Tokyo office rents crawl to 4-year high, new units on horizon

[TOKYO] Tokyo office rents have climbed to their highest since April 2011 as the economy gathers steam and demand for office space increases. But property analysts say the growth in rents is small and will be capped by imminent launches of new office towers.

Average rent for prime office space in Tokyo rose 4.8 per cent to 17,401 yen (US$191) per tsubo, or 3.3 square metres, in June from 16,607 yen a year earlier, according to broker Miki Shoji. But rents are not rising as fast as expected by real estate research firms - a sign that the government's stimulus policies have yet to filter through the entire economy.

The disappointing trend is reflected in Tokyo's property shares. The TOPIX sub-index of real estate shares has fallen 1.9 per cent since the Bank of Japan in April 2013 launched an aggressive drive to defeat deflation, compared with a 55 per cent jump in the broader Topix index.

"Investors have lost their confidence in the property sector because rents have risen only a little bit," said Hirokazu Anai, an analyst at JPMorgan Securities Japan. "The property index is unlikely to turn into an upward trend."

To see a faster rebound in Tokyo rents, the vacancy rate needs to fall to levels seen in the last property investment peak, said Yasuhiro Sato, general manager at Toshi Mirai Research Institute, a property research firm affiliated with Mizuho Financial Group.

In 2007, when property investment rose to a high, vacancy rates were at 3 per cent. A significant portion of prime office space then was occupied by foreign institutions, which later cut their operations after the 2008 global financial crisis. In June this year, the vacancy rate averaged 5.1 per cent.

Looming supply of new office space will cap rent growth. Taking advantage of low borrowing costs, Japanese developers are aggressively building new office towers. Until 2019, an average of 420,000 tsubos of new space, or 1.4 million square metres, will be added in central Tokyo every year.

That's more than 320,000 tsubos, or 1 million square meters, that were added each year between 2000 and 2014, according to Toshi Mirai.

New office towers include the 36-storey Toranomon Trust City World Gate, to be completed by 2018. Hotel Okura, built before the Tokyo Olympics in 1964, will be turned into a 38-storey complex of office and retail spaces by 2019.

REUTERS