184 trillion, just 34% Index stiffer competition from local malls of 1H/2015 volumes. Investment in 38 and specialty stores as one reason Japanese real estate across all sectors for the dwindling performance. Some has declined precipitously in 2016 investors such as United Urban REIT due to fewer investment opportunities 34 and Hankyu’s own REIT are buying up as well as the availability of attractive such properties and adding them to refi nancing. If the second half of 2016 30 their portfolios. Indeed, more mundane follows the same trend, total volumes Jan-13 Jan-14 Jan-15 Jan-16 retailers such as pharmacies and could fall just short of JPY400 trillion, Source: Cabinet Offi ce, Savills Research & Consultancy daily goods vendors are fl ourishing. or somewhere between 2011 and 2012 Part of this restructuring is driven by levels. Interestingly, the slowdown is GRAPH 8 a larger national trend of population primarily concentrated in transactions Retail property investment volume by clustering around major stations, involving J-REITs and domestic reducing the profi tability of outlying private entities. Overseas investors buyer type, 2007–2016F department stores in satellite cities but are for now continuing to invest at Listed REITs Private Overseas Equity & institutional Unknown Other creating investment opportunities near levels similar to in previous years. 1,400 transportation hubs. Net Operating Income (NOI) cap rates 1,200 In terms of new developments, activity for the retail sector have compressed continues both in Toyo and farther even as volumes slow, and rates 1,000 afi eld. for property in prime areas such as Ginza even dipped below 3% in early 800 Mori Building held a groundbreaking 2016. The 4-5% range is more typical 600 ceremony in July for its Shinbashi of reported J-REIT transactions in Billion yen 4-chome development in Tokyo, greater Tokyo, depending on building 400 centred on a new 15 storey building quality and location. Cap rates can with 17,500 sq m of planned GFA and range as high as 8-9% in outlying 200 two fl oors of retail space. The multi- regions. use building will also contain a fl oor 0 reserved for incubation offi ces for start Q2 and Q3/2016 saw several notable 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F ups. transactions, including deals involving Source: RCA, Savills Research & Consultancy

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large retail properties outside the 23 TABLE 2 wards of Tokyo. Among the largest Large retail transactions, Q2/2016—Q3/2016 was Frontier REIT’s acquisition of half of Mitsui Shopping Park LaLaport for Announcement GFA Price Appraisal JPY15.1 billion (US$140 million). The Property Location Buyer date (sq m) (JPY bn) cap rate (%) J-REIT reported an appraisal cap rate Mitsui Shopping Park of 5.0% on the transaction. Misato, Jul 16 LaLaport 136,000 15.1 5.0% Frontier REIT Saitama (50% ownership) Department store operator Marui also Shinjuku Higashiguchi Shinjuku, Domestic disposed of the Shinjuku Higashiguchi Sep 16 5,000 13.0 N/A Building Tokyo Company Building in Tokyo for JPY13.0 billion (US$120 million). The property Jul 16 Shinsaibashi GIGO Chuo, Osaka 2,900 12.0 N/A Domestic SPC stands adjacent to an exit of Shinjuku Sanchome Station. Marui managed Aug 16 Aeon Mall Higashiura Chita, Aichi 126,600 11.9* 5.5% Undisclosed the building as a rental property after 2012, when it consolidated some United Urban Aug 16 Kururu Fuchu, Tokyo 12,800 9.3 5.1% of its presence in Shinjuku. The REIT buyer was an undisclosed domestic * Price not disclosed; JPY11.9 bn estimate prorated based on book value company.  Source: RCA, Nikkei RE, Savills Research & Consultancy

OUTLOOK The prospects for the market

Japan’s relatively stable retail Per capita shopping expenditure by hubs in regional cities. Developers market has now seen two tourists has decreased, disappointing continue to work on new retail consecutive periods of mild many market players, but the medium- property, often as part of larger softness, but some positive term trend of increasing tourism still multi-use projects especially in Tokyo macroeconomic data and strong gives the sector growth potential. and Osaka. Volatile 1/F rents are tourism fi gures may signal some already high and it may take time upward movement ahead. The Abe Investment volumes have decreased for underlying fundamentals to push administration’s decision to delay signifi cantly in 2016 due to a lack them higher, but continued gradual its consumption tax hike to October of opportunities, but investors are increases in non-1/F rents could offer 2019 undoubtedly spared the retail still eyeing possible acquisitions in investors more subdued but steady market another economic shock. strategic locations such as transport growth in capital value.

Please contact us for further information Savills Japan Savills Research

Christian Mancini Tetsuya Kaneko Simon Smith Representative Director, CEO Director, Head of Research Senior Director +81 3 6777 5150 & Consultancy, Japan Asia Pacifi c [email protected] +81 3 6777 5192 +852 2842 4573 [email protected] [email protected]

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