Disaster monitoring by multi-temporal images of the 2011 Tohoku Earthquake and Tsunami
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Transcript of The Impact of the Tohoku Earthquake on the Outlook for … · The Impact of the Tohoku Earthquake...
July 2011
The Impact of the Tohoku Earthquake on the Outlook for the Real Estate Market
2 Advance
Overview of the Earthquake ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・4
Impact on the Real Estate Market ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・5 OfficeSector TokyoMarket OsakaMarket
ResidentialSector
RetailSector
LogisticsSector
HotelSector
Investment Market ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・12 Investors JapaneseInvestors(J-REITs,developers,insurancecompanies) OverseasInvestors
FundingEnvironment
Conclusion ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・14
TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket3
Executive SummaryOn11March2011,anearthquakemeasuring
magnitude9.0ontheRichterscaleoccurredapproximately130kmoffthePacificshoresoftheTohokuregion.ThiswasthestrongestquakeinJapanesehistoryandthefourthstrongestrecordedglobally.
Impact on the Real Estate MarketOffice SectorTheearthquakeisexpectedtohaveadampeningeffectonleasing,keepingrentallevelssoftthroughoutthecurrentyear.However,weexpecttenantactivitytopickupfrom2012andtomakeafullrecoveryoverthecourseofnextyear.
IntheOsakamarket,irrespectiveoftheearthquake,anabundanceofsupplyisdueoverthenext18months,pushingrentallevelsdownwardin2011and2012.However,thissupplywillbeabsorbedby2013andrentswillthenstabilise.
Residential SectorDemandforluxuryrentalhousinghasbeenhithardbytheoverseasrelocationoftheexpatriatecommunity;however,generalrentalhousinghasnotbeenadverselyaffectedandrentalincomeremainsstable.
Partneringisajourney-lineformanyorganizations;anddependingontheirmaturity,complexity,culture,andgeographicfootprint,organizationstypicallymigratelefttorightacrossthespectrum.
Retail SectorTheeffectoftheearthquakeondepartmentstoresandshoppingcentreswastemporary,whilethe
luxuryretailsector,representedbyGinzaandOmotesando,wasworstaffectedbecauseofthedeclineinforeigntouristarrivals.Theseareasarelikelytoremainweakfortheforeseeablefuture.
Logistics SectorTenantsareshowinginterestinlogisticsfacilitieswiththebeststructuralintegrityandthelatestsafetyequipment.Demandformodernfacilitieswithearthquake-tolerantfunctionsisexpectedtorise.
Hotel SectorThedeclineindemandisexpectedtobetemporaryandislikelytorecoverwithinarelativelyshortperiod.Thisgeneralstatementbeliesavariedpaceofrecoverydependingontheclassofhotel;however,thesectorasawholewillbebacktopre-earthquakedemandandperformancewithin1-2years.
Investment MarketTherehasbeennosignificantchangeintheviewamongJapaneseinvestorsandoverseasinvestorsareoptimisticaboutthelong-term,withrelativelyfewexceptions.Theearthquakedid,however,dampenactivityin2Q11,whichwillreducevolumesfortheyearasawhole.
OutlookAlthoughtheentireJapaneconomyandrealestateindustrywasadverselyaffectedbythedisasters,thesenegativeeffectswillunwindasreconstructiongetsunderway.Webelievethere isthepotentialforafaster-than-expectedpick-upinleasingdemandandinvestmentactivity,andinitialfiguresintheearlymonthsoftherecoverysupportthis.
4 Advance
Overview of the EarthquakeOn11March2011,anearthquakemeasuringmagnitude9.0ontheRichterscaleoccurredapproximately130kmoffthePacificshoresoftheTohokuregion.ThiswasthestrongestquakeinJapanesehistory,surpassingthe1923GreatKantoEarthquake(M7.9)andthe1995GreatHanshin-AwajiEarthquake(M7.3).Itwasalsothefourthmostpowerfulquakerecordedglobally:
1. ChileEarthquake(M9.5)1960
2. AlaskaEarthquake(M9.2)1964
3. SumatraEarthquake(M9.1)2004
4. Tohoku-PacificOceanEarthquake(M9.0)2011
Inadditiontothedirectdamagecausedbytheearthquake,amoresignificantlevelofdamage
wascausedbythetsunamithatfollowed.MiyakoCityinIwatePrefecturehadthelargeststormsurgebarrierinJapan;however,thetsunamiwasreportedlytwicetheheightofthebarrier,exceedingbyawidemarginanypreviousexperience.
