Japan - December 2022

S P OT L I G H T
Savills Research2022 Review and2023 Prospects

2022 Review and 2023 Prospects

Japan’s stability appeals amidst
global uncertainty
INTRODUCTION

US appear like they will slow down goingreopening from the pandemic, pent-up

2022 has been characterised by turbulence inforward. Hence, the worst might havedemand is high. The government has also

global geopolitical and economic landscapes.

passed for the Japanese yen, which has

made proactive efforts with supportive

Factors such as the conflict in Ukraine, energy

rapidly rebounded to more moderate levels

policies. Furthermore, the situation incrisis, and inflation as well as interest rateequivalent to this summer.

China might be a boon for Japan, and Japan

hikes have all weighed on the global economy.

So far, the Bank of Japan (BOJ) has been

will be a likely destination for some of theJapan, a country known for its stability,

hesitant to tighten its monetary policy

outgoing foreign capital from China, which

was not immune to this uncertainty, andand currently appears to be feeling little

was accelerated due to the recent politicalparticularly felt the impacts of a historically

immediate pressure to do so. Instead, it

developments and the ongoing strict COVID

weak yen.

has adopted a wait-and-see approach until

restrictions.

That said, the Japanese real estate market

the markets are calmer and will likely thenWith the optimism going forward,

looks and has overall been stable. While a

consider making revisions. Indeed, witnessing

the Japanese real estate market issmall number of investors currently takethe near collapse of pension funds in thefacing elevated prices across all sectors.

a wait-and-see attitude, most investors

UK following a sudden dramatic rise in

Fortunately, the Japanese market appears

continue to pursue investment opportunities.

interest rates, the BOJ is keenly aware of theto welcome some new players and more

Indeed, many investors struggled toimportance of subtle and measured decisiontransactions will likely take place. In 2022,

acquire assets in the extremely competitive

making. As the term of Governor Kuroda ends

several new names came to Japan fromacquisition markets last year, which suggests

in April 2023, the BOJ may revise the current

overseas. Also, investors using security

they are busy catching up now. Hence, signs ofmonetary policy by capitalising on the market

tokens (ST) have emerged in Japan. We

re-pricing have not been observed yet. Indeed,calmness after the dust settles. We believe

witnessed the first ST investor as recently

Tokyo and Osaka rank high in the recent

interest rate increments will likely be modest,

as in July 2021. As of December 2022, theinvestor survey by the Urban Land Institute.

as we have previously written, since inflation

underlying assets of ST investors grew toAmidst this uncertainty, investors are looking

in Japan is modest.

a total of JPY40 billion. In 2023, several

for stable investment destinations.
Furthermore, global inflation has likely
peaked out, and interest rate hikes in the

Recovery in 2023 looks like it will be

foreign ST investors are expected to enter

relatively stronger in Japan than other

the Japanese market, and the ST market sizecountries, and given Japan’s belated

is forecast to reach a total of JPY2.5 trillion
by 2030. The largest transaction by a ST
investor amounted to JPY14.6 billion, whichsuggests they could buy any asset class now.
Indeed, matured markets like Japan require

GRAPH 1: Investment Volumes, 2007 to Q3/2022

a more diversified pool of investors.
Nevertheless, risks are plentiful. Global

OfficeResidential

RetailHospitality

Logistics

Other

Total

inflation and elevated interest rates may

8.0

100%
90%
80%
70%

slowdowns have already started in some

6.0

countries and this is likely to cause some

50%

4.0

40%

3.0

30%

JPY TRILLION

5.0

60%

persist longer than expected. Economic

7.0

2.0

20%

1.0

10%
0%

0.0

deterioration in the Japanese economy. Highlevels of uncertainty may heighten regional
tension, although positive developments at
the G20 summit in Indonesia may offer somehopes of easing global tensions. Indeed,Japan’s stability shines amidst global
uncertainty.
Overall, the outlook for Japan real estate
looks stable, especially in relative terms.
With new investors and players in sight, themarket will become more liquid and show

Source RCA, Savills Research & Consultancy

savills.co.jp/insight-and-opinion/2

greater potential for growth.

2022 Review and 2023 Prospects

INVESTMENT TRENDS
While property-level performances havestarted showing signs of improvement,
investor sentiment is mixed, reflecting
uncertain macroeconomic conditions.
Although several major portfoliotransactions were recorded and investor
interest in Japanese real estate appears
sound, some investors are taking a wait-andsee attitude.
The logistics sector is still the mostsought-after with demand driven by
e-commerce and third-party logistics
companies steadily filling the large supply.
The residential sector has been popular due
to its defensive nature, and has continued
to draw investor interest. Although theoffice sector has not started a recovery inearnest, prime offices or select properties
with upside potential remain sought after.
More investors have begun exploring
opportunities in the retail and hospitality
sectors as well.
In-house cap rates for select sectors
have seen some changes over the year: cap
rates for Grade A office and residential havecompressed by 10 basis points (bps) to 2.6%
and 3.3%, respectively. Cap rates for othersectors remain unchanged.
According to Real Capital Analytics(RCA), as of Q3/2022, total investments
in Japanese real estate amounted toapproximately JPY3.3 trillion year-to-date(YTD) – around a 13% decline comparedto the same period last year. Whilemost sectors recorded contractions, thetransaction volume in the residential sector
increased by 8% compared to the same
period in 2021, highlighting its continuing
popularity.
Although total transaction volumes weredown, there were several major transactions
recorded in 2022. Most noticeably, it
has been announced that a consortium
led by Hulic will acquire the Japanese
government’s portion of Otemachi Place for
JPY436 billion, the largest transaction everin Japan. Reportedly, overseas institutional

