A decade later, Tokyo’s CRE prices lag pre-GFC levels

Prices of office, retail and industrial properties in Tokyo have dropped 11 percent in the ten-year period from their pre-financial crisis peak in 2007, according to a study conducted by property research firm Real Capital Analytics (RCA).

According to the Commercial Property Prices Index (CPPI) report published last week, Tokyo is the only Asia Pacific city, among the six that were analysed by RCA, to have recorded a negative price change in the past ten years. Contrastingly, Hong Kong is ranked number one among 20 global investment cities, on the back of an overwhelming 197 percent increase in commercial property prices from its pre-GFC levels.

“Domestic landlords remain unmotivated to sell due to limited lucrative options to recycle capital resulting in a limited growth of property prices and a lack of investment opportunities”

– Petra Blazkova

A combination of macro and real estate specific factors have contributed to Tokyo’s weaker post-crisis performance relative to other Asian cities, according to RCA.

Explaining some of the reasons, Petra Blazkova, senior director of analytics for Asia Pacific at RCA told PERE: “Abenomics failed to generate a desired asset price inflation. On the contrary, Bank of Japan’s negative interest rates improved refinancing terms and deterred a property prices growth.”

“Moreover, foreign investors have not returned to the market in the same force after the credit crunch. The Japanese market is now 80 percent dominated by domestic investors, in particularly Japanese REITs. Domestic landlords remain unmotivated to sell due to limited lucrative options to recycle capital resulting in a limited growth of property prices and a lack of investment opportunities,” she added.

In the hunt for yield, cross-border investors are also increasingly looking beyond Tokyo to invest in other Japanese regional cities such as Yokohama and Osaka. Blazkova noted that commercial properties outside Tokyo offer 100 basis points of extra yield. In fact, an earlier research published by RCA in August estimated the volume of real estate transactions outside Tokyo in the first half of 2017 to be the highest in the last decade. Examples include Gaw Capital’s reported purchase of the Minatomirai Center building for $763.2 million in April.

Tokyo has also lost its number one spot as the largest Asia Pacific commercial real estate investment destination in H1, 2017, a position it held since 2007, due to challenges of deploying capital and migration of investors to other Japanese cities. It was replaced by Hong Kong where total investment activity increased 5 percent year-on-year, as per RCA data.

On the performance of other Asian cities in the CPPI report, the report noted that the GFC was relatively shallow and brief in cities like Seoul, Hong Kong and Singapore, which partly explains why they recorded the greatest price gains in the past decade.