July 2011

The Impact of the Tohoku Earthquake on the Outlook for the Real Estate Market

2 Advance

Overview of the Earthquake ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・4

Impact on the Real Estate Market ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・5 OfficeSector TokyoMarket OsakaMarket

ResidentialSector

RetailSector

LogisticsSector

HotelSector

Investment Market ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・12 Investors JapaneseInvestors(J-REITs,developers,insurancecompanies) OverseasInvestors

FundingEnvironment

Conclusion ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・14

TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket3

Executive SummaryOn11March2011,anearthquakemeasuring

magnitude9.0ontheRichterscaleoccurredapproximately130kmoffthePacificshoresoftheTohokuregion.ThiswasthestrongestquakeinJapanesehistoryandthefourthstrongestrecordedglobally.

Impact on the Real Estate MarketOffice SectorTheearthquakeisexpectedtohaveadampeningeffectonleasing,keepingrentallevelssoftthroughoutthecurrentyear.However,weexpecttenantactivitytopickupfrom2012andtomakeafullrecoveryoverthecourseofnextyear.

IntheOsakamarket,irrespectiveoftheearthquake,anabundanceofsupplyisdueoverthenext18months,pushingrentallevelsdownwardin2011and2012.However,thissupplywillbeabsorbedby2013andrentswillthenstabilise.

Residential SectorDemandforluxuryrentalhousinghasbeenhithardbytheoverseasrelocationoftheexpatriatecommunity;however,generalrentalhousinghasnotbeenadverselyaffectedandrentalincomeremainsstable.

Partneringisajourney-lineformanyorganizations;anddependingontheirmaturity,complexity,culture,andgeographicfootprint,organizationstypicallymigratelefttorightacrossthespectrum.

Retail SectorTheeffectoftheearthquakeondepartmentstoresandshoppingcentreswastemporary,whilethe

luxuryretailsector,representedbyGinzaandOmotesando,wasworstaffectedbecauseofthedeclineinforeigntouristarrivals.Theseareasarelikelytoremainweakfortheforeseeablefuture.

Logistics SectorTenantsareshowinginterestinlogisticsfacilitieswiththebeststructuralintegrityandthelatestsafetyequipment.Demandformodernfacilitieswithearthquake-tolerantfunctionsisexpectedtorise.

Hotel SectorThedeclineindemandisexpectedtobetemporaryandislikelytorecoverwithinarelativelyshortperiod.Thisgeneralstatementbeliesavariedpaceofrecoverydependingontheclassofhotel;however,thesectorasawholewillbebacktopre-earthquakedemandandperformancewithin1-2years.

Investment MarketTherehasbeennosignificantchangeintheviewamongJapaneseinvestorsandoverseasinvestorsareoptimisticaboutthelong-term,withrelativelyfewexceptions.Theearthquakedid,however,dampenactivityin2Q11,whichwillreducevolumesfortheyearasawhole.

OutlookAlthoughtheentireJapaneconomyandrealestateindustrywasadverselyaffectedbythedisasters,thesenegativeeffectswillunwindasreconstructiongetsunderway.Webelievethere isthepotentialforafaster-than-expectedpick-upinleasingdemandandinvestmentactivity,andinitialfiguresintheearlymonthsoftherecoverysupportthis.

4 Advance

Overview of the EarthquakeOn11March2011,anearthquakemeasuringmagnitude9.0ontheRichterscaleoccurredapproximately130kmoffthePacificshoresoftheTohokuregion.ThiswasthestrongestquakeinJapanesehistory,surpassingthe1923GreatKantoEarthquake(M7.9)andthe1995GreatHanshin-AwajiEarthquake(M7.3).Itwasalsothefourthmostpowerfulquakerecordedglobally:

1. ChileEarthquake(M9.5)1960

2. AlaskaEarthquake(M9.2)1964

3. SumatraEarthquake(M9.1)2004

4. Tohoku-PacificOceanEarthquake(M9.0)2011

Inadditiontothedirectdamagecausedbytheearthquake,amoresignificantlevelofdamage

wascausedbythetsunamithatfollowed.MiyakoCityinIwatePrefecturehadthelargeststormsurgebarrierinJapan;however,thetsunamiwasreportedlytwicetheheightofthebarrier,exceedingbyawidemarginanypreviousexperience.

