Japan ViewPoint - Tokyo's Mid-Sized Office Market Whets Investor Appetite October 2017
From 2018 the Tokyo office market will see three consecutive years of above-averge new supply. The majority of this new supply will comprise of large-scale (Grade A) properties and CBRE forecasts that Grade A rents will drop c.15% in the next three years as a result. This then leads us to expect further traction for mid-sized offices as an investment class.
What makes mid-sized properties attractive to investors?
Stable leasing demand from SMEs: More than 90% of office-type business sites have less than 20 employees.
Scarcity of new supply means little risk of supply-demand loosening: Of the new supply scheduled for the coming three years in Tokyo, mid-sized (Grade B) buildings comprise only 6% of the total on a leased floor area basis.
Rents are expected to be more stable relative to large-scale buildings: While CBRE forecasts an approximate 15% drop in Grade A rents, the decline in Grade B rents is expected to be much smaller, at c.6%, over the next three years.
Higher yields compared to large-scale buildings: Yields from mid-sized buildings are estimated to be around 50bps higher compared to large-scale, prime office properties.
Higher liquidity: Since 2012, the number of transactions for mid-sized buildings has accounted for around 17% of the total, exceeding 9% for large-scale buildings.
80% of acquisitions by overseas investors since 2012 have involved buildings with a gross floor area of less than 7,000 tsubo. With interest also growing among investors in core-plus investment, robust demand for mid-sized offices is likely to continue.