SMTRI Topic Report Japanese Real Estate Market
October 2013
With Abenomics and Tokyo’s successful bid for the 2020 Olympics and Paralympics, the Japanese economy isaccelerating its recovery from its two lost decades. In this report, we describe the Japanese real estate market and its
outlook, noting signs of a recovery from declines following the Lehman crisis and the Great East Japan Earthquake.

■The Japanese real estate market bottoming out and recovering
In the latter half of 2012, expectations that the Japanese real estate market would begin bottoming out started to rise,backed by strong investment appetites among domestic and foreign funds. Just as the market was bottoming out, theAbe administration was inaugurated. From the end of 2012 to the first half of 2013, Abenomics and the Bank ofJapan’s monetary easing “of a different dimension” boosted market expectations. Real estate transactions have been
increasing and prices have started to rise, especially in Tokyo. The benchmark land prices announced in September
2013 show that land prices have risen, especially in the three major metropolitan areas: Tokyo, Osaka, and Nagoya.
The main reason for the recovery and rise in real estate prices is a decrease in the risk premium, reflecting
expectations of a recovery in rent associated with expected economic growth. In the office rental market, the market
consensus was that the vacancy rate had peaked but it would take some time for rent rises to be confirmed due tocautious companies. However, the mood in the real estate market is increasingly bullish given rising expectations thatthe 2020 Tokyo Olympics and Paralympics will be the “fourth arrow” of Abenomics, associated with its growthstrategy, and the increase in real GDP for the third consecutive quarter.
<Trends in the Japanese realestate market>

Second half of 2012

First half of 2013

From the second half of 2013

・Expectations of
the market bottoming out

・Expectations of
the market recovering(Prices expected to rise)・Expectations ofgrowth led by Tokyo(Rent expected to rise)
Abenomics
The 2020 Tokyo Olympics＜Composition of regions in Tokyoaccording to QoQ change in land price＞

100%
90%

Change inland price

80%

+6%

70%

+3‐6%

60%

Recovery trend

+0‐3%

50%
0%
40%

September 2008
Lehman shock

30%

‐0‐3%
March 2011
Great East JapanEarthquake

20%‐3‐6%‐6‐9%

10%‐9%0%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2007

2008

2009

2010

2011

2012

2013

Source:SMTRI based on data of MLIT「Land Value LOOK Report」■Impacts of Abenomics and the 2020 Tokyo Olympics

In his speech at the New York Stock Exchange on September 26, Prime Minister Shinzo Abe called for Wall Street toinvest in Japan, saying, “Buy my Abenomics.” Abenomics consists of “three arrows”: (1) bold monetary policy, (2)flexible fiscal policy, and (3) growth strategy to boost private investments. The table below describes the effects ofpolicies in each “arrow” on the real estate market. Until now, the bold monetary easing has brought risk-on
investments. J-REITs have aggressively purchased real estate through public stock offerings as their investment unit
prices recovered sharply, leading the revitalization of real estate transactions. The market is carefully watchingconcrete policies and their effects to determine whether the growth strategy will bring sustainable rent rises.

<Major effects of Abenomics on the real estate market>
Three arrows

Concrete policies(1) Monetarypolicy

Bold quantitative and qualitative
monetaryeasing(increasingpurchases of risk assets, purchasing
longer-term government bonds)(2) Fiscal policy(3) Growthstrategy

Effects on the real estate market
Short-term

Medium-term

Large-scale public works projects(strengthening national land throughcountermeasures against decrepit
infrastructure
anddisasterprevention measures)

Short- tomedium-term

Regulatory reform, participation in
TPP negotiations, restructuring ofindustry

Medium-term

Medium- tolong-term

Domestic and foreign investment funds making
risk-on investments
 The risk premium declining
Long-term interest rates rising The risk-free interest rate rising
The economy recovering 、 demand frombusinesses and households expanding Rent rising
Improvement in the safety and convenience ofinfrastructure and the stock of real estate The risk premium declining
Confidence in sustainable economic growth Sustainable growth in rent income