Although the pandemic has faded
into the background, 2022 was still
a tumultuous year highlighted byevents such as the war in Ukraine,
the subsequent energy crisis, andpersistent inflation leading to interest
rate hikes. A global recession is
likely, but the Japanese economy
looks to fare better due to its
belated reopening. The majority ofinvestors in Japan are still pursuing
new investment opportunities, and2023 will see more participants. The
matured Japan market will welcome
a more diversified pool of investors,
which will give the market more
liquidity and greater potential for
growth.

investors also showed strong interest.
Moreover, Brookfield Asset Management
is said to be in talks regarding theincluding Prince brand hotels from Seibu
Holdings for JPY150 billion.
As such, although the outlook of the global

acquisition of Meguro Gajoen from China

economy is shrouded with uncertainty,

Investment Corporation for an estimatedinvestor interest in the Japan real estate

JPY190 billion. Also, Kohlberg Kravis

market appears sound. Indeed, Gaw Capital

Roberts (KKR) is reported to have obtained

announced in summer that it would invest

the right of first refusal on the acquisition ofan additional US$3.5 to US$4.0 billion over

Hyatt Regency Tokyo along with an adjacent

the next 1.5 to 2 years by leveraging theoffice building, which is also likely to be

weak yen.

over JPY100 billion. Earlier this year, GIC
also acquired a portfolio of 30 properties3

2022 Review and 2023 Prospects

GRAPH 2: JREI Expected Prime Office Cap Rates by
City, 2H/2003 to 2022
Tokyo

Osaka

NagoyaFukuoka

Sendai8.0%

EXPECTED CAP RATE

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

3.0%
0304
03
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Source JREI, Savills Research & Consultancy

GRAPH 3: Investment-grade Office YoY Rental Growthand Vacancy Rates, 2H/2022

50,0002022 Rent
2022 Vacancy (RHS)

Rent YoY
-4.6%

-2.2%

0.5%

11%
0.0%

40,0007.7%

8%30,0007%

25,000

6%
4.1%

4.8%

5%
4%

15,00010,00010%
9%35,00020,00012%

VACANCY

JPY / TSUBO / MONTH

45,0002021 Rent
2021 Vacancy (RHS)

2.5%

2.8%

3.2%

2.3%
2.2%

5,000
0

3%
2%

Osaka

NagoyaFukuoka

Source Savills Research & Consultancy

GRAPH 4: Office Investment Volumes, 2007 to
Q3/2022
Overseas
Listed Companies & REITs
Unknown
Total (RHS)
100%

Equity & Institutional
Private
Other
5.0
4.5

80%

4.0

70%

3.5

60%

3.0

50%

2.5

40%

2.0

30%

1.5

20%

1.0

10%

0.5

0%

0.0

JPY TRILLION

90%

Source RCA, Savills Research & Consultancy

savills.co.jp/insight-and-opinion/

Investment Trends
The office sector is still the largest asset
class in Japanese real estate, and has
seen greater confidence in 2022 withthe pandemic having transitioned into
an endemic state. Savills in-house cap
rates for Grade A offices in Tokyo havecompressed by 10bps to 2.6% through2022. Meanwhile, the October 2022
Japan Real Estate Institute (JREI)1
survey also shows that expected cap rates
in Tokyo have compressed by 10bps YoY.
Fukuoka and Osaka have seen cap rates
tighten by 20bps YoY, while Nagoya’s cap
rates have tightened 10bps YoY.
Investment volumes in the officesector YTD as of Q3/2022 are around 18%
lower than volumes over the same period
in 2021 and 2020, although it should be
noted that figures are still preliminary
and will likely increase as more deals are
confirmed. Indeed, the transaction of
Otemachi Place by a consortium led by
Hulic, estimated to be at JPY436 billion,
the largest transaction ever in Japan, has
not yet been included in these figures.
The market has overall seen
substantial interest from overseas
investors as well; cross-bordertransactions comprised around 35%
of YTD Q3/2022 volumes. One majortransaction was an undisclosed overseas
investor purchasing Ariake Central
Tower for over JPY40 billion (estimated).

1%
0%

Tokyo

OFFICE

Review and Prospects
The pandemic transitioned to an endemic
state in 2022, and office attendancehas remained mostly stable throughout
the year. Remote work policies are stillprevalent, and it appears that many
companies have adopted some form of
hybrid work.
While the Tokyo office market hascontinued to weaken in 2022, rental
declines have slowed significantly Tokyo’s Grade A market rents have only
contracted 2.6% YTD as of Q3/2022.
Rents appear to be bottoming out andcould see some recovery. In fact, some
popular buildings have even started togradually raise rents.
At the same time, vacancy rates
have loosened 1.4 percentage points(ppts) over the same period. However,a majority of offices are close to
full occupancy, whereas a handfulof poorly located and older offices
have high vacancy rates, and are the
1 Expected cap rates reported by JREI tend to be wider
than market cap rates.

4

main contributors to this increment.
Indeed, the pandemic has created somebifurcation in the market, with older
offices that have poor accessibility
suffering disproportionately. Elsewhere,
Grade B offices appear to have been
prompted to lower rents due to thediminished relative affordability whencompared to declining Grade A rents.
As such, the Grade B market has overall
moved in tandem with the Grade A
market.
Rental trends in regional markets haveoutperformed Tokyo, with most markets
either remaining stable or only seeinga moderate decline. However, there issome disparity between markets whenit comes to vacancy. Osaka has seen asimilar rate of vacancy increment as
Tokyo. Meanwhile, Fukuoka’s vacancy
has remained almost flat, while Nagoya
saw a large increase in vacancy of 4.5ppts
YoY. Although the vacancy increment
in Nagoya was noteworthy, this mainly
stemmed from a few buildings, mostly
new ones, with a striking amount ofvacant space, likely due to the ownership
structure, whereas a majority ofbuildings in the market are actually
performing well.
Overall, the Japanese market has
been fairly stable and has shown signsof bottoming out, with some properties
seeing rents stabilise or even edge up
in recent quarters. Nonetheless, poorly
located, and older offices will likely suffer
for some time. While the large supply in
2023 has seen sound pre-leasing activity,
the global economic slowdown could
introduce hurdles to the market, anddemand might take longer to recover.
In this scenario, the gap between
outperforming and underperforming
offices may widen even more.