AsTokyoislocatedfarfromtheepicentreofthequake,therewasrelativelylittledamagetoorcollapseofbuildingsasaresultoftheearthquake,anddamagefromthetsunamiwasminimal.However,damagetooilrefineriesandtheFukushimanuclearpowerplantcausedbythesurgingwatersledtonumerouslaterdangers,includingradiationleaks,massblackoutsandfuelshortages.Together,theseweretohaveaveryprofoundnegativeimpactontheJapaneseeconomy.
TOKYOOSAKA
SENDAI
FUKUOKA
GREAT HANSHIN-AWAJI EARTHQUAKE
TOHOKU EARTHQUAKE
Map 1:TohokuEarthquakeandGreatHanshin-AwajiEarthquake
TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket5
Effect on the EconomyTheNikkeiIndexfellsharplyimmediatelyafterthequakeat2:46p.m.,sliding21%fromtheclosingpriceofJPY10,434.38on10MarchtohitabottomofJPY8,227.63on15March.Inaddition,thealready-strongyensoaredtoanhistorichighof76yentotheUSdollaron17March,spurredonbytheexpectationofcurrencyrepatriationinordertopayfortherecovery.Followinggovernmentintervention,theratefelltoaround85yenperdollarandwashoveringaround80yenatend-June.TheNikkeiIndexisnowbackatJPY9,800astheinitialpanichasgivenwaytostability(Figure1).
IntheTankansurveyofJune2011,theindexmeasuringtheviewoflargemanufacturingbusinessesfellto-9from+6takenatthetimeoftheearthquake;however,respondents’outlookforthequarteraheadplacedthediffusionindexat+2.Tointerprettheseresults:businessesappearconfidentthatthissummerwillbethebottomintermsofeconomicactivity,duetothenuclearcrisisandthesubsequentpowershortages (Figure2).
Priortotheearthquake,economicsconsultancyIHSGlobalInsightforecastrealGDPgrowthof1.3%in2011and1.8%in2012.However,thesefigureshavebeenadjusteddownwardsto-0.9%for2011toreflecttheimpactoftheearthquake,withasignificantreboundof4.4%expectedin2012inconjunctionwiththerecoveryefforts(Figure3).Onaverage,thegrowthrateoverthefive-yearperiodfrom2011-15willnowbe2.1%,exactlythesameaveragerateaspriortotheearthquake.Economicanalystsexpectnodetrimentallong-termimpactontheeconomy,merelyashiftinthepatternofgrowth.
Impact on the Real Estate MarketTheprincipalresultoftheearthquakehasbeenasignificantturningpointindemand.Notonlydiditresultina“flighttoquality”,butalsoa“flighttosafety”,withheightenedawarenessoflocationand
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Figure 1:Nikkei225andExchangeRate
Figure 2:DiffusionIndexforLargeManufacturingBusinessConditions
Figure 3:GDPForecastsPre-andPost-Earthquake
6Advance
buildingsafety.Inparticular,shiftsfromhighertolowerfloors,frombayareastoinlandareas,andfromlowertohigherqualitybuildingsareoccurringacrossallthesectorsdiscussedbelow.
Office SectorTokyo Market (CBD)AlthoughtherewasnodirectdamagefromtheearthquakeortsunamiintheTokyoCBD*GradeAofficemarket,tenantsarenonethelessreconsideringlocationinlightoftheearthquaketolerancefeaturesofbuildings.Inparticular,demandforlargebuildingsconstructedusingthelatestconstructiontechnologieshasrisen,witholderandlessearthquake-tolerantbuildingsnolongerbeingconsideredbysometenants.
Furthermore,energyconservationmeasuresarebeingimplementedthissummertocompensateforexpectedpowershortages.Asaresult,themarketislikelytopolarise,withcompetitivebuildingsofferingpowergenerationcapabilitiesattractingmoretenants,whileunequippedorlesserequippedbuildingswillfinditincreasinglydifficult.
JonesLangLaSalle’spipelinedatashowthatthesupplyscheduledfor2011,whenaffectoftheearthquakewillsuppressdemand,isextremelylimited.Meanwhile,theamountofspacebeingdeliveredintherecoveryperiodisaboutequaltotheaverageoverthepastdecade,minimisinganyconcernofover-supply.Thegovernmentisassistingtheconstructionindustryintherebuildingofquake-struckareas,whichmeansthattheywillhavepriorityaccesstoconstructionmaterials.ThismaydelaythecompletionofsomeGradeAbuildings.However,thelimitedsupplypipelineisapositivefactorasitdoesnotcreateanegativeoverhangthatcouldsuppressrentsin2012andbeyond.