AsTokyoislocatedfarfromtheepicentreofthequake,therewasrelativelylittledamagetoorcollapseofbuildingsasaresultoftheearthquake,anddamagefromthetsunamiwasminimal.However,damagetooilrefineriesandtheFukushimanuclearpowerplantcausedbythesurgingwatersledtonumerouslaterdangers,includingradiationleaks,massblackoutsandfuelshortages.Together,theseweretohaveaveryprofoundnegativeimpactontheJapaneseeconomy.

TOKYOOSAKA

SENDAI

FUKUOKA

GREAT HANSHIN-AWAJI EARTHQUAKE

TOHOKU EARTHQUAKE

Map 1:TohokuEarthquakeandGreatHanshin-AwajiEarthquake

TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket5

Effect on the EconomyTheNikkeiIndexfellsharplyimmediatelyafterthequakeat2:46p.m.,sliding21%fromtheclosingpriceofJPY10,434.38on10MarchtohitabottomofJPY8,227.63on15March.Inaddition,thealready-strongyensoaredtoanhistorichighof76yentotheUSdollaron17March,spurredonbytheexpectationofcurrencyrepatriationinordertopayfortherecovery.Followinggovernmentintervention,theratefelltoaround85yenperdollarandwashoveringaround80yenatend-June.TheNikkeiIndexisnowbackatJPY9,800astheinitialpanichasgivenwaytostability(Figure1).

IntheTankansurveyofJune2011,theindexmeasuringtheviewoflargemanufacturingbusinessesfellto-9from+6takenatthetimeoftheearthquake;however,respondents’outlookforthequarteraheadplacedthediffusionindexat+2.Tointerprettheseresults:businessesappearconfidentthatthissummerwillbethebottomintermsofeconomicactivity,duetothenuclearcrisisandthesubsequentpowershortages (Figure2).

Priortotheearthquake,economicsconsultancyIHSGlobalInsightforecastrealGDPgrowthof1.3%in2011and1.8%in2012.However,thesefigureshavebeenadjusteddownwardsto-0.9%for2011toreflecttheimpactoftheearthquake,withasignificantreboundof4.4%expectedin2012inconjunctionwiththerecoveryefforts(Figure3).Onaverage,thegrowthrateoverthefive-yearperiodfrom2011-15willnowbe2.1%,exactlythesameaveragerateaspriortotheearthquake.Economicanalystsexpectnodetrimentallong-termimpactontheeconomy,merelyashiftinthepatternofgrowth.

Impact on the Real Estate MarketTheprincipalresultoftheearthquakehasbeenasignificantturningpointindemand.Notonlydiditresultina“flighttoquality”,butalsoa“flighttosafety”,withheightenedawarenessoflocationand

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Figure 1:Nikkei225andExchangeRate

Figure 2:DiffusionIndexforLargeManufacturingBusinessConditions

Figure 3:GDPForecastsPre-andPost-Earthquake

6Advance

buildingsafety.Inparticular,shiftsfromhighertolowerfloors,frombayareastoinlandareas,andfromlowertohigherqualitybuildingsareoccurringacrossallthesectorsdiscussedbelow.

Office SectorTokyo Market (CBD)AlthoughtherewasnodirectdamagefromtheearthquakeortsunamiintheTokyoCBD*GradeAofficemarket,tenantsarenonethelessreconsideringlocationinlightoftheearthquaketolerancefeaturesofbuildings.Inparticular,demandforlargebuildingsconstructedusingthelatestconstructiontechnologieshasrisen,witholderandlessearthquake-tolerantbuildingsnolongerbeingconsideredbysometenants.

Furthermore,energyconservationmeasuresarebeingimplementedthissummertocompensateforexpectedpowershortages.Asaresult,themarketislikelytopolarise,withcompetitivebuildingsofferingpowergenerationcapabilitiesattractingmoretenants,whileunequippedorlesserequippedbuildingswillfinditincreasinglydifficult.

JonesLangLaSalle’spipelinedatashowthatthesupplyscheduledfor2011,whenaffectoftheearthquakewillsuppressdemand,isextremelylimited.Meanwhile,theamountofspacebeingdeliveredintherecoveryperiodisaboutequaltotheaverageoverthepastdecade,minimisinganyconcernofover-supply.Thegovernmentisassistingtheconstructionindustryintherebuildingofquake-struckareas,whichmeansthattheywillhavepriorityaccesstoconstructionmaterials.ThismaydelaythecompletionofsomeGradeAbuildings.However,thelimitedsupplypipelineisapositivefactorasitdoesnotcreateanegativeoverhangthatcouldsuppressrentsin2012andbeyond.

