Nippon Building Fund, Japan's biggest real estate investment trust, said property prices for prime office buildings have started to rise, signalling a turnaround in a two-decade decline.
Demand to buy office buildings outpaced supply and has pushed prices higher, said Kenichi Tanaka, president and chief executive officer of Tokyo-based Nippon Building Fund Management, which manages the reit.
The reit has acquired 156.8 billion yen (HK$12.4 billion) of office buildings so far this year, more than three times what it had planned, he said.
"Even though the market hasn't reached a point where you can call it is overheated, it has become tight," Tanaka said.
"We think it would be difficult to make a similar amount of acquisitions in the second half."
Real estate broker Jones Lang LaSalle and Barclays are forecasting rental for prime office space in the capital to climb this year and next. The office vacancy rate, a measurement of unoccupied office space, dropped to 8.6 per cent in March in Tokyo after rising to a record high in June, according to Miki Shoji, an office brokerage company.
The capitalisation rate, a measure of investment yield, for office buildings in Tokyo declined for four straight months to 5.2 per cent in February from 5.5 per cent in October, the highest since Real Capital Analytics started compiling the data in 2009.
A drop in the cap rate - a property's net income divided by the purchase price, usually signals an increase in real estate prices.
Japan has been struggling with deflation that has caused companies and households to put off spending since the late 1990s. Prices have declined for 21 years, cutting rents for all categories of offices in the city's five central wards by 63 per cent, according to Miki Shoji.
Office rents in the central wards rose in the three years to 2008, before the global financial crisis, as increasing demand pushed vacancies to around 4 per cent in 2005, leading to rent rises.