2022 Review and 2023 Prospects

GRAPH 5: Residential Investment Volumes,
2007 to Q3/2022

100%

Overseas
Listed Companies & REITs
Unknown
Total Investment (RHS)RESIDENTIAL

Equity & Institutional
Private
Other
2.0
1.8

80%

1.6

70%

1.4

60%

1.2

50%

1.0

40%

0.8

30%

0.6

20%

0.4

10%

0.2

0%

0.0

JPY TRILLION

90%

Source RCA, Savills Research & Consultancy

GRAPH 6: Rents by Unit Size, C5W, 2014 to Q3/2022
15-30 sq m

30-45 sq m

45-60 sq m

5,200

JPY / SQ M / MONTH

5,000
4,800
4,600
4,400
4,200
4,000

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

3,800
2014 2015 2016 2017 2018 2019 2020 2021 2022
Source Savills Research & Consultancy

GRAPH 7: Tokyo Monthly Population Change, 2019 toNovember 2022
2019

2020

2021

2022

40,000

POPULATION CHANGE

30,00020,00010,0000-10,000-20,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source Tokyo Metropolitan Government,
Savills Research & Consultancy

Investment Trends
Savills in-house cap rates for mid-market
residential properties have tightened to
3.3%, decreasing 10bps over the year. The
stability of this asset class has heightened
the competition for acquisitions, andresidential properties remain popular in
the market. According to JREI, expected
cap rates for residential properties in
Jonan have tightened 10bps YoY to 3.9%,
showing the continued interest in the
sector.
As of Q3/2022, YTD residential
investment volumes were around 8%
higher than the figure observed overthe same period in 2021, although they
were lower than the extremely largetransaction volumes over the same
period in 2020. Nonetheless, a number ofmajor portfolio transactions have takenplace in 2022, including an acquisition of
32 residential properties by Gaw CapitalPartners and Qatar Investment Authority
for an estimated US$450 million. Thishigh level of activity is likely to continue
into 2023.
Review and Prospects
The Tokyo 23W market has experienced
noticeable recovery over the past year
as society transitioned to an endemic
state. Average asking rents have trended
upwards, and have neared pre-pandemic
levels. Meanwhile, average occupancy
rates have also recovered, although they
appear to remain around 1.0ppts lower
than the pre-pandemic highs.
Although moderate, inflation has
hit Japanese households due to the
spike in energy prices and imports
due to the weakened yen. This comesagainst a backdrop of modest wage
growth, and has overall eroded theaverage household’s purchasing power.
Consequently, some people could behesitant to return to the relatively
expensive 23W market, and may slow
growth in the Tokyo residential leasing
market for the meantime.
As of October 2022, the population of
the 23W is still slightly lower than prepandemic times. In contrast, many outer
cities within Tokyo prefecture, and next
to Tokyo prefecture actually saw a netincrement in their population over the
past two years. This was likely primarily
due to the relative affordability and larger
living spaces that could be found in theselocations, especially while working fromhome arrangements were commonplace.
Indeed, migration trends in 2021 showthat the largest population outflows from5

the 23W were to surrounding regions inGreater Tokyo.
Nevertheless, while net population
growth has been slow throughout 2022,
there are signs of changing fortunes forTokyo’s demographic situation. The 2022
spring moving season saw a net-influxof 43,000 people into Tokyo prefecture,compared to 15,000 in 2021. The easingof border restrictions and returnof many foreign nationals to Tokyosignificantly contributed to this recovery,as this demographic constituted alarge proportion of the net population
increment, even well after the spring
moving season. Furthermore, the net
influx of people in the desirable 20-to29-year-old age band remains high, which
is a testament to Tokyo’s continuing
status as an economic powerhouse.
Hybrid work arrangements are stillcommon, meaning that larger units haveretained their popularity among renterslooking for units that feature space forremote work. As such, larger units havecontinued to maintain their premium
over small units in 2022. The relative
scarcity of such units within the 23W has
also contributed to this upward trend.
The population of the 23W will likely
be supported by the return of foreign
nationals in the short-term. However,with the heightened costs of living due
to inflation, combined with prevailing
hybrid workstyles, areas that are more
affordable such as outer wards andcities outside the 23W will likely remain
popular for the time being. In contrast,
the C5W may perform well, since
residents of these submarkets typicallyhave high incomes and are affected lessby inflation.
Overall, the global economic slowdown
should dampen the recovery of the 23W
residential market somewhat. Goingforward, further growth and recovery
will be contingent on both economic
conditions, wage growth and the extent
that companies continue hybrid work.
In general, more companies appear tohave requested greater attendance inthe office, although remote work policies
are still in place. Similar to a year ago,
residents will still need to find a balance
between distance from the office andlarger space at home for remote work.

2022 Review and 2023 Prospects

RETAILGRAPH 8: JREI Expected Retail Cap Rates by City,
2H/2003 to 2022
9.0%

Osaka

NagoyaFukuoka

Sendai

Tokyo

8.5%
8.0%
EXPECTED CAP RATE

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H
2H

3.0%
03
04
03040506
07 0809 10 11 12 13 14 15 16 17 18 19 20 21 22
Source JREI, Savills Research & Consultancy

GRAPH 9: Retail Investment Volumes, 2007 to
Q3/2022

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
1,000

90%

900

80%

800
700
600

50%

500

40%

400

30%

300

20%

200

10%

100

0%

0

JPY BILLION

70%
60%

Source RCA, Savills Research & Consultancy

GRAPH 10: Sector J-REIT* performance, as ofNovember 2022
Retail Index
Residential Index
130