Thebiggestconcernamongforeigncorporationsandinvestorsisthenuclearpowerplantcrisis,whichremainsanongoingissue.However,theTokyometropolitanareaismorethan200kmfromFukushima(Map2).Providedthatthecoolingsystemsarerestoredwithoutanymajorissues,thefearshouldabate.Overthelonger-term,however,therearehugechallengesintermsofthetreatmentofcontaminatedlandandtheimpactonthemarineenvironment.However,thephysicalconsequencesfortherealestatemarketarerelativelyminimal.

Thepsychologicalimpactoftheearthquake,aswellasrealpowershortagesandtheongoingnuclearcrisis,areallactingasconstraintsontenantdemand.Nevertheless,webelievethatthereislittleroomforafurtherdeclineinrentsintheTokyoGradeAofficemarket.AlthoughsignsofrecoverywereapparentintheTokyomarketpriortotheearthquake(Figure4.1),tenantactivities

SENDAI

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MIYAGI

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200KM0*CBD:JonesLangLaSalledefinestheCentralBusinessDistrictasChiyoda,ChuoandMinatoWards.

Map 2:DistancesbetweenTokyoandFukushima

TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket7

haveslowedfollowingthedisaster,promptingustoreviewthepositionoftheTokyomarketwithintherentalcycle(Figure4.2).Thatsaid,currentrentsarenearing2003levelswhenthemarketwasoversupplied.Comparingthequalityandspecificationsofthebuildingsnowandthen,acomparablelevelofrentclearlyindicatesthattenantscannowbenefitfromrealbargains.

Asthenationmovestogethertowardsrecovery,weexpectfewlandlordstoimposeblatantrentalhikes;instead,theywilltakethisopportunitytobuildamiablerelationshipswithtenantsforthemediumtolongterm.Whilethisculturalanalysisdoesnotreallyfitwithintheconfinesofatraditionalsupply-demandforecast,itisnonethelessrepresentativeofthetrendsweseedevelopinginthemarket.Thecommunalapproachtoenergyconservationisindicativeofthisbehaviour.Asaresult,weexpectarentaldeclinein2011,butastrongpick-uponceweseeafullyfledgedrecoveryoftenantdemandfrom2012.Weforecasta3-5%declinein2011anda5-10%surgein2012(Figure5).

Intheinvestmentmarket,acasecanbemadethatriskpremiumswillincreaseinTokyo.Wedisagree.Investorshavenotyetre-ratedthemarketand

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GrowthSlowing

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^ CBD & SBD

Hong Kong

Guangzhou

Singapore, Melbourne

Kuala Lumpur

Osaka, Ho Chi Minh City

Shanghai, Adelaide

Auckland

Hyderabad, TaipeiBrisbane

CanberraSydney, ManilaMumbai^, Bangalore^

Tokyo, Jakarta, Perth, Delhi^

Beijing

BangkokSeoul

GrowthSlowing

RentsFalling

RentsRising

DeclineSlowing

^ CBD & SBD

Beijing, Hong Kong

Guangzhou

Singapore, MelbourneSeoul, Ho Chi Minh City

Osaka, BangkokShanghai, Adelaide

Auckland, Kuala Lumpur, TokyoChennai, Brisbane, Delhi^

CanberraSydney, ManilaBangalore^

Mumbai^, Perth,Taipei, Jakarta

*CBD:JonesLangLaSalledefinestheCentralBusinessDistrictasChuoandKitaWards.

Tokyo’ssignificanceasaninternationalinvestmentmarkethasnotbeenadverselyaffected.Domesticlendershavenotaddedadditionalpremiumsonloaninterestratesandforeignlendershavefollowedthusfar.Assuch,weexpectthecapratetofallbythetimethemarketrecoversin2012.

Osaka Market (CBD)Therewasnoearthquake-relateddamagetotheOsakaCBD*GradeAofficemarket.TenantshavebeenrelocatingandexpandingtheirspaceinGradeAbuildingsthathavebecomecheaper,and

Figure 4.1:PropertyClock4Q10 Figure 4.2:PropertyClock1Q11

Figure 5:SupplyandRentsintheTokyoCBDGradeAOfficeMarket

8Advance

andareasusing50Hzpowerareimplementingplannedblackoutsandenergyconservationmeasurestomakeupthesupply.Therefore,certaincompaniesinindustriesthatwillsufferbusinessdisruptionfromblackouts,suchasfinancialinstitutionsandITfirms,werequicktoseekalternativesites,particularlyinOsakaGradeAbuildings.

