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Commercial property prices in Tokyo, a bellwether for Japan’s market, look to have peaked as the capital faces a glut of new offices even as the number of office workers is set to decline.

The property market had rebounded in the past three years as Prime Minister Shinzo Abe’s economic policies, with ultra-low interest rates, drew in investors attracted by the wider gap than in other developed markets between returns on property and borrowing costs.

Also, as Japanese companies regained confidence, they sought more space, helping drive down office vacancy rates in the capital. Rents have been rising since 2014.

But office rents are now expected to start falling as early as 2018 as new space goes on the market, analysts and commercial property owners say.

“Tokyo’s office space is almost full, but if the economy turns negative, some tenants may reduce their space or move to a cheaper location,” said Masashi Saio, section manager at the real estate department of Nippon Life Insurance, which owns office buildings nationwide.

“If that happens, owners of office properties may have to cut rents. We expect a large supply of office space that could affect the balance between supply and demand,” he said.

Between 2018 and 2020, when Tokyo is due to host the Olympic Games, the capital expects to add two million square metres of new office space – equal to more than eight per cent of its total as of mid-2016, said Shunji Kobayashi, senior manager at the real estate research team for Sumitomo Mitsui Trust Bank.

“Newer space may be filled, but there will be vacancies in older properties,” he said.

“Demand for new office space is not expanding because financial institutions are not growing their space like they used to.”

Worries over falling rents are already feeding into property firms’ share prices, with the performance of the Topix real estate index ranking 26th out of 33 sub-indices in 2016.

 
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