Thebiggestconcernamongforeigncorporationsandinvestorsisthenuclearpowerplantcrisis,whichremainsanongoingissue.However,theTokyometropolitanareaismorethan200kmfromFukushima(Map2).Providedthatthecoolingsystemsarerestoredwithoutanymajorissues,thefearshouldabate.Overthelonger-term,however,therearehugechallengesintermsofthetreatmentofcontaminatedlandandtheimpactonthemarineenvironment.However,thephysicalconsequencesfortherealestatemarketarerelativelyminimal.
Thepsychologicalimpactoftheearthquake,aswellasrealpowershortagesandtheongoingnuclearcrisis,areallactingasconstraintsontenantdemand.Nevertheless,webelievethatthereislittleroomforafurtherdeclineinrentsintheTokyoGradeAofficemarket.AlthoughsignsofrecoverywereapparentintheTokyomarketpriortotheearthquake(Figure4.1),tenantactivities
SENDAI
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TOKYO
FUKUSHIMA
MIYAGI
IWATE
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CHIBA
200KM0*CBD:JonesLangLaSalledefinestheCentralBusinessDistrictasChiyoda,ChuoandMinatoWards.
Map 2:DistancesbetweenTokyoandFukushima
TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket7
haveslowedfollowingthedisaster,promptingustoreviewthepositionoftheTokyomarketwithintherentalcycle(Figure4.2).Thatsaid,currentrentsarenearing2003levelswhenthemarketwasoversupplied.Comparingthequalityandspecificationsofthebuildingsnowandthen,acomparablelevelofrentclearlyindicatesthattenantscannowbenefitfromrealbargains.
Asthenationmovestogethertowardsrecovery,weexpectfewlandlordstoimposeblatantrentalhikes;instead,theywilltakethisopportunitytobuildamiablerelationshipswithtenantsforthemediumtolongterm.Whilethisculturalanalysisdoesnotreallyfitwithintheconfinesofatraditionalsupply-demandforecast,itisnonethelessrepresentativeofthetrendsweseedevelopinginthemarket.Thecommunalapproachtoenergyconservationisindicativeofthisbehaviour.Asaresult,weexpectarentaldeclinein2011,butastrongpick-uponceweseeafullyfledgedrecoveryoftenantdemandfrom2012.Weforecasta3-5%declinein2011anda5-10%surgein2012(Figure5).
Intheinvestmentmarket,acasecanbemadethatriskpremiumswillincreaseinTokyo.Wedisagree.Investorshavenotyetre-ratedthemarketand
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GrowthSlowing
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^ CBD & SBD
Hong Kong
Guangzhou
Singapore, Melbourne
Kuala Lumpur
Osaka, Ho Chi Minh City
Shanghai, Adelaide
Auckland
Hyderabad, TaipeiBrisbane
CanberraSydney, ManilaMumbai^, Bangalore^
Tokyo, Jakarta, Perth, Delhi^
Beijing
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GrowthSlowing
RentsFalling
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^ CBD & SBD
Beijing, Hong Kong
Guangzhou
Singapore, MelbourneSeoul, Ho Chi Minh City
Osaka, BangkokShanghai, Adelaide
Auckland, Kuala Lumpur, TokyoChennai, Brisbane, Delhi^
CanberraSydney, ManilaBangalore^
Mumbai^, Perth,Taipei, Jakarta
*CBD:JonesLangLaSalledefinestheCentralBusinessDistrictasChuoandKitaWards.
Tokyo’ssignificanceasaninternationalinvestmentmarkethasnotbeenadverselyaffected.Domesticlendershavenotaddedadditionalpremiumsonloaninterestratesandforeignlendershavefollowedthusfar.Assuch,weexpectthecapratetofallbythetimethemarketrecoversin2012.
Osaka Market (CBD)Therewasnoearthquake-relateddamagetotheOsakaCBD*GradeAofficemarket.TenantshavebeenrelocatingandexpandingtheirspaceinGradeAbuildingsthathavebecomecheaper,and
Figure 4.1:PropertyClock4Q10 Figure 4.2:PropertyClock1Q11
Figure 5:SupplyandRentsintheTokyoCBDGradeAOfficeMarket
8Advance
andareasusing50Hzpowerareimplementingplannedblackoutsandenergyconservationmeasurestomakeupthesupply.Therefore,certaincompaniesinindustriesthatwillsufferbusinessdisruptionfromblackouts,suchasfinancialinstitutionsandITfirms,werequicktoseekalternativesites,particularlyinOsakaGradeAbuildings.
