Japan's office market set for slower recovery on natural disasters

TOKYO: Japan's office market recovery will be set back by the the 9.0-magnitude earthquake and subsequent tsunami, albeit only on a limited scale in the short-term according to early analyses by international real estate outfit DTZ.

In its DTZ Insight: Japan Earthquake March 2011 report, the firm said the temporary economic slowdown wrought by the natural disasters will cause office rents to drop 9.1% in 2011 before stabilising in 2012 and rising in 2013.

"This is a modest downward revision, especially when compared to the downside scenario from our Global Outlook," the firm pointed out.

Earlier, DTZ had projected a 6.5% decline in office rents during 2011 before a slow recovery next year.

Meanwhile,in its 2011 Global Outlook report published in March, it had predicted a 10.7% decline in rents this year followed by a a further 5.7% drop in 2012 in the event of Japan's gross domestic product (GDP) contracting 0.3% before growing 1.1% in 2012.

Oxford Economics had revised Japan's GDP growth to 1% from 1.3% before the natural calamities, while the Daiwa Institute of Resarch has predicted that the earthquake will shave 0.2% off of estimated GDP growth this year, said DTZ.

"Although it is extremely hard to assess the impact of this terrible event on GDP, historical experience suggests that calamities have a significant initial impact, but that is shortlived," it said.

In terms of investment, Japanese real estate investment trusts (J-REITs) have reported limited damage to their portfolio while rating agency Moody's have announced that only 0.8% of its rated REITs portfolios were in the affected areas and no major damage was reported.

Meanwhile, prime office yields are poised to remain flat or even grow if investors revise down their expectations for rental growth, said the firm.

Earlier, DTZ had forecast a mild contraction in prime office yields to 4.1% at end-2011 and 4% at end-2012 as the market recovered, from 4.2% at end-2010.

"Furthermore, the calamity might prompt investors to hold back on present investment plans, putting off yield compression in the short term. In the longer term investors might also reconsider the risk premium that they apply to commercial property in Japan, and other markets exposed to natural calamities with non-negligible probablities," it said.

DTZ added that the earthquake had raised awareness among tenants on the importance of seismic structure, and companies mulling office dispersions to lower risk may drive other types of demands.