Intermsoffuturesupply,2011and2012areprettytightbutthereissignificantsupplyexpectedin2013.TheeffectofthismaybereducediftherecentfocusontheOsakamarketcontinues.Asaresult,althoughwemaintainourviewthatthevacancyrateoverthenextfiveyearswillpeakattheendof2012,theriseinvacancyratesmaynotbeassharpaswehadpreviouslyexpected.

thisdemandisexpectedtoaccelerate.Historically,businessestendedtoconcentrateinTokyobuttheearthquakehaspromptedreviewsofbusinesscontinuityplans.Asaresult,somecompaniesareaddingaback-upsitetotheirTokyooffice,withOsakatheirlocationofchoice.

InadditiontoescapingthenuclearissuecausedbytheFukushimanuclearplantcrisis,companiesarealsodrawntowesternJapanbecauseofthedifferenceinpowerfrequency.ThefrequencyprovidedineastJapan,wheretheTokyoElectricPowerCompany(TEPCO)coverstheTokyometropolitanarea,is50Hz,whereasthefrequencyinthewestis60Hz(Map3).TEPCO’ssupplycapacityhasbeenreducedsignificantlybytheshutdownoftheFukushimaNuclearPowerPlant,

NIIGATAFUKUSHIMA

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Map 3:BoundaryofPowerFrequencies

TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket9

ThequalityoftheofferinOsakaisalsoimproving.Previously,accessbetweenthenorthandsouthsidesofOsakaStationwasinconvenientbut,withthecompletionofthenewpedestrianpathasapartofthestationredevelopmentproject,accessibilityhasimproveddramatically.Also,theopeningoftheadjacentGrandFrontOsaka(OsakaNorthYard)in2013willimprovetheappealofOsaka’sofficearea.Finally,InterContinentalHotelwillentertheKansaimarkettooccupythehotelsectionofGrandFrontOsaka,offeringanadditionalimprovementintheofficeofferforforeigncorporations.

Notably,themarketissubjecttosomeover-renting,particularlypropertiescompletedwithfulloccupancyduringthe2007-2008peak.Thisleavesroomfordownwardadjustments.Thankstosupportivefactorsonthedemandside,overallrentallevelsshouldbottomoutafterabsorbingthejumpinsupplyin2013.Therefore,weforecasta3-5%declineinrentsin2011and5-10%declinein2012,withtherateofdeclineflatteningtowardstheendof2013(Figure6).

Residential SectorLeasing MarketTheluxuryleasingmarketinTokyowashithardbytheexodusoftheexpatriatepopulationduetotherisksassociatedwiththenuclearpowerplantincident.Asdemandinthismarketissupportedbyexpatriatesworkingforforeigncompaniesandtheirfamilies,themarketshouldrecoverinlinewiththegradualreductioninriskperceptionandthepick-upintheGradeAofficemarket.

Ontheotherhand,thegeneralleasingmarkethasbeenlargelyunaffected.Therewasnogreatoutwardmovementcomparabletothatoftheexpatriatesand,asaresult,rentalincomehasbeenstable.Japaneseinvestorshavecontinuedtoacquirepropertiespost-earthquake,underliningtherelativelyminimalimpactofthedisasteronthissegmentofthemarket.InSendai,thecorecityoftheTohokuRegion,themarkethastightenedasaresultoftherelocationofthoseaffectedtoelsewhereintheTohokuRegion.

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Sales MarketDemandforresidentialspacebyend-usersdidnotchangemuchbeforeoraftertheearthquake(Figure7).However,thelocationofdemandhasshifted.CertainsectionsoftheBayareathathadbeenpopularthankstotheirconvenientaccesstometropolitanTokyoandmagnificentwaterfrontviewssuffereddirectdamagefromtheearthquake,includingliquefaction,subsidenceandtheinterruptionofsuchlifelinesaswaterandgas.Asaresult,moresolidinlandareasareattractingincreaseddemandafterthequake.

Figure 7:NewCondominiumContractRatio

Figure 6:SupplyandRentsintheOsakaCBDGradeAOfficeMarket

10 Advance

spendingrestraint,aswellaseffortstosaveelectricity.Whetherornotthistrendisenduringortemporaryisnotyetclearbut,judgingfromthelatestdata,whichshowthatthedeclineindepartmentstoresaleshasstartedtoreverse,webelievethatthefallinconsumptionisbroadlyatemporaryfeature.

