Japanese real estate set for downturn beginning next year, Jefferies says
Fund house downgrades real estate sector to ‘underweight’, warning prime office rents set to cool while apartments prices are already stretched
Japan’s real estate market will likely reach its peak late next year before succumbing to structural headwinds, according to Jefferies, which downgraded its outlook for the Japanese real estate sector to underweight, citing weakness in office lease rates and condo sales.
Real estate developers have ranked as the third worst performing sector among the 33 Tokyo subindexes during the past three years, tumbling 7.4 per cent versus a 15 per cent gain in the Tokyo Stock Price Index.
A business downturn brought on by a stronger yen, a depressed global economy and financial uncertainties are among reasons for slumping demand for prime office space, according to Jefferies analyst Chang Han Joo.
“The slowdown in demand, coupled with large increases in supply, is bound to put pressure on rents and vacancy rates,” Joo said.
Analysts expect vacancy rates to increase from the third quarter and rents for class-A buildings to peak out in the current cycle late next year. According to a survey of large office buildings in Tokyo, average new supply will be 5 per cent higher in the next five years compared to the past five years. But there will be “limited incremental demand” for class-A office spaces, which is bad news for Japan’s three major developers, since 65 per cent of their profits come from office spaces, Joo said.
