By David Green-Morgan on May 20th, 2019
Traditional real estate investment practice dictates that when transaction activity diminishes then the lack of buyers in the market leads to prices dropping which in turn encourages buyers back into the market and activity increases. However, what happens when a drop off in activity is not accompanied by an adjustment in pricing?
The Japanese commercial property market has occasionally defied conventional wisdom around market fundamentals and has frequently been one of the most difficult markets to determine sentiment and the direction of travel.
For decades it was the largest commercial property market in Asia Pacific, although in recent times is has been surpassed by China. However, it is the opaqueness, dominance of domestic groups and the lackluster economic background that delivers its individuality.
In recent times transaction volume have undergone a structural change. Annual volume shifted to a level around $10-$15 billion lower than the market peak of $56 billion in 2014 and last year the level was closer to $35 billion. Meanwhile transaction activity in other developed markets continued to grow through 2018.
But while acquisition volume has dropped substantially in Japan, pricing indicators have yet to head for a downturn. This is partly due to the strong holding power of the landlords and the very low financing costs which puts little pressure on owners even when activity dwindles.
Price growth as measured by the RCA CPPI accelerated between 2013 and 2015; apart from a couple of quarters of slower pace in 2016, pricing has essentially maintained its momentum even though the wider transaction market has weakened. Commercial prices in Japan rose 6.6% YOY in the first quarter of 2019, as reported in the latest edition of RCA CPPI Global Cities.
Japan doesn’t always follow the global trends of other developed markets, but if we continue to see transaction volumes falling at this rate for a further sustained period, then price growth is more likely to follow the trend we have seen in other markets, irrespective of the uniqueness of Japan.
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