September 19, 2014

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Quarterly Analysis of Free Rent (Tokyo Office)Ratio of Free Rent Granted and Average Free Rent (Month) both show clear trends of decreasing.
The analysis of free rent is a study of current trends of free rent given to new lease. Xymax Real Estate
Institute used the data of lease contracts collected through the group’s business activities and has so far
released Ratio of Free Rent Granted (a percentage of new lease contracts with two months or more free rentin all the new lease contracts) and Free Rent Index (an index based on average rent-free period) for FY2012
1and FY2013 .
On this occasion, we have revised the calculation method of the analysis. From this issue, we will report Ratioof Free Rent Granted and Average Free Rent (Month) on a quarterly basis. To provide a more precise pictureof the overall market, we will present a breakdown of rent-free period (one day and above / two months andabove / six months and above) and the average free rent in actual months rather than the indexed data.
Figure 1: Free Rent for New Lease (Tokyo 23 Wards)
5. Average Free Rent (Month)
Contracts with free rent

1. Free Rent Granted (%)
One day and above

2. Free Rent Granted (%)
Two months and above

4. Average Free Rent (Month)
All the contracts

3. Free Rent Granted (%)
Six months and above

Results for the last four quarters

Ratio of Free
Rent Granted
Average FreeRent (Month)

1.
2.
3.
4.
5.

One day and above
Two months and above
Six months and above
All the contracts
Contracts with free rent

Q3 2013

Q4 2013

Q1 2014Q2 2014

64.8%
59.8%
38.7%
3.9
6.0

66.0%
61.3%
37.7%
3.8
5.8

69.1%
60.8%
34.5%
3.7
5.3

61.1%
53.2%
25.0%
2.9
4.7

Quarter-on
quarter-8.0 pts.
-7.6 pts.
-9.5 pts.
-0.8
-0.6

Numerical data for the entire period is available at the end of this report.
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The previous report was released on July 2, 2014: http://www.xymax.co.jp/english/research/release/140702.html

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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In Figure 1, the area graph shows changes in Ratio of Free Rent Granted, and the line graph shows changes
in Average Free Rent (Month).
The edge of the light green area (1.) represents the rent-free period of at least one day (61.1% in Q2 2014).
The white area represents lease contracts with no free rent. The figure shows that even during the strong
market in 2007-2008, owners offered free rent in 30%-50% of the contracts signed, indicating that free rent isa sort of market practice in Japan.
The edge of green area (2.) represents the rent-free period of two months and above (53.2% in Q2 2014) andthe edge of the orange area (3.) represents six months and above (25.0% in Q2 2014). The percentage offree rent of two months and above drastically increased in a downtrend market, because the rent-free periodof such length is more like a reduction of rent than merely for avoiding double rent payment.
The line graph shows Average Free Rent (Month). The red solid line (4.) is the average of all the contracts
including those with no free rent. The gray dashed line (5.) is the average of the contracts with free rent only.
The former represents the overall trends whereas the latter is useful for analyzing the types of free rentoffered.
Recent Free Rent Trends
Ratio of Free Rent Granted fell sharply in 2012 as the market recovered, but it slowed at the start of 2013,
influenced apparently by owners who took advantage of the recovering demand to quickly achieve higher
occupancy rates and offered some free rent so that tenants think it is affordable.
In the recent data, Average Free Rent (Month) of contracts with free rent (5.) stays in a relatively high levelcompared to that of all the contracts (4.). This is because, although office leases are becoming lessdependent on free rent, some offices definitely require a very long rent-free period of 12 to 18 months. The
demand gap between attractive office spaces and other office spaces are expanding. Some owners of officebuildings with high occupancy rate have actually succeeded in filling vacancy by offering a long rent-freeperiod.
Despite such slow movements, the latest data for Q2 2014 recorded a positive trend: a decrease of both Ratioof Free Rent Granted and Average Free Rent (Month). As the vacancy rate has improved, free rent
campaigns aiming at quick filling of the vacancies have apparently ended.
Free Rent in JapanFree rent is the time lag between the start of contract and the start of rent. In other parts of the world, free rent
is looked as incentives or concessions, whereas in Japan, free rent is originally more like an avoidance ofdouble rent payment when moving to one place from another. Such free rent is offered by an owner of the newspace. Thus, free rent is a market practice in Japan, and therefore some are offered regardless of market
conditions. The free rent for the purpose of avoiding double rent payment is generally a period of roughly twomonths; the period longer than that can be, however, looked as a reduction of rent reflecting the market
conditions.

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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Accordingly, not only rent but also free rent is an important element in lease contract. An analysis of the rent
and free rent combined can describe accurate market conditions.
Free Rent and Xymax New Contract Rent Index
2

Figure 2 is a comparison of the free rent and Xymax New Contract Rent Index . As the graph shows, the rent
index and free rent are correlated. There are three notable periods as discussed below.
Figure 2: Free Rent and Xymax New Contract Rent Index
Year 2003

Fund Bubble

I

GFC

Abenomics

IIIII

Contract Rent Index

Average Free Rent (Month)
All the contracts

I

End of Year 2003 Large Supply
The market showed signs of recovery following the elimination of excess supply in 2003. The rent
level, however, did not increase immediately but remained flat for some period. In contrast, the freerent showed a clear decreasing trend, meaning the effective rent is actually increasing.

II

Global Financial Crisis
When the market is declining, the rent level and free rent deteriorate simultaneously.

IIIAbenomics
The recession is over and the market is on track for recovery. Here again, the free rent is decreasing
ahead of the slow recovery of the rent level. It is still difficult to raise the face rent in the early stageof market recovery. It can be explained that the free rent is the valve to adjust the effective rent foran eventual recovery.

2Xymax New Contract Rent Index http://www.xymax.co.jp/english/research/new_research.html

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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Xymax Real Estate Institute will continue to provide materials for market participants to understand a clearer
picture of the actual market through the combined analysis of the trends of contract rent and free rent.
Data overview and analysis method
NameXymax Free Rent Analysis: Ratio of Free Rent Granted and Average Free Rent (Month)

Subject
Property

Office buildings in Tokyo 23 Wards

PeriodApril 1, 2001 – June 30, 2014 (to be updated quarterly)

No. of Data

Average of 150 per quarter (252 in the latest quarter in Q2 2014)

Analysis
MethodFree rent period

The period from the start of contract to the start of rent, shown in days

Ratio of Free RentGranted

The percentage of new lease contracts with free rent in all the newcontracts (excl. expansion within the building and recontract)

Average Free Rent(Month)•All thecontracts

The simple average of the free rent period including
lease contracts with no free rent.

Contractswith free rent

The simple average of the free rent period of lease
contracts with free rent.

The original research report in Japanese and translated reports in Chinese and Korean are also available
online.
Japanese http://www.xymax.co.jp/Chinese http://www.xymax.co.jp/cn/index.html
Korean http://www.xymax.co.jp/ko/index.html

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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Reference: Numerical data for the entire period

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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