Commentary

Recovery in Japan’s office investment market

Good investment opportunities in Japan Office

December 06, 2021

In 3Q21, a large office building was transacted in Tokyo CBD. The seller was Dentsu, Japan’s biggest advertising company. The price had exceeded JPY 300 billion (USD 2.6 billion), apparently the largest real estate sales transaction ever in Japan. The background was the declined attendance of employees due to changes in working methods since the outbreak of COVID-19. As the firm was interested in securing funds, it planned a sale-and-leaseback deal to reduce its office space. This record-breaking office building deal revived transactions in Japan’s office segment in a market that had been stagnant since the pandemic started. Not only are core investments increasing, but value-add and opportunistic investment are also rising.

Figure 1: Office investment volume in Japan

Source: JLL Research 3Q21

The music company Avex sold its headquarter in March 2021 and Japan’s largest travel agency JTB also sold its headquarter by using sale-and-leaseback scheme in August 2021. Various businesses, such as restaurants, apparel companies, and manufacturing corporations, are also selling their office buildings. There are cases where office buildings for lease are sold to secure investment capital for the owner’s core businesses. Also, there are cases where company-owned building are sold in sale-leaseback arrangements so the business can use the current office building and secure funds simultaneously. The variety of transactions include owner-occupied properties, buildings for lease that require renovation and tenant recruitment, or tenants scheduled to move out, besides properties located in Tokyo CBD, which are expected to operate stably.

Furthermore, corporations that lease offices are downsizing or relocating while investors review their portfolio of assets and decide to sell. Nippon Building Fund, Japan's largest office REIT, sold office buildings in Tokyo and Osaka. In addition, large office buildings were transacted in fringe areas, such as Shinagawa and Minatomirai, where tenant demand is sensitive to the economy. Those properties have some risks, such as the increase in vacant space or the renovation cost in the future. Yet, they offer a good opportunity for value-add and opportunistic investors.

In Japan, the number of new COVID-19 infections has decreased significantly since October, and people are beginning to return to offices. Consequently, investors are showing an increasing willingness to invest in office buildings. Under these circumstances, offices with various investment options, from core to opportunistic, are increasing in Japan.