Forexample,nationwidedepartmentstoresalesforMarchwereJPY462.4billion,down14.7%y-o-y(JapanDepartmentStoresAssociation,onacomparablestorebasis).Therateofdeclinewasthesecondlargestever,followingthe20.8%recoilinMarch1998resultingfromlast-minutedemandpriortotheriseinconsumptiontax,andexceededtheslumpimmediatelyaftertheglobalfinancialcrisis.However,salesfiguresthenimprovedsignificantly,risingtoJPY475.0billioninApril(down1.5%y-o-y)andtoJPY482.0billioninMay(down2.4%y-o-y)(Figure8).However,thesituationinareasdependentonthetouristdollarremaingrim;salestoforeignvisitorsweregrowinguntiltheearthquake,butweredown47.8%and76.8%y-o-yinMarchandApril,respectively,andhaveshownnosignofrecoveryinMay,at-45%y-o-y(Figure9).

Therefore,theimpactoftheearthquakeontheperformanceofdepartmentstoresandshoppingcentressupportedbyJapaneseconsumerswillbetransitory,whiletheluxuryretailsector,representedbyGinzaandOmotesando,whichwassupportedbyforeigntourists,willbeslowertorecover.However,judgingfromtheavailabletransactionsinthemarket,investorsexpecteventhistobeatemporary,ifslightlylonger,lullinactivity.Wehavenotobservedariseintheriskpremiumdemandedineitherthegeneralortheluxuryretailsector.

Logistics SectorThemanufacturingindustryisstillsufferingseriousdisruptionsduetothedevastationofpartsoftheTohokuarea,whichistheproductionhubofJapan.Inaddition,manyfactoriesinareasnotdirectlyhitbythequakecannotreturntonormaloperationbecauseofthepowershortage.

Inrelationtosupply,constructionmaterialpriceshavesurgedasaresultoftherecoveryandreconstruction,withaknock-onimpactforpricesintheresidentialmarket.Thisiscausingdeveloperstobeconservativeaboutlandacquisition.Asaresult,end-usersarelikelytobepassedatemporarypriceincreaseduetothedelayinconstructioncausedbydifficultiesintheprocurementofconstructionmaterials.

Retail SectorTherewasanotablereductioninconsumerspendingineastJapanasaresultofself-imposed

Department Store

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Figure 8:SalesinDepartmentStoresandShoppingCentres(SC)

Figure 9:SalestoForeignTourists

TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket11

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2005 Average = 100 Seasonal Adjustment Index

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Source:STRGlobal,JonesLangLaSalleHotels

InMarch,theIndustrialProductionIndex(MinistryofEconomy,TradeandIndustry,2005=100,seasonallyadjusted)wasdown15.5%m-o-mto82.7.Therateofdeclinewasthelargestinhistory,exceedingthe-8.6%recordedinFebruary2009asaresultoftheglobalfinancialcrisis.ProductionlinesfortheindustrialdriversoftheJapaneseeconomy,suchasautomobilesandelectronics,haveseentheirsupplychainsdisruptedandtheirfactoriesshutdownbyplannedblackouts,ifnotdestroyedordamagedbythenaturaldisasters(Figure10).

Logisticsfacilitieshavealsowitnessedaflighttoqualitythankstotheearthquake.Tenantswhosuffereddamagetogoodsstoredinaffectedwarehousesarereviewingtheearthquaketoleranceofthestructures.Tenantswhomainlysoughtstorageinoldwarehousesarenowlookingatlogisticsfacilitiesofferingthelatestequipment.Thisalsohasageographicalcomponent;thosebusinesseswhoseoperationsarenotlinkedtoTokyoPortand/orHanedaAirportnowhaveamarkedpreferencefortheinlandarea,wheresoilliquefactionbecauseoftheearthquakehasnotoccurred.Weexpectthistohaveamedium-termimpactthat,outsideofthoselogisticshubslinkedtothePortandAirport,willbenefitpropertieslocatednearsuchmajorhighwaysasTomei,ChuoandTohoku-do.