Logistics Index
Hotel Index

Offce Index

4 JAN 2022 = 100

120
110
100
90
80
70
60

Source Japan Exchange Group, Savills Research & Consultancy*The J-REIT index was constructed from J-REITs of each respective
sector with a market capitalisation of greater than JPY100 billion at
the start of 2022.

savills.co.jp/insight-and-opinion/

Investment Trends
As of Q4/2022, Savills in-house cap rates
for high-street retail in Tokyo are at 2.7%
and have remained at that level since2020. According to JREI, expected cap
rates for prime retail property in Ginza
have been stable at 3.5% - unchanged over
the year.
Retail transaction volumes have beenslower compared to those in 2021, withtransactional volumes as of Q3/2022(YTD) having fallen around 22%compared to the same period in 2021.
However, investment volumes shouldpick up as the retail situation continues
to improve with the resumption of
inbound tourism. Indeed, some investors
were prescient to this heightened
optimism in the market, and a few largescale transactions were observed in 2022.
For instance, Tokyu REIT purchased a
portion of the mixed-use retail complex
Futako Tamagawa Rise in Tokyo for
JPY20.2 billion.
Review and Prospects
Japan has transitioned towards anendemic state, and footfall has mostly
recovered in many areas. However, astark dichotomy in performance persists
between prime and non-prime areas at thesubmarket level. While prime streets inTokyo and other regional cities have very
few vacancies and are performing well,less prominent peripheral streets continue
to struggle, contributing to higher averagevacancy rates in several submarkets.
Indeed, these locations are often home to
F&B and entertainment businesses, whichhave suffered disproportionally as a resultof the pandemic. Hence, recovery for theretail sector has largely depended on thearea.
Upper floor units have experienced
particularly high levels of vacancy.
These units are frequently occupied
by F&B establishments, and so weredisproportionately affected by lower
levels of footfall. While they have seensome reprieve in tenant demand fromservice providers such as beauty clinics
and coworking spaces, it will still takesome time before the market sees a fullrecovery.
Inflated commodities prices, coupledwith the weak yen have had knockon effects for consumer prices, while
average households continue to struggle
with modest wage growth and inflation.
These issues may impede some recovery

6

as consumers are increasingly conscious
about spending and eating out.
In contrast, the luxury sector has gonefrom strength to strength, supported
by high levels of domestic spending bywealthy residents. Prime streets in Ginza,
Omotesando, and other premier shopping
areas have seen a revival in fortunes, andthere have been several new luxury retail
openings and new major redevelopment
projects. Sentiment in the luxury sector
should continue to grow as inboundtourism picks up in 2023.
While domestic consumption mightface a slowdown, the resumption of
inbound tourism in October 2022 should
be a boon for the retail industry, bolsteredfurther by the weak yen. That said, withtypically high-spending Chinese visitors
unable to travel due to COVID restrictionsin China, the boost from inbound tourism
might be limited.
There are a number of large-scale
developments in the pipeline that are
expected to transform their respective
retail landscapes. Many of them will bemixed-use, so as to diversify revenue
streams. Furthermore, another growing
trend is that developers are increasingly
incorporating ESG principles into newretail projects, to embed developments
within the surrounding community andreduce any negative externalities thatmight arise. Secondly, the location ofdemand and function of physical retailstores have undergone some changes.
Namely, the outflow of people from urban
centres observed during the pandemic
has notably increased suburban retaildemand, while the unabated growth of
e-commerce has contributed to moreretail space being transformed to function
as a showroom for retail goods, while
actual purchasing is carried out online.
Going forward, the retail sector is
likely to continue improving and havestronger prospects. Indeed, retail J-REITs
have outperformed other J-REIT sectors
in 2022, with exception of the hotel
sector. The transition toward an endemic
state and the reopening of borders
should boost some retail spending frominbound tourists leveraging the weakyen, even without Chinese shoppers.
This could attract the attention of moreinvestors, especially as the yield spreadsof sectors that were very popularduring the pandemic, such as logistics
and residential, appear tight, as retailproperties still have room for value-add
opportunities.

2022 Review and 2023 Prospects

GRAPH 11: JREI Expected Logistics Cap Rates by City,
2H/2005 to 2022
Tokyo - Bayside
8.0%

Osaka - Inland

NagoyaFukuoka

EXPECTED CAP RATE

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

4.0%
0506
05
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Source JREI, Savills Research & Consultancy

GRAPH 12: Logistics Investment Volumes, 2007 to
Q3/2022

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
1,000
900

80%

800

70%

700

60%

600

50%

500

40%

400

30%

300

20%

200

10%

100

0%

0

JPY BILLION

90%

Source RCA, Savills Research & Consultancy

15%

4,500

10%

4,000

5%

3,500

0%

3,000

-5%

2,500

-10%

2,000

-15%
FY2000FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008FY2009FY2010FY2011FY2012FY2013
FY2014FY2015FY2016FY2017FY2018FY2019FY2020
FY20215,000

GROWTH RATESPACKAGES (MILLION)

GRAPH 13: Package Delivery Volume, FY2000 to
FY2021

Source Ministry of Land, Infrastructure, Transport and Tourism,
Savills Research & Consultancy

