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Empty Tokyo offices drag down property shares

Office vacancies in five major business districts rise for fourth consecutive month, gaining to 1.97% in June

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The Covid-19 pandemic has made prospective tenants reluctant to sign leases and raised questions worldwide about the future of the office.

Tokyo

RISING vacancies for offices in central Tokyo are weighing on shares of Japan's real estate developers and owners as the market digests the damage that the pandemic has done to a seven-year office boom.

Office vacancies in five of Tokyo's major business districts rose for a fourth consecutive month, gaining to 1.97 per cent from 1.64 per cent in May, real estate brokerage Miki Shoji said last Thursday. The increase is the the largest one-month gain in more than a decade.

Shares in Tokyu Fudosan Holdings fell as much as 4.6 per cent on Friday, while Ichigo fell as much as 6 per cent. The Topix Real Estate index fell as much as 2.9 per cent, the third-worst performer among the index's 33 sub-groups.

Vacancies in Tokyo fell almost unrelentingly for the seven years since before Prime Minister Shinzo Abe came to power in late 2012, even as rents continued to rise.

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The vacancies trend was halted by the pandemic, which has made prospective tenants reluctant to sign leases and raised questions worldwide about the future of the office.

Fujitsu, one of the country's largest employers, has already declared its intent to cut its office space in Japan by 50 per cent over the next three years and have 80,000 workers work mostly from their homes.

Hisayuki Shimokawa, an analyst with Tachibana Securities in Tokyo, said it was hard for investors to favour real estate stocks given the lack of clarity surrounding the future of the office amid the need to avoid enclosed spaces.

Reports on companies reducing office space or spreading their space out were weighing on real estate stocks, he added.

Tokyu Fudosan's share drop on Friday was larger than some peers, with the increase in vacancies especially prominent in the Shibuya area, where the rate increased to 3.38 per cent from 2.55 per cent. The area houses about a third of Tokyu's office portfolio, according to Jefferies.

"Shibuya is known for a higher concentration of both tech-related and mid-sized tenants," said Jefferies analysts William Montgomery and Shunsuke Kuriyama.

"With the increase in teleworking, the market is concerned that small and mid-sized companies and tech-focused companies are reducing demand."

However, they noted that while its older portfolio of Shibuya properties will be under pressure, much of its portfolio is new, which will add "earnings resilience".

SMBC Nikko Securities analyst Junichi Tazawa expects vacancies to increase to 3.9 per cent by the end of the year, before recovering to 3.4 per cent by the end of 2021 and 3.1 per cent by the close of the following year. BLOOMBERG

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