RCA Insights

Looking at Liquidity in Sydney and Tokyo

By on July 10th, 2018

Central Tokyo and Sydney are the most liquid commercial real estate markets in Asia Pacific, according to RCA’s Capital Liquidity Scores. Liquidity in Tokyo and Sydney has edged lower in recent periods, however, and this may be a factor to take in when considering the pricing outlook for both cities.

It’s worth looking first at how liquidity for central Tokyo and Sydney has changed over time, and what’s happening in other key markets in Japan and Australia. RCA’s Capital Liquidity Scores calculate the liquidity of 155 cities across the globe using proprietary RCA deal data.

Central Tokyo’s liquidity has been the least volatile of all markets in Asia Pacific throughout this cycle: the Tokyo 5 Wards district score has hovered between 85.0 and 91.0 since Q1’09. (Scores are weighted by absolute and relative measures to create a final score between 1 and 100, with 100 the highest achievable liquidity.)

Tokyo’s liquidity score now sits slightly below its long-term average. Elsewhere in Japan, liquidity has risen in Yokohama and Osaka on the back of higher cross-border activity and a growing variety of market players. Outside of Tokyo, Japanese markets have displayed a wide range of liquidity since the inception of the scores.

1807 JPN AUS liquidity-01

Sydney has displayed a much wider range of liquidity than Tokyo since the scores began. Indeed, shortly after the Global Financial Crisis, Sydney’s liquidity score dropped to 41.5. The most recent set of results show the city’s liquidity has ticked lower but still sits above its long-term average.

In Australia, cities have behaved more in sync with Sydney, all displaying high ranges of liquidity throughout the cycle. Cross-border investors were essential for liquidity in these markets: their participation was the most stable input to their liquidity scores while other indicators dropped significantly during the downturn. Melbourne was the third most liquid market in Asia Pacific in the latest survey, while Brisbane was seventh.

Tokyo and Sydney, which account for a quarter of Asia Pacific’s commercial real estate investments, have shared a similar story in recent periods. Fueled by cross-border investors, their investment volume peaked in 2015, and yields have compressed to all-time lows in both cities. Low cap rates and uncertainty make deals harder to complete for many investors; since 2015, deal count has fallen as well as liquidity. Tokyo observed a 5% drop in liquidity and Sydney an 8% decline since liquidity peaked for the cities in the first half of 2015.

RCA analysis points out that long-term liquidity trends have bearing on pricing: the higher the liquidity, the lower the yield investors can expect. In both Japan and Australia, yields have continued to compress, and many market players and observers continue to question what stage the markets are at in the cycle. Declining liquidity scores should be a factor to consider in answering that question.

The next edition of Asia Pacific Capital Trends will be published in early August. To find out more about becoming an RCA client, contact us.