LOGISTICS
Investment Trends
The popularity of the logistics sector
has remained high over the past year.
According to JREI’s October 2022 survey,
expected cap rates compressed in all
major markets over the year, with theTokyo bayside area marking a 10bps fall
to 4.0%. At the same time, our in-housesurvey indicates that cap rates for prime
logistics properties remain unchanged
and are as low as 3.3%.
Investment activity has been slow
across many sectors so far in 2022 andlogistics was no exception. Transaction
volumes as of Q3/2022 (YTD) werearound 55% lower than the same period
in 2021 at JPY215 billion. That said,
there were a few notable activities
in 2022. Most recently, Gaw CapitalPartners will reportedly acquire sevenlogistics facilities from Blackstone forapproximately JPY80 billion, Indeed,
investor interest in this sector remains
strong despite the currently low cap
rates.
Despite the logistics sector’s
continuing popularity, investors
should take heed of a number of risk
factors, namely the global inflationary
environment putting cost-relatedpressures, especially on logistics
tenants typically with thin operating
margins, and the potential interest rateincrements in the coming year, whichmight affect the previously popular stablelong-term lease model.
Review and Prospects
In 2022, Greater Tokyo has continued
to perform soundly with average rents
growing. Specifically, asking rents in theregion increased 2.6% YoY to JPY4,700 per
tsubo as of Q3/2022. Strong demand frome-commerce operators and 3PL companies
appears to continue propping up themarket. That said, the average vacancy
rate has increased 2.3ppts YoY to 4.0%.
Although the market is still tight, theincreasing supply has led to some slightloosening.
Meanwhile, Greater Osaka has seen
limited vacancy increments in 2022.
Compared to 2021, supply in the region
was significantly limited and newly
completed facilities have been leased
at a sound pace. As a result, vacancy
increments have been milder at 0.5ppts
YoY to 1.6%. Encouraged by the soundmarket conditions, average asking rents
have risen 6.7% YoY to JPY4,300 per
tsubo as of Q3/2022.

7

Going forward, Greater Tokyo is expected
to see about 4.0 million sq m of new supply(GFA) in 2023, the same level experienced
in 2022. The sound absorption pace in2022 is an encouraging sign, but there aresome indications that certain inland areas
are seeing a softening and will take moretime to attract tenants. In Greater Osaka,
supply in 2023 is expected to be about
75% greater than in 2022. A large portionof the 2023 supply is expected in inland
areas of Osaka and Kobe where some
softening has been already observed. As
such, although there is some concern,
the amount of supply forecast for Greater
Osaka looks manageable overall.
The momentum stemming from thegrowth in e-commerce might slow downin Japan, at least temporarily, as society
progresses toward normalcy. This, inturn, might slow down demand growthfrom e-commerce operators.
Additionally, as we explored in one of
our reports [Japan Logistics – Evidenceof caution], the unique characteristicsof the logistics sector, such as the low
land value, the difficulty of tenant
diversification, and chronic labour
shortages may weaken market conditions
if the logistics market experiences any
softening.
Furthermore, the new regulation thatwill come into effect in April 2024 will
cap overtime hours at 960 hours a year
and will also force truck companies topay 50% more wages on overtime hours
that exceed 60 hours a month. Based on asurvey conducted by the Japan Trucking
Association in early 2022, many were notprepared for the change.
Overall, fundamentals for the logistics
sector remain sound, and investors are
expected to seek opportunities in this
sector. However, there are increasing
concerns over inflation and future
supply in the pipeline. With the growing
competition for tenants, some investors
may find it difficult to achieve sufficiently
high rents to justify their sharp pricing.
With some changes in consumer patterns
and regulation expected, potential
investors need to assess how the assets
will respond in turn to them.

2022 Review and 2023 Prospects

HOTEL

Sendai

NagoyaOsaka

Fukuoka

2H

Sapporo

2H

Tokyo
8.0%

2H

GRAPH 14: JREI Expected Cap Rates for Hotels by
City, 2H/2006 to 2022

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

2H

4.0%
0607
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Source JREI, Savills Research & Consultancy

GRAPH 15: Hotel Investment Volumes, 2007 to
Q3/2022

100%

Overseas
Listed Companies & REITs
Unknown
Total (RHS)

Equity & Institutional
Private
Other
1,000
900

80%

800

70%

700

60%

600

50%

500

40%

400

30%

300

20%

200

10%

100

0%

0

JPY BILLION

90%

Source RCA, Savills Research & Consultancy

GRAPH 16: Overseas Tourists by Month, January 2022
to October 2022
600,000

500,000

PEOPLE

400,000

300,000

200,000

100,000

0
Jan Feb Mar Apr May Jun

Jul Aug Sep Oct

2022
Source Japan National Tourism Organization,
Savills Research & Consultancy

savills.co.jp/insight-and-opinion/

Investment Trends
Border controls in Japan have been liftedin 2022, and the hospitality sector is set
for a long-waited recovery. Investment
volumes in this sector lagged in 2022,
falling 35% YTD as of Q3/2022 comparedwith the same period in the previous
year. Indeed, many hotel owners werereluctant to sell during the pandemic.
2023 should see an intensification oftransaction activity as more inboundtourists enter Japan, and owners arelikely to be able to sell hotels only at
acceptable discounts compared to prepandemic prices.
There were several notabletransactions in 2022. In February 2022,
Seibu Holdings announced that it willsell 31 hospitality properties including
15 hotels to GIC for an estimated JPY150
billion.
Elsewhere, Odakyu Electric Railway
Company is reportedly planning to sell
Hyatt Regency Tokyo to KKR. Although
the details are unknown, the price forthe hotel and the adjacent office building
is estimated to be about JPY140 billion 2 .
Daiwa House has also announced that
it will sell the Daiwa Resort business toEbisu Resort, which is managed by Japan
Hotel REIT Advisors, for JPY55.6 billion
in April 2023. Daiwa Resort is currently
operating 24 hotels across Japan.
More recently, it has been reported
that China Investment Corporation(CIC) is considering to sell Meguro
Gajoen to Brookfield for an estimated
JPY190 billion. The property is a multipurpose facility with hotel, wedding
venue, and office functions.
Review and Prospects
2022 is a watershed year for thehospitality sector as inbound tourists
have started to return to Japan withborder controls being largely lifted
after two years of strict restrictions on
international travel.
Considering that inbound tourism
was growing at a breakneck pace before
the pandemic, recovery is likely to bestrong as pent-up demand is released andthe weak yen helps to attract tourists.
According to the World Economic
Forum, Japan took the top spot as a
tourist destination for the first time in2022. While the Japanese government
started to reopen its borders to tour
2
In May 2022, Nikkei reported that Dai-Ichi Life
Insurance Company is considering acquiring the officeportion.

