TSE Cash Markets

In the Japanese real estate investment trust (REIT) market, office REITs, which account for the largest percentage of the market, are rising. Although the steep rate hike will be a strong disadvantage to the US office market, investments by Japanese companies have triggered a ransacking of some prime office space. Improving global market sentiment is providing a tailwind to the relative stability of Japanese offices.

On August 3, in the Tokyo Stock Exchange REIT Index by three uses, “office” was up 8% from the end of March, beating out “residential” (up 5%) and “retail, logistics, etc. (up 1%) to take the top spot in terms of percentage increase during this period.” It was the most inferior until mid-June, but was overtaken by the current situation.

Etsuro Akiyama, Head of REIT Group at Sumitomo Mitsui DS Asset Management, noted, “Office REITs are being reevaluated globally.” “S&P Composite 1500 Office REITs Index,” which summarizes the price movements of major US office stocks, has rebounded a little over 20% sharply from a 14-year low hit in May 2023 to the current level.

“It changed the mood of the market from one of pessimism,” many real estate insiders point out, is the Mori Trust deal. Through its US subsidiary, it will purchase a 49.9% ownership interest in a high-rise building completed in 1967 in a prime New York City location and participate in a renovation (large-scale refurbishment) project. The total investment amount is large, on the scale of 100 billion yen, and the market has been picking up US REITs with offices that have the seeds of revival in the contrarian market.

The Chinese real estate market, which had been a matter of concern, has also been somewhat reduced as the authorities have announced measures to support the market through deregulation and other measures. The “CSI300 Real Estate Index,” which consists of leading stocks listed on the mainland, was also sold off, so the current rebound is significant.

The improvement in sentiment among global real estate investors, including those in Asia, is a tailwind for the Japanese REIT market, which has a high ratio of foreign investors. With the heavy burden removed, the relative strength of the office market has become easier to focus on.

Sanko Estate (Chuo-ku, Tokyo), a major office brokerage firm, announced on 3rd that its contracted rent index for the April-June period was 18,545 yen per tsubo (about 3.3 square meters) for a “B class” building in central Tokyo. It increased 993 yen (5.7%) from the January-March period.

The year 2023 will be a period of massive supply of office space, mostly due to very large buildings such as “Azabudai Hills.” “There has been a move to raise rents and other leasing conditions as vacancies are being filled” (Sanko Estate, Chief Analyst) in a medium-sized building that is unlikely to compete directly. If one looks closely, there are signs that the downward trend in rents since the COVID-19 pandemic has finally bottomed out for some properties.

Investors will also focus on the return of Japanese workers to the office. WFH Research examined the number of workdays per week required by workers during April and May, and found that Japan had the fifth lowest average of 1.44 days, in the 34 countries/regions surveyed. US workers sought 2.56 days.

The BOJ moved to modify its short- and long-term interest rates manipulation (Yield Curve Control, YCC) policy late last week. Rising interest rates are generally detrimental to REITs. Because of this sense of caution, REITs have lagged behind Japanese equities and other markets to date. Akihiko Murai, Portfolio Manager at FIL Investments, noted “Rather, ‘no further news’ has increased the relative attractiveness of REITs.”