Intermsoffuturesupply,2011and2012areprettytightbutthereissignificantsupplyexpectedin2013.TheeffectofthismaybereducediftherecentfocusontheOsakamarketcontinues.Asaresult,althoughwemaintainourviewthatthevacancyrateoverthenextfiveyearswillpeakattheendof2012,theriseinvacancyratesmaynotbeassharpaswehadpreviouslyexpected.
thisdemandisexpectedtoaccelerate.Historically,businessestendedtoconcentrateinTokyobuttheearthquakehaspromptedreviewsofbusinesscontinuityplans.Asaresult,somecompaniesareaddingaback-upsitetotheirTokyooffice,withOsakatheirlocationofchoice.
InadditiontoescapingthenuclearissuecausedbytheFukushimanuclearplantcrisis,companiesarealsodrawntowesternJapanbecauseofthedifferenceinpowerfrequency.ThefrequencyprovidedineastJapan,wheretheTokyoElectricPowerCompany(TEPCO)coverstheTokyometropolitanarea,is50Hz,whereasthefrequencyinthewestis60Hz(Map3).TEPCO’ssupplycapacityhasbeenreducedsignificantlybytheshutdownoftheFukushimaNuclearPowerPlant,
NIIGATAFUKUSHIMA
TOCHIGI
GUNMA
NAGANOIBARAKI
SAITAMA
TOKYO
TOYAMA
ISHIKAWA
FUKUIGIFU
SHIGA
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KANAGAWA
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Map 3:BoundaryofPowerFrequencies
TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket9
ThequalityoftheofferinOsakaisalsoimproving.Previously,accessbetweenthenorthandsouthsidesofOsakaStationwasinconvenientbut,withthecompletionofthenewpedestrianpathasapartofthestationredevelopmentproject,accessibilityhasimproveddramatically.Also,theopeningoftheadjacentGrandFrontOsaka(OsakaNorthYard)in2013willimprovetheappealofOsaka’sofficearea.Finally,InterContinentalHotelwillentertheKansaimarkettooccupythehotelsectionofGrandFrontOsaka,offeringanadditionalimprovementintheofficeofferforforeigncorporations.
Notably,themarketissubjecttosomeover-renting,particularlypropertiescompletedwithfulloccupancyduringthe2007-2008peak.Thisleavesroomfordownwardadjustments.Thankstosupportivefactorsonthedemandside,overallrentallevelsshouldbottomoutafterabsorbingthejumpinsupplyin2013.Therefore,weforecasta3-5%declineinrentsin2011and5-10%declinein2012,withtherateofdeclineflatteningtowardstheendof2013(Figure6).
Residential SectorLeasing MarketTheluxuryleasingmarketinTokyowashithardbytheexodusoftheexpatriatepopulationduetotherisksassociatedwiththenuclearpowerplantincident.Asdemandinthismarketissupportedbyexpatriatesworkingforforeigncompaniesandtheirfamilies,themarketshouldrecoverinlinewiththegradualreductioninriskperceptionandthepick-upintheGradeAofficemarket.
Ontheotherhand,thegeneralleasingmarkethasbeenlargelyunaffected.Therewasnogreatoutwardmovementcomparabletothatoftheexpatriatesand,asaresult,rentalincomehasbeenstable.Japaneseinvestorshavecontinuedtoacquirepropertiespost-earthquake,underliningtherelativelyminimalimpactofthedisasteronthissegmentofthemarket.InSendai,thecorecityoftheTohokuRegion,themarkethastightenedasaresultoftherelocationofthoseaffectedtoelsewhereintheTohokuRegion.
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Sales MarketDemandforresidentialspacebyend-usersdidnotchangemuchbeforeoraftertheearthquake(Figure7).However,thelocationofdemandhasshifted.CertainsectionsoftheBayareathathadbeenpopularthankstotheirconvenientaccesstometropolitanTokyoandmagnificentwaterfrontviewssuffereddirectdamagefromtheearthquake,includingliquefaction,subsidenceandtheinterruptionofsuchlifelinesaswaterandgas.Asaresult,moresolidinlandareasareattractingincreaseddemandafterthequake.