8

groups in June 2022, travel restrictions
on individual tourists were not removed
at full scale until mid-October 2022. In
October, the number of inbound tourists
increased from 207,000 in September
to 499,000, and the November figure
is expected to increase significantly,
reflecting the full impact of the borderreopening. Moreover, as mainly relatively
affluent travelers return to Japan, average
ADRs are improving strongly.
Furthermore, domestic tourism isreturning in earnest, rapidly approaching
pre-pandemic levels. According to theJapan Tourism Agency (JTA), the numberof hotel stays by domestic tourists has
started to gradually recover toward theend of 2021. Recently, the number in
September 2022 was only 5.4% below thelevel seen in the same month in 2019, a
noticeable improvement from double
digit declines in most preceding months.
However, the pace of recovery is
likely to be capped by China’s prolonged
COVID restrictions. Indeed, tourists
from China made up one third of thetotal inbound spending in 2019, and it isunlikely that inbound tourist figures will
return to pre-pandemic levels without
these neighboring regions.
Market participants appear toremain bullish on the luxury sector.
A noticeable example is the recently
announced opening of a hotel affiliatedwith Dorchester Collection in Torch
Tower. Scheduled to open in FY2028,
it is planned to be on the 53rd to 58th
floors and will house 110 guestrooms.
Elsewhere, the upscale sector should
also pose opportunities as the stock/
supply is limited. Branding may be key toattracting affluent guests from all over
the world.
Overall, the situation surrounding
the hospitality industry has beensteadily improving and is expected to getsignificantly better as the strict bordermeasures have been lifted. We expect
many hotel transactions in 2023 sinceowners are now able to sell their hotels
at acceptable discounts on pre-pandemic
prices.

2022 Review and 2023 Prospects

ALTERNATIVE ASSETS
Since the onset of the pandemic, data centres havearguably become the most sought-after alternative
sector largely due to increasing demand for
hyperscale data centres. Although the pandemic
has shifted to an endemic state, the popularity
has not waned. While student housing and senior
housing remain as popular alternative segments
for the competitive residential asset class and are
expected to benefit from secular demographic
changes, the current inflationary environment
may weaken the sentiment for the senior housing
typically with fixed long-term leasing contract.
Data centres
During the pandemic, the data centre sector has
gained increasing interest. Particularly, demandfor hyperscale data centres is strong due to aconfluence of factors such as the absence ofdominant domestic players in Japan, the country’s
strategic location as a network connection
and distribution hub, and the increased
implementation of digital transformation during
the pandemic. The current friend-shoring trend
may accelerate the movement.
This is not the first data centre boom in Japan,
but is in fact considered the fourth one. The firstboom came with the emergence of the internet forcommercial use in the 1990’s, and needs for data
centres have changed significantly since then.
For instance, there is a greater need for facilities
that can use large amounts of electricity, since
the current boom stems from heightened demandfor hyperscale data centres with larger computing
power. Consequently, more sophisticatedcooling systems are necessary to dissipate theheat produced by more powerful servers, andthe floor loading capacity must be sufficiently

high to hold more densely packed equipment.
With companies becoming increasingly ESG
conscious, it has become more important fordata centres to run efficiently and also to haveaccess to green energy. Against this backdrop,
new, state-of-the-art data centres have been
built in recent years, and more are currently
under construction.
Given the strong growth in data usage
expected by various forecasters, as well asJapan’s ageing data centre stock, interest in
developing new data centres should continue toexpand. Indeed, Google has announced that it
will open its first data centre in Japan by 2023
as part of its US$730 million investment ininfrastructure in Japan. However, as mentioned
in our report last year, finding suitabledevelopment sites is a challenge. In addition
to requirements like having access to a large
and stable electricity supply, the availability oflarge sites for future expansion is important
especially for hyperscalers. Furthermore,when taking into account other criteria such asaccessibility from cities, proximity to internet
exchange and submarine cables, the distancefrom active fault lines, and safety concerns
such as the likelihood of terrorist attacks, ideal
sites are few and far between. The scarcity
of suitable land is a likely reason why the
number of announcements of new data centre
developments appear fewer in 2022 than in 2021.
Despite these hurdles, new players havesurfaced. For instance, GLP has announced
its intention to enter the data centre market inFebruary 2022. The company plans to invest
more than JPY1.0 trillion and construct morethan six data centres with total capacity of
900MW in Greater Tokyo and Greater Osaka

GRAPH 17: Percentage of Cloud Service Use by Company*, 2015 to 2021
80%

USE OF CLOUD SERVICE

70%
60%
50%
40%
30%
20%
10%
0%
2015

2016

2017

2018

2019

2020

2021

Source Ministry of International Affairs and Communications, Savills Research & Consultancy*Percentages of respondents who answered that their companies used cloud service, at least partially.

9

by 2028. Reportedly, it has already secured
six sites for development and is targeting
hyperscalers such as Google and Microsoft
as potential tenants. Gaw Capital Partners
has also acquired the Fuchu Building
located in Fuchu Intelligent Park in Tokyo.
Combined with the adjacent site that thefund acquired in April 2021, the total campus
size will reach 11,000 sq m and is planned
to be a site for a 50MW data centre with
about 4,000 racks. Furthermore, Daiwa
House has launched its data centre brand,
DPDC, in April 2022. The company has
been developing data centres in Inzai since
October 2020 and plans to construct 14 data
centres with 330,000 sq m in GFA under the
DPDC brand.
Moreover, the Japanese government has
been trying to facilitate the development ofdata centres in regional cities. In April 2022,
the government disclosed 78 potential data
centre development sites that were proposedby municipalities, including the information
about items such as power infrastructure,
network accessibility, and land prices of
those sites. Considering that there were
unsuccessful cases of data centres inregional cities in previous booms, whether
developers can reduce risk with the support
from the government might become an
important consideration.
Overall, the prospects for the data
centre sector are promising. Consideringthat the demand for data storage should
only increase going forward, and Japan’s
strategic location as a pivotal network
hub in the region, the data centre market
is expected to expand. With new players
making a foray into the market, data centre
developments are expected to continue topick up. However, a scarcity of ideal sites
and the difficulty of securing a large supplyof stable electricity might limit the pace ofdevelopment. Especially for new entrants,
the ability to collaborate with local partners
is likely to be essential.
Healthcare
The operation of healthcare assets wasparticularly disturbed by the pandemic as
operators needed to take extra caution toprevent COVID-19 outbreaks. That said, thepandemic has shifted to an endemic state,
and there were several announcements madein 2022.
For instance, AXA Investment Managers
has recently announced its debut in this
sector. Its first investment is JPY21.9 billion
portfolio acquisition including 15 facilities.
Elsewhere, Nuveen Real Estate has closed
its US$100 million Japan Alternative Living
Strategy, which has a focus on stablised

