Rules for building safety pay off
The earthquake and tsunami that devastated Japan six months ago appears to have caused no more than a rumble in Tokyo's property market. Tragically, for so many communities, at least 135,000 homes were destroyed and whole neighbourhoods wiped out in the disaster that killed nearly 16,000.
Yet, even as the carnage mounted in the earthquake-ravaged coastal region of Tohoku, compounded by fears of radioactive contaminants in the nation's drinking water, in the major cities of Tokyo and Osaka, no major structural damage was reported.
Christian Mancini, managing director and CEO of Savills Japan, says the fact that Tokyo's real estate emerged largely unscathed from the strongest earthquake to hit the city since the Great Kanto Earthquake of 1923 was testament to the stringent seismic countermeasures required under Japan's Building Standard Law. In other words, lessons had been learned. A building code designed to make buildings safer in earthquakes, and implemented in the 1980s, appears to have saved lives in the densely populated cities.
'All new buildings constructed in Japan use state-of-the-art seismic resistance methods,' says Mancini, who is originally from Chicago and has been a Tokyo resident for 18 years. 'The very large contractors and some developers spend more money on R&D [research and development] to test out these new seismic countermeasures than most of their counterparts in the world.'
But the quake did shake business confidence, at least initially. The stock market plunged and, in an initial report weeks after the earthquake, Savills research shows that, in the commercial sector, some foreign companies had temporarily relocated their Japanese headquarters away from Tokyo to the Greater Osaka region.
Most soon returned, with Savills predicting that for some landlords the impact could be positive.
'Newly built office properties conforming to full seismic codes and located away from the bayside areas are expected to achieve a demand premium,' the report says.
Six months on, that outlook seems to have been correct. Mancini says the market has polararised into two distinct sectors. 'The achievable rents of grade-A offices have gone up considerably, post-earthquake,' he says. 'People want these safer buildings. It is too early to pin down a trend, but anecdotes suggest in some cases up to 20 per cent.'
The bottom end of the B-market - the so-called 'pencil buildings': tall and narrow - is languishing.
'A lot of those buildings are built to pre-earthquake standards. They have fairly small floor plates and go up eight, nine, 10 storeys. In any seismic activity, they shake like a leaf,' Mancini says.
'Our view is that there is no economic rent level at which these will be tenantable. The quake introduced an emotional component to relocation decisions that hadn't existed previously.'
As a result, 'the top end of the commercial market is at a premium because of the sophistication of the space they offer. The bottom part of the market is suffering badly'.
Savills is not involved in the residential market, but as a knowledgeable observer, Mancini has noticed a trend there, too.
'Over the past decade, we have seen a lot of residential high-rise development done on reclaimed land near Tokyo Bay. There is no shortage of people looking to get out of those properties, and sales for residential high-rises have dropped off drastically. We alluded [in our report] to the possibility this might happen,' he says.
'In terms of the obliteration of capital value in the Tokyo property market, that has not happened, at least in terms of institutional investors. Rent has not gone through an unforeseen deceleration. Investors running for the door and selling at a discounted rate? Absolutely not.' Today, as expected, the market 'has not deteriorated in a way that a lot of investors, looking for distressed investment opportunities, had rather hoped it would', Mancini says.
'We have seen a polarisation of the rental market, but that was not unexpected. Everyone knew that deals under way when the earthquake happened would be postponed. We expected a period of very light investment activity, followed by recovery in the third quarter, which is very evident right now. Confidence not jaded? You might be able to argue to the contrary. That was the largest quake in most people's living memory. Yet, Tokyo had very few fatalities, no meaningful damage done to commercial property. The Japanese are proud of touting their building quality - it is only in those moments you can appreciate how true that is.'
Takeshi Akagi, Japan head of research at Jones Lang Lasalle, even sees recovery on the horizon. Having forecast nothing but 'a short-term hiatus' in foreign property investment following the earthquake, he now notes 'several signs of improvement since July, as we expected. Although there has been no data to support a rental recovery as yet, we believe that rents are close to bottoming and expect a full-scale recovery in 2012 with double-digit growth'.
He points to several significant transactions, particularly by J-REITs. Japan Retail Fund acquired a retail portfolio for 46 billion yen (HK$4.66 billion), while Daiwa Office Investment Corporation purchased an office building in Shibuya valued at 24 billion yen.
Domestic players are taking advantage of less competition from overseas investors 'to acquire assets in Japan', Akagi says. 'We expect to see activity by private funds and foreign investors in the near future.'