Figure 7:NewCondominiumContractRatio
Figure 6:SupplyandRentsintheOsakaCBDGradeAOfficeMarket
10 Advance
spendingrestraint,aswellaseffortstosaveelectricity.Whetherornotthistrendisenduringortemporaryisnotyetclearbut,judgingfromthelatestdata,whichshowthatthedeclineindepartmentstoresaleshasstartedtoreverse,webelievethatthefallinconsumptionisbroadlyatemporaryfeature.
Forexample,nationwidedepartmentstoresalesforMarchwereJPY462.4billion,down14.7%y-o-y(JapanDepartmentStoresAssociation,onacomparablestorebasis).Therateofdeclinewasthesecondlargestever,followingthe20.8%recoilinMarch1998resultingfromlast-minutedemandpriortotheriseinconsumptiontax,andexceededtheslumpimmediatelyaftertheglobalfinancialcrisis.However,salesfiguresthenimprovedsignificantly,risingtoJPY475.0billioninApril(down1.5%y-o-y)andtoJPY482.0billioninMay(down2.4%y-o-y)(Figure8).However,thesituationinareasdependentonthetouristdollarremaingrim;salestoforeignvisitorsweregrowinguntiltheearthquake,butweredown47.8%and76.8%y-o-yinMarchandApril,respectively,andhaveshownnosignofrecoveryinMay,at-45%y-o-y(Figure9).
Therefore,theimpactoftheearthquakeontheperformanceofdepartmentstoresandshoppingcentressupportedbyJapaneseconsumerswillbetransitory,whiletheluxuryretailsector,representedbyGinzaandOmotesando,whichwassupportedbyforeigntourists,willbeslowertorecover.However,judgingfromtheavailabletransactionsinthemarket,investorsexpecteventhistobeatemporary,ifslightlylonger,lullinactivity.Wehavenotobservedariseintheriskpremiumdemandedineitherthegeneralortheluxuryretailsector.
Logistics SectorThemanufacturingindustryisstillsufferingseriousdisruptionsduetothedevastationofpartsoftheTohokuarea,whichistheproductionhubofJapan.Inaddition,manyfactoriesinareasnotdirectlyhitbythequakecannotreturntonormaloperationbecauseofthepowershortage.
Inrelationtosupply,constructionmaterialpriceshavesurgedasaresultoftherecoveryandreconstruction,withaknock-onimpactforpricesintheresidentialmarket.Thisiscausingdeveloperstobeconservativeaboutlandacquisition.Asaresult,end-usersarelikelytobepassedatemporarypriceincreaseduetothedelayinconstructioncausedbydifficultiesintheprocurementofconstructionmaterials.
Retail SectorTherewasanotablereductioninconsumerspendingineastJapanasaresultofself-imposed
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Figure 8:SalesinDepartmentStoresandShoppingCentres(SC)
Figure 9:SalestoForeignTourists
TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket11
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InMarch,theIndustrialProductionIndex(MinistryofEconomy,TradeandIndustry,2005=100,seasonallyadjusted)wasdown15.5%m-o-mto82.7.Therateofdeclinewasthelargestinhistory,exceedingthe-8.6%recordedinFebruary2009asaresultoftheglobalfinancialcrisis.ProductionlinesfortheindustrialdriversoftheJapaneseeconomy,suchasautomobilesandelectronics,haveseentheirsupplychainsdisruptedandtheirfactoriesshutdownbyplannedblackouts,ifnotdestroyedordamagedbythenaturaldisasters(Figure10).
Logisticsfacilitieshavealsowitnessedaflighttoqualitythankstotheearthquake.Tenantswhosuffereddamagetogoodsstoredinaffectedwarehousesarereviewingtheearthquaketoleranceofthestructures.Tenantswhomainlysoughtstorageinoldwarehousesarenowlookingatlogisticsfacilitiesofferingthelatestequipment.Thisalsohasageographicalcomponent;thosebusinesseswhoseoperationsarenotlinkedtoTokyoPortand/orHanedaAirportnowhaveamarkedpreferencefortheinlandarea,wheresoilliquefactionbecauseoftheearthquakehasnotoccurred.Weexpectthistohaveamedium-termimpactthat,outsideofthoselogisticshubslinkedtothePortandAirport,willbenefitpropertieslocatednearsuchmajorhighwaysasTomei,ChuoandTohoku-do.