Hotel SectorThedemandfortravelfellsharplyforaboutamonthaftertheearthquake.Forexample,dailysalesperroomforTokyocityhotelsweredown38.0%y-o-yand56.8%y-o-yinMarchandApril,respectively,thelargestdeclineinhistory.Thusfar,therecoveryisonlyjustbeginning,withthefigure-37.0%inMay(Figure11).Inadditiontothelossofservicebyrailroadsandhighwaysdirectlyafterthequake,thefigureswereimpactedbytravelwarningsissuedbyvariouscountriesandforeigncorporations.Asatend-May2011,allmajorcountrieshadliftedtheirtravelwarningsforTokyobutremainonalertduetotheradiationleakfromFukushima.DemandforleisuretraveltoJapan

isstillnotshowingsignsofafull-scalerecovery.Bycontrast,demandfromJapanesecorporationsisincreasing,partlyduetoearthquakerecoveryefforts,anddomesticleisuredemandisalsoshowingsignsofrecovery,asseenbythere-openingofTokyoDisneylandbeforeGoldenWeek.

ManyhoteldevelopmentplanswerestalledaftertheLehmanBrothers’bankruptcyinSeptember2009.However,fewprojects,otherthanthoseinaffectedareas,havebeencancelledbecauseoftheearthquake.Thedeclineindemandforhotelsbecauseofthedisasterisdeemedtemporaryandisexpectedtorecoverwithinarelativelyshortperiod.

Figure 10:IndustrialProductionIndex

Figure 11:DailySalesperRoomforTokyoCityHotels

12 Advance

Nonewtransactionswereexecutedaftertheearthquakebut,accordingtoourinterviewswithinvestors,therehasbeenlittleriseincapratescausedbythedisasterandthedecreaseincashflowduetosluggishdemandoverthenextyearortwomaybethefactordrivingthevalueofhotelassetsdownwards.

Investment MarketInvestorsJapanese InvestorsJ-REITsTheJ-REITshadbeenactivefromthebeginningof2011,withtheeffectofthemodestmonetaryinterventionbytheBankofJapan(BOJ)apparent.Transactionpricesperpropertywerehigherthaninpreviousyears,aswitnessedbythepurchasesofGradeAbuildingsbyJ-REITs(Table1).Althoughtheinvestmentunitpriceweakeneddirectlyafterthequake,aquickresponsefromtheBOJtoincreaseitssupportandatransparentdisclosureofdamagebytheJ-REITsthemselveshelpedthemarketgetbackonitsfeetrelativelyquickly,especiallycomparedtothebroadermarket,wherethestocksofpower,autoandmanufacturingcompanieswerestillsuffering(Figure12).

Asoverseasinvestorsaretakingawait-and-seeapproach,leadingtoadelayinacquisitions,

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Nikkei J-REIT Index

Source:TokyoStockExchange

competitioninthemarketisvisiblylower,creatinganadvantageforexistingdomesticplayers.ThisisagoodopportunityforJ-REITsthatcontinuouslyacquireandmanageJapaneseproperties,andtheyareexpectedtoleadthemarketintotherecoveryperiod.

Developers

TheinvestmentstanceamonglargeJapanesedevelopers,whichhaveasignificantinfluenceontheJapaneseinvestmentmarket,hasremainedlargelyunchangedfollowingthequake.Theirbusinessmodelwasnotaffectedbecausetheyacquiredevelopmentsiteswithalong-termvisiontoholdtheproperty.Inaddition,therearenoconcernsovertheirfundingcapacities,asfundingisprocuredmostlythroughcorporateloansbasedontheircreditstandings.

Insurance Companies

InsurancecompanieshavehistoricallybeenthemajorbuyersinJapan.However,theyarepreparingforinsurancepayoutsandcurrentlyhavenocapacitytoconsidernewinvestments.Insurerswillbeexperiencingcapitaloutflowstodealwithinsuranceclaimsfortheforeseeablefuture.Therefore,therepatriationoftheirforeignassetsisexpectedtoincrease,withvirtuallynoJapaneseinstitutionalinvestorsconsideringforeigninvestment.

Overseas Investors

Themoodofoverseasinvestorsisoneofcaution,whichisunderstandable.Ifnothingelse,theneedforadditionalengineeringsurveystoascertainalocation’sexposuretoearthquakeandliquefactionriskhassloweddownthepaceofactivity.Thatsaid,since1April,therehasbeenoverUSD1billionofoffice,retail,hotelandindustrialcommercialpropertytransactionsinJapanaccordingtoRealCapitalAnalyticsdata.Thetotalismuchhigherifyouincluderesidentialanddevelopmentsitetransactions.Ofthis,thevastmajoritywasinTokyo,althoughitisneverthelessworthnotingthatthelion’sshareofthesetransactionswascarriedoutbetweenJapanese

Figure 12:ChangesinStockMarket

TheImpactoftheTohokuEarthquakeontheOutlookfortheRealEstateMarket13

principals–notforeigninvestors–onboththeacquisitionanddisposalside.

