Japan housing & real estate sector - Central Tokyo office vacancy rate down in July
Miki Shoji released July office vacancy rate data for the five central wards of Tokyo at 11:00 JST on 10 August. The vacancy rate was 3.94% and represented the first time it had fallen below 4% since August 2008. Data pointing to tightening supply-demand conditions for office space is likely to be good news for real estate stocks. That said, we think investors are unlikely to be overly enthused about the main reason for the improvement in the office vacancy rate, which was several properties being taken off the market. Real estate stocks headed higher following the initial news of an improvement in the vacancy rate, but subsequently corrected following the release of detailed data from 13:00 JST. Minato Ward and Chuo Ward each saw the completion of a single small/midsize office building in July, while two properties in Chiyoda Ward, one in Minato, and two in Chuo were taken off the market, resulting in a net decrease in office space supply volume (new supply - properties taken off the market) of 27,372m2. In other words, there was a decline in leasable office floor space in the five central wards of Tokyo in July. The 27,372m2 fall in leasable floor space can be broken down to a 10,365m2 decline in vacant office space and a 17,007m2 decline in occupied floor space, which signifies weaker demand. This was the second consecutive month of m-m decline in overall demand. That said, we see little impact on near-term earnings or the value of properties at the major developers, as tighter supply-demand conditions have underpinned a sustained rise in rents and they have maintained high occupancy rates at their portfolios containing several highly competitive properties. While the planned completion of the large Kyobashi Edogrand office building in October 2016 and other developments risk a deterioration in the vacancy rate, redevelopment of office buildings, commercial facilities, and hotels in central Tokyo is picking up and we expect plenty of properties to continue to be demolished or otherwise taken off the market. We therefore expect the central Tokyo vacancy rate to remain favorable at least through end-2017.