Hotel SectorThedemandfortravelfellsharplyforaboutamonthaftertheearthquake.Forexample,dailysalesperroomforTokyocityhotelsweredown38.0%y-o-yand56.8%y-o-yinMarchandApril,respectively,thelargestdeclineinhistory.Thusfar,therecoveryisonlyjustbeginning,withthefigure-37.0%inMay(Figure11).Inadditiontothelossofservicebyrailroadsandhighwaysdirectlyafterthequake,thefigureswereimpactedbytravelwarningsissuedbyvariouscountriesandforeigncorporations.Asatend-May2011,allmajorcountrieshadliftedtheirtravelwarningsforTokyobutremainonalertduetotheradiationleakfromFukushima.DemandforleisuretraveltoJapan
isstillnotshowingsignsofafull-scalerecovery.Bycontrast,demandfromJapanesecorporationsisincreasing,partlyduetoearthquakerecoveryefforts,anddomesticleisuredemandisalsoshowingsignsofrecovery,asseenbythere-openingofTokyoDisneylandbeforeGoldenWeek.
ManyhoteldevelopmentplanswerestalledaftertheLehmanBrothers’bankruptcyinSeptember2009.However,fewprojects,otherthanthoseinaffectedareas,havebeencancelledbecauseoftheearthquake.Thedeclineindemandforhotelsbecauseofthedisasterisdeemedtemporaryandisexpectedtorecoverwithinarelativelyshortperiod.
Figure 10:IndustrialProductionIndex
Figure 11:DailySalesperRoomforTokyoCityHotels
12 Advance
Nonewtransactionswereexecutedaftertheearthquakebut,accordingtoourinterviewswithinvestors,therehasbeenlittleriseincapratescausedbythedisasterandthedecreaseincashflowduetosluggishdemandoverthenextyearortwomaybethefactordrivingthevalueofhotelassetsdownwards.
Investment MarketInvestorsJapanese InvestorsJ-REITsTheJ-REITshadbeenactivefromthebeginningof2011,withtheeffectofthemodestmonetaryinterventionbytheBankofJapan(BOJ)apparent.Transactionpricesperpropertywerehigherthaninpreviousyears,aswitnessedbythepurchasesofGradeAbuildingsbyJ-REITs(Table1).Althoughtheinvestmentunitpriceweakeneddirectlyafterthequake,aquickresponsefromtheBOJtoincreaseitssupportandatransparentdisclosureofdamagebytheJ-REITsthemselveshelpedthemarketgetbackonitsfeetrelativelyquickly,especiallycomparedtothebroadermarket,wherethestocksofpower,autoandmanufacturingcompanieswerestillsuffering(Figure12).
Asoverseasinvestorsaretakingawait-and-seeapproach,leadingtoadelayinacquisitions,
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Source:TokyoStockExchange
competitioninthemarketisvisiblylower,creatinganadvantageforexistingdomesticplayers.ThisisagoodopportunityforJ-REITsthatcontinuouslyacquireandmanageJapaneseproperties,andtheyareexpectedtoleadthemarketintotherecoveryperiod.
Developers
TheinvestmentstanceamonglargeJapanesedevelopers,whichhaveasignificantinfluenceontheJapaneseinvestmentmarket,hasremainedlargelyunchangedfollowingthequake.Theirbusinessmodelwasnotaffectedbecausetheyacquiredevelopmentsiteswithalong-termvisiontoholdtheproperty.Inaddition,therearenoconcernsovertheirfundingcapacities,asfundingisprocuredmostlythroughcorporateloansbasedontheircreditstandings.
Insurance Companies
InsurancecompanieshavehistoricallybeenthemajorbuyersinJapan.However,theyarepreparingforinsurancepayoutsandcurrentlyhavenocapacitytoconsidernewinvestments.Insurerswillbeexperiencingcapitaloutflowstodealwithinsuranceclaimsfortheforeseeablefuture.Therefore,therepatriationoftheirforeignassetsisexpectedtoincrease,withvirtuallynoJapaneseinstitutionalinvestorsconsideringforeigninvestment.