Just as details of the growth strategy were attracting attention, Tokyo was chosen to host the 2020 Olympics andParalympics. The Tokyo metropolitan government has announced that the economic ripple effect (productioninducement) of the Olympics during the seven years to 2020 will be 3 trillion yen. (The economic ripple effect of theLondon Olympics in the nine years before the Games was 31 billion to 33 billion pounds.) Since Tokyo is the capitalof a mature economy, the expected economic ripple effect of the Olympics is only around 0.6% of the nominal GDP,and direct economic effects will be limited. Steady demand, however, mitigates economic fluctuations in a
low-growth economy. Moreover, if 2020 is used for setting targets for implementing policies, such as the achievementof fiscal soundness – an international commitment for Japan – the realization of a low-carbon society, and theenhancement of Tokyo’s international competitiveness, the Olympics are expected to promote economic growth overthe medium to long terms.
The table below describes the major effects of the Olympics on the real estate market. The effect that particularly
attracts attention is infrastructure building. The time required to reach Narita Airport and Haneda Airport is expectedto be shortened through improvements to railways. Expected improvements in the network of the main roads incentral Tokyo and the greater Tokyo area will mitigate traffic congestion and improve logistical efficiency. Tokyo isexpected to take on a sustainable urban structure through the accelerated development of the Tokyo Bay area, where arange of athletic facilities will be built. Further increases in the number of tourists from abroad (especially Asia),
which has already been increasing thanks to initiatives to promote tourism, are expected to boost demand for
tourism-related facilities, including retail facilities and hotels. In the short term, real estate prices may rise in areas thatwill profit from these initiatives due to speculative investments.
There are, however, some concerns. The costs of construction work (especially labor costs), which are rising sharply
with full-scale reconstruction in disaster-stricken Tohoku, may rise further, and as a result, real estate development
costs may increase. Achieving fiscal soundness may be delayed due to excessive investment in sports facilities andinfrastructure.
<Major effects of the 2020 Tokyo Olympics on the real estate market>

Positive effects

Negative effects

・ Improvement in the convenience of infrastructure,including airports and roads
・The remodeling of Tokyo through the development of theBay area
・Growth in the tourism industry
・Mitigation of an economic slowdown following
consumption tax hikes

・Increases in development costs due to sharp rises inconstruction costs (especially labor costs)
・Fiscal deterioration as a result of excessive investments insports facilities and infrastructure・Declines in regional areas due to the excess concentrationof population and industry in Tokyo■The outlook for the Japanese real estate market and investment opportunities

Real estate markets are expected to recover and grow in major cities in Asia, including Tokyo and Singapore, as well asin London. Tokyo in particular is attracting the attention of real estate investment funds worldwide as a city offeringcore investment opportunities based on stable economic growth after the end of monetary easing policies worldwide.
As a consequence, real estate transactions in Tokyo are increasing. Until now, declines in the risk premium due tomonetary easing have been the main reason for rises in real estate prices. If increases in rent income are confirmed
against a backdrop of the end of deflation and economic growth, real estate prices will likely continue to risemoderately.
We forecast that the office market in Tokyo will stage a full-scale recovery in 2014, with the vacancy rate declining andrent starting to rise. However, if the consumption tax rate is raised twice, in 2014 and 2016, as planned, we anticipate
that the economy will slow and the office market will soften in 2016. If the growth strategy of Abenomics isimplemented steadily and the effects of the 2020 Tokyo Olympics mitigate the anticipated slowdown, the real estatemarket should grow steadily with stable economic growth.
We need, however, to be aware that Japan will be a very aged society (with persons aged 65 or over accounting for29.1% of the population) in 2020, and that even in Tokyo those aged 65 or over are expected to account for 24% of thepopulation. The key is for Tokyo to become a universal design city suitable for an aging society with fewer children andwill present an urban model as an Asia headquarters that has strengths, including advanced technologies, and to boast
strong economic vitality, from a long-term perspective.
If we focus on qualitative changes in demand for real estate in response to the excess concentration in Tokyo and theemergence of a social system compatible with a super-aged society, rather than declining total demand, we willcontinue to find many investment opportunities.
＜Global office rent cycle (as of 2Q 2013)＞
Rent
Recovering

Rent Rent Decline
Starting
PeakedRent Growth
Accelerating

Los Angeles
New York

Rent Decline
AcceleratingRent
Bottoming
OutBeijing
ShanghaiSingapore
Hong Kong

TokyoLondon
Source:SMTRI■

About Sumitomo Mitsui Trust Research Institute
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Company name: Sumitomo Mitsui Trust Research Institute Co., Ltd.
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Phone: +81-3-6430-1300 / FAX: +81-3-6430-1301

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Business License:
General real estate investment advisory services; License #0003375(granted by the Minister of Land, Infrastructure and Transportation)
Securities Investment advisory services; License #822
(granted by the chief of Kanto Local Finance Bureau)
Professional Affiliations:
The Japan Association of Independent Research Institutes
The Japan Association of Real estate Financial Engineering
Japan Investment Advisers Association
The Security Analysts Association of Japan (Corporate member)
The Association for Real Estate Securitization (Supporting member)■Contact
Sumitomo Mitsui Trust Research Institute Co., Ltd.
https://www.smtri.jp/en/contact/index.html

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