Japan housing & real estate sector - Vacancies improving on rising demand, demolitions

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Completion of major buildings in October may cause vacancy rates to deteriorate temporarily

Major office brokerage Miki Shoji released its report on office supply-demand conditions in Tokyo’s five central wards in September 2016 on 13 October. The vacancy rate was down 20bp m-m at 3.70%, and moreover rising demand was cited as the reason for the improvement for the first time in four months, unlike in Jun-Aug, when the demolition of empty buildings was given as the reason. We think this is a positive for real estate leasing-related stocks such as Mitsui Fudosan [8801]. The total increase in the amount of office floor space required in Jan-Sep was 114,077 tsubo (1 tsubo = 3.3m²), up 45% on the increase in the same period in 2015, and equivalent to 88% of our initial estimate of a 130,000 tsubo increase in demand. This works out at an annualized rate of increase in demand of 2.2%. However, with October seeing the completion of Kyobashi Edogrand (34,000 tsubo of floor space, 20,000 tsubo of leasable floor space), and the grand opening of Sumitomo Fudosan Roppongi Grand Tower (61,000 tsubo, 31,000 tsubo), we think the vacancy rate may deteriorate temporarily.