CBRE Quarterly Investment Survey Finds Continuing Fall in Expected Yields

Expected yields in Tokyo’s core areas have decreased across all covered sectors, except for office yields (Otemachi – which were flat), compared to the previous quarterly survey in April 2013.

Expected yields for both multi-tenant and single-tenant industrial facilities in the Tokyo Bay Area fell to their lowest levels since the first issue of the Quarterly Survey in July 2003.

CBRE's Tankan survey (Diffusion Index) for Tokyo offices found that sales prices and expected yields should improve for investors.

CBRE's Tankan survey for Tokyo Metropolitan Area large multi-tenant industrial facilities again showed an improving trend, but investors are focused on the year ahead when a large amount of new supply is expected to come online.

Expected yields: Overview of survey results

During the quarter, expected yields (based on net operating income [NOI*1]) in the office, multi-family residential, retail, hotel, and industrial sectors in Tokyo continued to decline compared to the previous survey period (April 2013). The upper limit for retail (Ginza Chuo Dori) fell to 4.70%, the lowest level since the surveys first began in 2003.

Looking at expected yields (based on NOI) in various areas of the city, the upper and lower limits both fell by 10bps in the Hibiya/Uchisaiwaicho and Nihonbashi areas, while they were flat to slightly down in other areas. With vacancy rates being relatively low in prime areas, investors are expecting some rents to rise, especially in the Hibiya/Uchisaiwaicho area. In Nihonbashi, where vacancies are low in existing buildings, the recent new supply in neighboring areas is having a positive impact in attracting large amounts of demand. In major Tokyo districts as a whole, there is strong interest from both domestic and international investors who see the weaker yen as a good opportunity to invest. In the rental market, the vacancy rate has steadily fallen, and expectations for rent increases have gradually increased. Consequently, the downward trend in expected yields is likely to continue.

Expected yields for multi-tenant industrial facilities in the Tokyo Bay Area (based on NOI) are between 5.4% and 5.9%, a decline of 10 bps in both the upper and lower limits. Yields for single-tenant facilities range from 5.3% to 5.7%, representing a major drop of 30bps in the upper limit and 20bps in the lower limit. This shows that investor interest in single tenant facilities has risen, with the increased difficulty in acquiring multi-tenant facilities.

A survey was administered for office buildings in Tokyo, with questions regarding current conditions and the expected situation one year from now (with results collected as the CBRE Tankan Diffusion Indices*2). Topics included: 1) real estate trading volume, 2) sales prices, 3) NOI, 4) expected yields, 5) the lending attitude of financial institutions, and 6) stance on investment and loans. Compared to the previous survey in April 2013, the responses for current conditions (as of July 2013) improved across almost all categories, with particularly large improvements again in trading volume, and expected yields. The exception was the lending attitude of financial institutions for Grade A buildings, which was almost flat. The survey also showed that many investors expect the situation one year from now to improve on the current situation. For NOI in particular, there has been a large increase in the proportion of investors expecting an improvement in one year's time, for both Grade A and non-Grade A buildings.

A survey was administered for large multi-tenant industrial facilities in Greater Tokyo, with questions regarding current conditions, and the expected situation one year from now. Topics included: 1) the outlook for real estate trading volume, 2) sales prices, 3) rents, 4) vacancy rates, 5) expected yields, 6) the lending attitude of financial institutions, and 7) stance on investment and loans. The responses for current conditions (as of July 2013), indicated rising sales prices, expected yields, and the lending attitude of financial institutions compared to the previous survey in January 2013. Conversely, the responses for current conditions indicated a fall in vacancy rates, and no change in trading volume, rents, or stance on investment and loans. With regard to conditions one year from now, the proportion of investors expecting improvement declined across almost all categories. This is likely due to concerns regarding the new supply due to come online in the second half of 2013, as shown by the fact that the expectations for improving rents fell this quarter, and that hopes for an improvement in expected yields fell significantly for the year ahead.

*2 Diffusion index (DI) ： Diffusion index subtracts the ratio (%) of respondents that expected a “contraction (fall)” from the ratio (%) of respondents that expected an “expansion (rise)” for all six items, including expected yields, selling price and trading volume, for office buildings in the major areas of Tokyo. A positive DI means that the number of respondents that answered “expansion (rise)” exceeded the number that answered “contraction (fall).”

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