2022 Review and 2023 Prospects

GRAPH 18: Accommodation Capacity for Senior
Housing Facilities* in Japan, 2013 to 2020
Residences for elderly people with service
Senior housing other than residences for elderly
people with service
900,000
800,000
700,000

PEOPLE

600,000
500,000
400,000
300,000
200,000
100,000
02013 2014 2015 2016 2017 2018 2019 2020
Source Ministry of Health, Labour and Welfare,
Savills Research & Consultancy*Here, senior housing facilities exclude welfare facilities for the elderly(“roujin fukushi shisetsu”).

GRAPH 19: Inflow, Outflow, and Net-Flow of Foreign
Nationals, January 2020 to September 2022
100,000

Inflow

Outflow

Net Flow

80,000PEOPLE

60,00040,00020,0000-20,000-40,000

properties in 2021. Aiming to diversify
its currently Indonesia-centric portfolio,
the REIT is expected to continue to makeacquisitions in Japan going forward.
Some J-REITs also continued toacquire healthcare assets over the past
year. For instance, Healthcare & Medical
Investment Corporation acquired 10
properties across Japan for JPY11.4
billion in March and April. More recently,
Kenedix Residential Next Investment
Corporation announced the acquisitionof five senior housing properties for
JPY6.8 billion in November.
As such, the healthcare sector
appears to be getting a healthy level ofinvestor interest, though challenges
remain. Firstly, the current inflationary
environment could eat away at the
profits of senior housing facilities.
Considering that their end tenants are
elderlies that rely on their savings, it ishard for operators to transfer heightened
operational costs. Furthermore, the longterm fixed rent leases that are common
in the sector are disadvantageous in
inflationary environments. That said,
some investors seem satisfied with extra
50bps+ on top of multi-family cap rates.
In the long term, a shortage of nursing
and care-giving staff may be a persistentproblem. According to the government’s
estimate released in 2021, the labour
shortage of care-giving staff is projected
to be 320,000 - around 13% of thenecessary staff in the healthcare sector
by FY2025. Given the above, the qualityof operators will be an increasingly
important factor in weighing investment
opportunities.

Source Statistics Bureau of Japan, Savills Research & Consultancy

senior housing assets, in July. Both of them have been alreadyactive in the multifamily sector.
Elsewhere, Singapore Parkway Life REIT, one of the first
entrants in this market, continues to be active and acquired
five senior housing properties in 2022. Divided into two
separate portfolios, the Singaporean REIT purchased threeproperties in Hokkaido, including Blue Terrace Kagura,Blue Rise Nopporo, and Blue Terrace Taisetsu, for JPY2.6
billion from Blue Melon Capital and its subsidiary while italso acquired two properties in Tokyo and Chiba from Daiwa
House Industry for JPY2.9 billion. Average cap rates of thesetwo portfolios are 6.5% and 5.2%, respectively.
Additionally, another Singaporean REIT, First REIT,
acquired two healthcare properties, including Medical
Rehabilitation Home Bon Séjour Komaki in Aichi and Loyal
Residence Ayase in Kanagawa, in 2022 for JPY2.6 billion
in total. These purchases follow its strategic entry into theJapanese market with the acquisition of 12 senior housing

savills.co.jp/insight-and-opinion/

Student Housing
Without a doubt, the pandemic andsubsequent entry ban dimmed theprospects for the student housing sector.
However, with the relaxation of border
restrictions starting from March 2022,
the outlook has significantly improved.
According to the data published by theJapanese government, the monthly net
migration of foreign nationals to Japan
has increased from -6,600 in January2022 to 30,500 in September 2022.
Moreover, Kyoritsu Maintenance, a major
student housing operator, revealed thatoccupancy in its dormitory businesssegment, which was 92.1% in FY2021,
moderately increased to 93.5% in FY2022.
Rental recovery observed in thegeneral multifamily market is also
positive for the student housing
sector. Granted that facility features

10

and amenities of student housing
are different from those of generalmultifamily properties, Japanese
students in particular are likely tocompare both types when considering
accommodation options. As such, whenrents for general multifamily properties
increase, all-inclusive, relatively
affordable student housing should
become more appealing.
There were some recent transactions
as well. For instance, AXA Investment
Managers acquired four student housing
properties along with 29 multifamily
properties, which was announced in
September 2022. While the details havenot been made available, the student
housing properties reportedly include 539
studio units near universities in Greater
Tokyo. Elsewhere, J-REITs have alsotransacted a number of student housing
properties in 2022, though relatively few.
Recently, Comforia Residential REIT has
announced that it will acquire Campus
Village Akatsuka-Shinmachi in Itabashi
for JPY2.3 billion at an appraisal direct
cap rate of 4.1% in October. There arealso instances of dispositions by J-REITs,
such as Tokyo Student-House Wako
which was sold by Advance Residence
Investment Corporation to its sponsor,
ITOCHU Property Development, for
JPY800 million at an appraisal direct cap
rate of 5.2%.
Overall, it is likely that the student
housing sector will regain its momentum
as the influx of international students
resumes. With yields for generalmultifamily assets compressed, this is
an interesting alternative sector that is
equipped with the defensive nature ofresidential property and growth potential
based on secular social trends. As themarket grows, more investors will showinterest in this sector. If geopoliticaltensions rise among some countries,
Japan might also increase its popularity
as a host country for international
students.

