Charging Premium Rent In Tokyo Getting Harder

Source : The Business Times, November 20, 2008

(TOKYO) Seeking higher rents from tenants moving into new buildings has become 'difficult' amid the economic slowdown resulting from the credit crisis, said Mitsubishi Estate Co, Japan's largest developer by market value.

The owner of about 30 buildings in areas adjacent to Tokyo Station, Japan's most expensive business district, earned record operating profit on rising leasing income for a third straight year for the period ended March.

It was projecting a fourth year of record profits until the credit crisis struck, prompting a forecast cut on Oct 31.

'It is unclear how long the economic slowdown will affect Japan's property market,' Toyohisa Miyauchi, executive vice-president of Mitsubishi Estate, said. 'While we will continue to raise rents for existing tenants, we are seeing a softening in the market for new tenants.'

Before credit markets ground to a halt, the highest monthly rent agreed upon for new buildings in the area was 80,000 per tsubo (S$382 per square metre), for the Marunouchi Park Building, a 34-storey commercial tower set for April completion.

London has the world's highest office rents, followed by Moscow and Tokyo, according to a May report by CB Richard Ellis Inc, the world's largest commercial brokerage.

The highest rents obtained for the Marunouchi Park Building would lift Tokyo to second place after the yen's 8.4 per cent appreciation against the US dollar since May 31.

The commercial real estate market has since weakened, with Tokyo office vacancies rising to a three-year high in October, as companies cut spending and Japan's economy has fallen into recession.

The Topix Real Estate Index is the worst performer among 33 industry groups this month, having dropped 24 per cent.

'The vacancy rate is going up in Tokyo. That's one signal for us to reduce our holdings of some large real estate stocks,' said Yuichi Chiguchi, who helps manage about US$8.6 billion in assets at DIAM Co in Tokyo. 'We have to admit demand is slowing down in the office property market.'

Mitsubishi Estate shares fell 3.4 per cent, or 44 yen, to close at 1,236, taking the decline over the last six months to 57 per cent.

Mitsubishi Estate expects an increase in leasing income for the year ending March 2010, after the completion of the Marunouchi Park Building. The developer is trying to attract tenants that will be relatively insulated from the current slowdown, such as law firms, accountants, and merger and acquisition consulting companies, Mr Miyauchi said.

'There will always be companies that are financially sound even in a downturn.'- Bloomberg