Overseas Investors
Themoodofoverseasinvestorsisoneofcaution,whichisunderstandable.Ifnothingelse,theneedforadditionalengineeringsurveystoascertainalocation’sexposuretoearthquakeandliquefactionriskhassloweddownthepaceofactivity.Thatsaid,since1April,therehasbeenoverUSD1billionofoffice,retail,hotelandindustrialcommercialpropertytransactionsinJapanaccordingtoRealCapitalAnalyticsdata.Thetotalismuchhigherifyouincluderesidentialanddevelopmentsitetransactions.Ofthis,thevastmajoritywasinTokyo,althoughitisneverthelessworthnotingthatthelion’sshareofthesetransactionswascarriedoutbetweenJapanese
Figure 12:ChangesinStockMarket
TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket13
principals–notforeigninvestors–onboththeacquisitionanddisposalside.
ThisneatlyhighlightsthecautionthatweareanecdotallyhearingaboutfrominvestorselsewhereinAsia,inEuropeandinNorthAmerica.However,itisvitaltodifferentiatebetweencautionandpessimism.TheglobalfundswithanallocationtoAsia-Pacificacknowledgethat,becauseofitssize,liquidityandcomparabletransparency,tosucceedinplacingasignificantamountofcapitalinthisregionwillrequireanallocationtoJapan.Furthermore,manyfundsare
confidentaboutTokyo’smedium-termprospects,regardlessoftheseevents.Thequestionwillbeoneofasset,notcountry,selection.
Theprovisoworthnotingiscountrieswherepublicsentimentandthemediaareseverelyanti-nuclear.OneoftheunforeseeableimpactsofthecrisisatFukushimahasbeenaseachangeinGermany’senergypolicy.ThiswillhavetoweighontheconsiderationofanyGermaninvestorlookingatJapaneseassets.Whilesuchascenariocouldplausiblydevelopelsewhere,forthemoment,thisappearstobeauniquesituation.
Table 1:MajorTransactionsbyJ-REITs
Subject Property Gross Floor Area
(sqm)
Total Price (JPY mil)
Vendor (Seller)
Purchaser (Buyer)
NOI Cap Rate (%)
MitsubishiHeavyIndustriesBuilding
67,124 60,500 MitsubishiHeavyIndustries NipponBuildingFundInc.(REIT),DomesticInstitutionalInvestor
4.3
ApartofHirakawachoMoriTower
9,818(NLA) 18,200 MoriBuilding GlobalOneRealEstate InvestmentCorporation(REIT)
4.5
RiverCityM-SQUARE 26,439 13,350 MitsuiFudosan NipponBuildingFundInc.(REIT) 5.5
OsakiFrontTower 23,674 12,300 TMKofMitsubishiEstate JapanRealEstateInvestmentCorporation(REIT)
7.0
ApartofGateCityOsaki NA 11,650 SumitomoLifeInsuranceCompany
NipponBuildingFundInc.(REIT) 4.5
DaibaGardenCityBuilding
NA 11,000 SekisuiHouse JapanExcellent,Inc.(REIT) 5.4
HakoneGora-onsenTokinoyuSetsugenka
10,655 3,550 Y.K.SpringProperty JapanHotelandResort,Inc.(REIT) 5.9
ApartofArkMoriBuilding 4,343(NLA) 9,770 MoriBuilding MoriHillsREITInvestmentCorporation(REIT)
4.5
ApartofChofuSouthGateBuilding
11,613(NLA)
9,320 ShimizuCorporation NipponBuildingFundInc.(REIT) 6.0
IIFNagoyaLogisticsCenter
8,721 1,050 TaiheiyoCementCorporation
Industrial&InfrastructureFundInvestmentCorporation(REIT)
7.9
14 Advance
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Unit
Source:HyogoPrefecture
Theareamostaffectedbytheearthquakeandtsunamiwasnotoneheavilyfavouredbyforeigninvestors,soitistheeconomicconsequencesforTokyothatprincipallyweighoninvestors’minds.Thisincludesthepotentialforenergyshortagesoverthesummer,theriskoffutureearthquakesandliquefaction,andthelonger-termimpactofadditionalgovernmentborrowingforreconstruction.Aswehavealreadynoted,thesefactorswillinspireshort-termcaution,notenduringpessimism.
Funding EnvironmentForeignfinancialinstitutionshavesoughttoaddriskpremiumontheirloansbuthavenotbeenabletodosoashigherinterestrateswoulddriveborrowersaway.Therefore,spreadsandLTVshavenotbeenaffectedbytheearthquake.
Japanesefinancialinstitutionsarealsoshowingflexibilitytowardsrefinancingbyindicatingthattreatmentofbaddebtsunderthecurrentmarketisnotawisedecision.
