From disaster to opportunity
While the 11 March earthquake did very little structural damage in Tokyo, it did raise questions about the capital’s resilience and the impact that might have on the real estate market, already under pressure from two decades of economic stagnation.
Will business and corporate tenants look elsewhere? How will power-supply concerns affect location choice? How will the nuclear crisis impact Japan’s attempt to attract occupiers? Disasters aside, are Japanese authorities doing enough to encourage private investment, including by foreign entities?
At a recent EURObiZ Japan roundtable, four executives from foreign real estate firms addressed these and other questions – not least how to persuade corporate Japan to consult outsiders on making the best use of its huge property inventory.
How has the Japan real estate market been affected by the 11 March disaster?
John Mader: The effects in Tokyo are huge, but primarily from the nuclear problem rather than the tsunami itself. If the quake demonstrated anything, it was that Japanese buildings are safe. Buildings shook violently in Tokyo but disruption was minimal.
It is interesting to see how fast things have returned to normal. That may be a bad thing, because we do have to think about the risk of a big earthquake in Tokyo in the next few years.
Andy Hurfurt: The large majority of those not directly affected by the earthquake are turning their focus to other matters. When investors buy in Japan, they accept that it’s a seismically active country and understand that the buildings are largely able to withstand earthquakes.
But the impact of Fukushima could raise other concerns among investors. It’s not the radiation risk per se, but the impact of the nuclear situation on the Japanese economy. If the economy weakens, it could impact rents for buildings that investors are looking to buy.
Do you get the sense that tenants want to relocate, given the risks in Tokyo?
Gus Hayward: Power backup is an issue in Tokyo and elsewhere. I think we’re seeing a sea change in landlords’ attitudes towards this issue because they can keep tenants and attract new ones if they can guarantee power resilience with backup generators and so on. Before the earthquake there was a desire to expand into places like Sapporo and Osaka for business continuity. There is a drive towards polycentricity post-quake, but I think the trend was there anyway.
Gordon Hatton: The lesson is that you can’t force people to live where they don’t want to live, and it’s obvious that the centre of Tokyo is going to continue to grow. It’s about recognising the risks and mitigating them, then building on the things that make Tokyo a great place to live.
Mader: I think people who are saying that this will prompt a move away from Tokyo are dreaming. The Japanese economy revolves around Tokyo and one-quarter of the population lives in this area, so there is this inexorable suction effect.
Hurfurt: There was short-term demand for space in Osaka and other cities immediately following the earthquake. The initial demand was almost exclusively from international companies. About 10% of our clients are looking for longer-term requirements.
Won’t the risks and Japan’s economic difficulties make other Asian cities more attractive?
Mader: If there is an impact from the disaster, what will that mean for Tokyo from the point of view of multinationals? Tokyo used to be the only game in East Asia, but now Singapore and Hong Kong are popular for Asian headquarters.
Is what happened in March going to further sidetrack Tokyo in the global picture?
Hatton: Japan internationalised greatly during the 1980s and 1990s, and now it’s more of a domestic story. Tax rates are more favourable for international corporate clients in Hong Kong and Singapore. It’s about cost of living and the fact international companies that have been here 20 years or more are localised. Japan isn’t an immature market anymore. That won’t change, and that has nothing to do with earthquakes.
Hurfurt: We will still see global occupiers with substantial operations in Japan. Over the years, Tokyo has lost some ground to Hong Kong and Singapore, as headquarters for global occupiers, but the Haneda airport expansion has improved things. That said, businesses will continue to focus on Hong Kong, Singapore and Shanghai.
Are there any legal, structural or cultural barriers that need to come down in Japan’s real estate market?
Hatton: Japanese requirements are more proscriptive than some people would like. Private finance initiatives [PFIs] are one area. They are supposed to achieve efficiency in the operation of a facility, but Japanese PFIs tend to amount to just a deferred payment schedule. They don’t give the PFI consortium the benefits they should.
Mader: Japan overall is not growing, but where there is growth, it is in selling services to Japanese corporate clients, who up to now have not used outsiders. They’ve depended on their own people to work out the real estate play, but we believe they would be better advised to use professionals. Outsourcing has always been an issue for Japanese firms. They want to clean, build and develop their buildings in-house; even though they might be, say, a copy-machine company.
Hurfurt: We’ve started to gain some traction with Japanese corporate clients here in terms of outsourcing services.
Hayward: The only way to tap the potential here is to have a cultural shift among Japanese corporate clients, to encourage firms with a huge amount of real estate to outsource to a third party that can manage their assets in a much more efficient way. It’s a slow process and a long road. That said, Japanese corporate clients are very quick to recognise a job well done.
Do you see any openings for more private investment in real estate here?
Hurfurt: There is a lot of equity out there that is interested in infrastructure and I’m sure that, if the political will existed to open up funding, there would be a lot of groups interested in doing so.
Hatton: There needs to be a bit more leeway for innovation to be proposed and accepted, for the rulebook to be dispensed with sometimes. That might open up opportunities for foreign entities to invest.
Mader: Some people think there could be an opening for new investment now, because the Japanese government no longer has the money. There are also a fair number of cash-strapped municipalities who will struggle to finance what they need to do.
Have the disaster and Japan’s continuing economic problems changed your view of the market here?
Hatton: Our commitment to Tokyo is unchanged by the earthquake. The current assets we hold are new, low-rise buildings, so we feel that they actually are well positioned for the new requirements in Tokyo with regard to earthquake readiness.
Hurfurt: We have a serious commitment to Japan. We consider it a market with a lot of untapped potential for professional real estate services. It’s a very large market with lots of opportunities.
Hayward: We see Japan as a growth market globally; in the Asia-Pacific, it’s one of the areas we see as having huge potential. It is a great time to be a tenant in Tokyo. The vacancy rate for Tokyo Grade A offices is just above 5%, which sounds low, but is high for Tokyo, considering in 2004-2007 the Grade A vacancy rate didn’t rise above 2%.
The new development supply coming to the market in 2011 and 2012 is providing quality options for tenants and creating genuine competition among landlords. This is leading to flexible leases, and beneficial financial and non-financial terms being offered to attract large-scale tenants to buildings.