ThisneatlyhighlightsthecautionthatweareanecdotallyhearingaboutfrominvestorselsewhereinAsia,inEuropeandinNorthAmerica.However,itisvitaltodifferentiatebetweencautionandpessimism.TheglobalfundswithanallocationtoAsia-Pacificacknowledgethat,becauseofitssize,liquidityandcomparabletransparency,tosucceedinplacingasignificantamountofcapitalinthisregionwillrequireanallocationtoJapan.Furthermore,manyfundsare

confidentaboutTokyo’smedium-termprospects,regardlessoftheseevents.Thequestionwillbeoneofasset,notcountry,selection.

Theprovisoworthnotingiscountrieswherepublicsentimentandthemediaareseverelyanti-nuclear.OneoftheunforeseeableimpactsofthecrisisatFukushimahasbeenaseachangeinGermany’senergypolicy.ThiswillhavetoweighontheconsiderationofanyGermaninvestorlookingatJapaneseassets.Whilesuchascenariocouldplausiblydevelopelsewhere,forthemoment,thisappearstobeauniquesituation.

Table 1:MajorTransactionsbyJ-REITs

Subject Property Gross Floor Area

(sqm)

Total Price (JPY mil)

Vendor (Seller)

Purchaser (Buyer)

NOI Cap Rate (%)

MitsubishiHeavyIndustriesBuilding

67,124 60,500 MitsubishiHeavyIndustries NipponBuildingFundInc.(REIT),DomesticInstitutionalInvestor

4.3

ApartofHirakawachoMoriTower

9,818(NLA) 18,200 MoriBuilding GlobalOneRealEstate InvestmentCorporation(REIT)

4.5

RiverCityM-SQUARE 26,439 13,350 MitsuiFudosan NipponBuildingFundInc.(REIT) 5.5

OsakiFrontTower 23,674 12,300 TMKofMitsubishiEstate JapanRealEstateInvestmentCorporation(REIT)

7.0

ApartofGateCityOsaki NA 11,650 SumitomoLifeInsuranceCompany

NipponBuildingFundInc.(REIT) 4.5

DaibaGardenCityBuilding

NA 11,000 SekisuiHouse JapanExcellent,Inc.(REIT) 5.4

HakoneGora-onsenTokinoyuSetsugenka

10,655 3,550 Y.K.SpringProperty JapanHotelandResort,Inc.(REIT) 5.9

ApartofArkMoriBuilding 4,343(NLA) 9,770 MoriBuilding MoriHillsREITInvestmentCorporation(REIT)

4.5

ApartofChofuSouthGateBuilding

11,613(NLA)

9,320 ShimizuCorporation NipponBuildingFundInc.(REIT) 6.0

IIFNagoyaLogisticsCenter

8,721 1,050 TaiheiyoCementCorporation

Industrial&InfrastructureFundInvestmentCorporation(REIT)

7.9

14 Advance

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Unit

Source:HyogoPrefecture

Theareamostaffectedbytheearthquakeandtsunamiwasnotoneheavilyfavouredbyforeigninvestors,soitistheeconomicconsequencesforTokyothatprincipallyweighoninvestors’minds.Thisincludesthepotentialforenergyshortagesoverthesummer,theriskoffutureearthquakesandliquefaction,andthelonger-termimpactofadditionalgovernmentborrowingforreconstruction.Aswehavealreadynoted,thesefactorswillinspireshort-termcaution,notenduringpessimism.

Funding EnvironmentForeignfinancialinstitutionshavesoughttoaddriskpremiumontheirloansbuthavenotbeenabletodosoashigherinterestrateswoulddriveborrowersaway.Therefore,spreadsandLTVshavenotbeenaffectedbytheearthquake.

Japanesefinancialinstitutionsarealsoshowingflexibilitytowardsrefinancingbyindicatingthattreatmentofbaddebtsunderthecurrentmarketisnotawisedecision.