TherewasvirtuallynoimpactonnewlyissuedCMBSasthemarkethadbeenstagnantsincetheglobalfinancialcrisis.Nosignificantimpactwasobservedintheseniordebts,althoughliquidityforjuniordebts,forwhichthevalueshadbeenfallingduetothesluggishrealestatemarketafterthefinancialcrisis,isdecreasing,withasmallernumberofbuyersinthemarket.Asaresult,higherriskproductsarefindingfewerbuyers,leadingtoincreasedlossesinsomecases.Also,largetransactionshavenotmaterialisedduetoalackofmezzaninefinancing.Therefore,mezzaninelendersholdthekeytomarketrecovery.
ConclusionBasedontheabove,thedeclineindemandintherealestatemarketisexpectedtobetemporary.Infact,theJapaneserealestatemarketwasbeginningtoshowsignsofrecoveryin2011andwebelievethatafull-scalerecoveryhassimplybeendelayedinto2012.Turningtopastexperience,housingconstructionfiguresinHyogoPrefectureincreasedsignificantlyin1995and1996aftertheGreatHanshinEarthquakeinJanuary1995(Figure13).Inadditiontorevivingtherealestatemarket,thiswasafactorthatdroveupGDPgrowth.Asimilardynamicisexpectedduringtherecoveryphaseforthisearthquake,withtheJapaneseeconomyandtherealestatemarketmakingasignificantreboundin2012.
Infact,themanufacturersofautosandsemiconductors,whicharethemajoreconomicdriversinJapan,havealreadyannouncedtheirexpectationthatpre-earthquakeproductionlevelswillbeachievedearlierthanexpected.Asaresult,theBOJrevisedupwarditseconomicoutlookintheMonthlyReportofRecentEconomicandFinancialDevelopmentsforJune.AlthoughtheentireJapaneconomy–andrealestateindustryinparticular–sufferedintheimmediateaftermathofthenaturaldisasters,itisourviewthatthespeedoftherecoveryin2012willoutpacetherateofgrowthforecastpriortotheeventsof11March.
Figure 13:HousingConstructionFigures
Yuto OhigashiManagerResearch&Advisory
YutoOhigashijoinedtheJonesLangLaSalleResearchandAdvisoryteamin2007andisresponsibleforrealestateresearch,economicandinvestmentanalysis.PriortojoiningJonesLangLaSalle,heengagedinfinancialanalysisworkfordomesticcompanytomanagestockportfolio.Healsohasathree-yearexperienceinBostonandNewYorkasarealestatemarketanalystafteracquiringaMaster’sDegreeinFinancialEconomicsfromBostonUniversity.
Yoshihiro InumaAssociateDirectorResearch&Advisory
YoshihiroInumajoinedtheJonesLangLaSalleResearchandAdvisoryteamin2006andismanagingresearchteam.PriortojoiningJonesLangLaSalle,heworkedinarealestateinvestmentcompanyandarealestateappraisalfirm,responsibleforprovidingvaluationreportstovariousclientele.HeisalsoacertifiedrealestateandaFirst-classArchitect.
Takeshi AkagiLocalDirectorResearch&Advisory
TakeshiAkagiisworkingcloselywiththeresearchteamandappraisersforvariousassignments.Hisresponsibilitiesalsoincludeprimaryrealestateresearch,economicandinvestmentanalysis,propertyforecasts,inputintoJonesLangLaSallemarketmonitoringpublications,andcontributionsandcommentariesonissuesrelatingtoJapan.
HotelSectorcontributedbyTomohiko Sawayanagi,JonesLangLaSalleHotelsInvestors–OverseasInvestorssectioncontributedbyPaul Guest,GlobalCapitalMarketsResearch.
COPYRIGHT©JONESLANGLASALLE2011Allrightsreserved.NopartofthispublicationmaybepublishedwithoutpriorwrittenpermissionfromJonesLangLaSalle.Theinformationinthispublicationshouldberegardedsolelyasageneralguide.Whilstcarehasbeentakeninitspreparationnorepresentationismadeorresponsibilityacceptedfortheaccuracyofthewholeorany part.Westressthatforecastingisaproblematicalexercisewhichatbestshouldberegardedasanindicativeassessmentofpossibilitiesratherthanabsolutecertainties.Theprocessofmaking forwardprojectionsinvolvesassumptionsregardingnumerousvariableswhichareacutelysensitivetochangingconditions,variationsinanyoneofwhichmaysignificantlyaffecttheoutcome, andwedrawyourattentiontothisfactor.
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