2022 Review and 2023 Prospects

OPPORTUNITIES AND RISKS
Opportunities
With the pandemic receding, all sectors have seensome recovery over the past year. That said, 2022 hasbeen a year characterised by war, inflation and a highglobal interest rate environment, which all make theworld unstable. Even Japan, a country known for its
stability, has experienced a historic weakening of theyen. Given that wage growth remains largely modest
in Japan, average households have suffered.
Inflation is currently at acceptable levels and interest
rates remain low in Japan. As such, while some aretaking a wait-and-see approach due to concerns overa future increase in interest rates, most investors
are looking to snap up opportunities. Indeed, 2022
has been another busy year with multiple largetransactions. On top of the JPY436 billion deal
involving Otemachi Place, the largest transaction
ever in Japan, several transactions valued at over
JPY100 billion have taken place over the past year.
Interest rate hikes in the US are likely to slow
down, and many believe that the upward pressure
on interest rates in Japan should be manageable.
Investors will likely get a clearer picture of thedirection of the market by early 2023 as inflationin the US gradually slows down. J-REITs arenotably susceptible to changes in interest rates
and their activity level depends on the interest rateenvironment. Given the relatively high prices of realestate, transactions volumes by J-REITs will likely
be affected if interest rates go up.
Nevertheless, some economic slowdown orrecessions are likely, which will negatively impact realestate activity. With this high level of uncertainty,
investors remain cautious as well as selective intheir investments. For instance, although the officesector remains stable, office location appears to be
an increasingly decisive factor, especially considering
the long-term impact of hybrid work arrangements.
ESG appears to be gaining further ground.
According to a survey by the Development Bank ofJapan, approximately half of tenants responded thatthey would accept some level of rental premium for
ESG compliant office buildings.
With this in mind, the points below represent
some of our views on investment strategies forJapanese real estate.

Core and Core-plus
The logistic sector remains sought after, although
there are increasing concerns over inflation andlarge supply. Tenants are struggling with thin profit
margins and inflation, and competition for tenants is
growing. Some investors may not be able to achieverents high enough to justify their own sharp pricing.
Multi-family retains its popularity due to its stable
cash flow even during the pandemic. There wereseveral large portfolio transactions over 2022, and2023 is also likely to see a high level of activity. Rental
levels have almost recovered to pre-pandemic levels,and meaningful wage growth should come before
further rental hikes. Student housing and healthcare
facilities appear to be popular targets as well.
Office attendance has improved throughout
2022 and there has been stability in the officemarket. Investors have been very selective aboutlocation – poorly located offices will likely struggle
to attract tenants while hybrid work arrangements
are common.
Value-add
Urban retail still appears to have some room for
growth. Indeed, brick and mortar demand fromdomestic consumers has largely recovered in 2022.
That said, recovery has been fragmented even inprime submarkets. High-spending inbound tourists
should help change the fortunes of urban retail.
Disposals of corporate real estate, especially by
the industries hit the hardest by the pandemic, arestill likely to continue in 2023.
Opportunistic
The hotel sector continues to be attractive toinvestors, given that inbound tourism has resumed
and domestic tourism, which comprises roughly
80% of market before the pandemic, has recovered
to pre-pandemic levels. Furthermore, investors,
anticipating interest rate hikes, are encouraged by
the fact that hotel performance is far less linked tointerest rates than other sectors. We expect many
hotel transactions in 2023 since owners are now able
to sell their hotels at acceptable discounts on prepandemic prices.
Elsewhere, luxury or branded residences might
be interesting opportunities to explore, especiallybecause the stock level remains subdued. Tokyo

will see its first branded residence in 2023,
provided by Aman Tokyo Residences, which will pave
the way and spark new entries from other market
participants.
There should be some opportunities in the officesector, particularly among office buildings with highvacancy. This comes with significant risks, but shrewd
investors may identify properties with high potential.
Risks
There are several risk factors in the current global
landscape, and the following will be important toconsider for real estate investment.
Interest rate risks
While the Japanese real estate sector has mostly
remained stable throughout the pandemic, anoticeable increase in interest rates will likely trigger
some corrections, especially for assets that haveexperienced sharp pricing and compressed cap rates.
If global interest rates continue to increase, andthe depreciation of the yen continues, or CPI in
Japan remains elevated, the BOJ is more likely totighten its monetary policy. With a new governor
set to be elected by April, the BOJ may revise
its policy. This is likely to lead to an increase ininterest rates as well as a change in lender sentiment.
Nevertheless, we expect only moderate change
because inflation in Japan is expected to remain at a
manageable level and BOJ has little reason to increaseinterest rates as long as the exchange rate stays
within a preferable range.
Geopolitical risks
2022 has been a turbulent year, with the crisis in
Ukraine, strict COVID restrictions in China, andtensions between the US and China all shaping the
global geopolitical and economic landscape. These
events have all contributed to a global economic
slowdown, especially among Japan’s trading partners,
which will negatively impact the Japanese economy.
Pandemic risks
The spread of the highly transmissible omicron strain
in early 2022 exposed the prevailing risks of new
COVID-19 variants. Another new strong variant may
disrupt the global economy again, as well as further
change the behaviour of people.

For more information about this report, please contact us
Savills Japan

Savills Research

Christian Mancini
CEO, Asia Pacific(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Managing Director, Head of
Research & Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Regional Head of Research& Consultancy, Asia Pacific+852 2842 4573
ssmith@savills.com.hk

Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK,continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative
purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. While every effort has
been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form
is prohibited without written permission from Savills Research.

11