TherewasvirtuallynoimpactonnewlyissuedCMBSasthemarkethadbeenstagnantsincetheglobalfinancialcrisis.Nosignificantimpactwasobservedintheseniordebts,althoughliquidityforjuniordebts,forwhichthevalueshadbeenfallingduetothesluggishrealestatemarketafterthefinancialcrisis,isdecreasing,withasmallernumberofbuyersinthemarket.Asaresult,higherriskproductsarefindingfewerbuyers,leadingtoincreasedlossesinsomecases.Also,largetransactionshavenotmaterialisedduetoalackofmezzaninefinancing.Therefore,mezzaninelendersholdthekeytomarketrecovery.

ConclusionBasedontheabove,thedeclineindemandintherealestatemarketisexpectedtobetemporary.Infact,theJapaneserealestatemarketwasbeginningtoshowsignsofrecoveryin2011andwebelievethatafull-scalerecoveryhassimplybeendelayedinto2012.Turningtopastexperience,housingconstructionfiguresinHyogoPrefectureincreasedsignificantlyin1995and1996aftertheGreatHanshinEarthquakeinJanuary1995(Figure13).Inadditiontorevivingtherealestatemarket,thiswasafactorthatdroveupGDPgrowth.Asimilardynamicisexpectedduringtherecoveryphaseforthisearthquake,withtheJapaneseeconomyandtherealestatemarketmakingasignificantreboundin2012.

Infact,themanufacturersofautosandsemiconductors,whicharethemajoreconomicdriversinJapan,havealreadyannouncedtheirexpectationthatpre-earthquakeproductionlevelswillbeachievedearlierthanexpected.Asaresult,theBOJrevisedupwarditseconomicoutlookintheMonthlyReportofRecentEconomicandFinancialDevelopmentsforJune.AlthoughtheentireJapaneconomy–andrealestateindustryinparticular–sufferedintheimmediateaftermathofthenaturaldisasters,itisourviewthatthespeedoftherecoveryin2012willoutpacetherateofgrowthforecastpriortotheeventsof11March.

Figure 13:HousingConstructionFigures

Yuto OhigashiManagerResearch&Advisory

YutoOhigashijoinedtheJonesLangLaSalleResearchandAdvisoryteamin2007andisresponsibleforrealestateresearch,economicandinvestmentanalysis.PriortojoiningJonesLangLaSalle,heengagedinfinancialanalysisworkfordomesticcompanytomanagestockportfolio.Healsohasathree-yearexperienceinBostonandNewYorkasarealestatemarketanalystafteracquiringaMaster’sDegreeinFinancialEconomicsfromBostonUniversity.

Yoshihiro InumaAssociateDirectorResearch&Advisory

YoshihiroInumajoinedtheJonesLangLaSalleResearchandAdvisoryteamin2006andismanagingresearchteam.PriortojoiningJonesLangLaSalle,heworkedinarealestateinvestmentcompanyandarealestateappraisalfirm,responsibleforprovidingvaluationreportstovariousclientele.HeisalsoacertifiedrealestateandaFirst-classArchitect.

Takeshi AkagiLocalDirectorResearch&Advisory

TakeshiAkagiisworkingcloselywiththeresearchteamandappraisersforvariousassignments.Hisresponsibilitiesalsoincludeprimaryrealestateresearch,economicandinvestmentanalysis,propertyforecasts,inputintoJonesLangLaSallemarketmonitoringpublications,andcontributionsandcommentariesonissuesrelatingtoJapan.

HotelSectorcontributedbyTomohiko Sawayanagi,JonesLangLaSalleHotelsInvestors–OverseasInvestorssectioncontributedbyPaul Guest,GlobalCapitalMarketsResearch.

COPYRIGHT©JONESLANGLASALLE2011Allrightsreserved.NopartofthispublicationmaybepublishedwithoutpriorwrittenpermissionfromJonesLangLaSalle.Theinformationinthispublicationshouldberegardedsolelyasageneralguide.Whilstcarehasbeentakeninitspreparationnorepresentationismadeorresponsibilityacceptedfortheaccuracyofthewholeorany part.Westressthatforecastingisaproblematicalexercisewhichatbestshouldberegardedasanindicativeassessmentofpossibilitiesratherthanabsolutecertainties.Theprocessofmaking forwardprojectionsinvolvesassumptionsregardingnumerousvariableswhichareacutelysensitivetochangingconditions,variationsinanyoneofwhichmaysignificantlyaffecttheoutcome, andwedrawyourattentiontothisfactor.

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