February 1, 2016

The Bank of Japan surprised markets on Friday by adopting negative interest rates on excess reserves with the central bank, in an attempt to stave off ongoing deflation fears. This means that banks will now pay the central bank 0.1% on reserves exceeding the required amount set by regulators. The BoJ asset purchase program remains unchanged at a pace of 80 trillion yen per annum. The markets reacted to the news immediately with the yen depreciating, the Nikkei 225 improving and government bond yields dropping into negative territory all the way out to 8 year terms.

The impact on real estate markets will be largely positive as a result of Friday’s policy change. The general impacts are outlined below.

  • The relative yield of real estate to other assets classes will improve further. Already government and corporate bonds yields have dipped sharply lower. The 10 year government bond is now yielding just 0.07% and average AA rated corporate bonds on 5 year terms are yielding 0.18%. Even more incredibly, swap rates have turned negative out to 5 year terms, so interest rate fixing costs and lending base rates are now at all-time record lows. It is likely that lending margins will also sharpen across the entire curve as dormant capital begins to look for a new home in a positive yield environment – so the all in cost of debt will continue to fall.
  • Banks will likely become even more aggressive in their lending appetite in order to put latent excess capital sitting in central bank reserves to better use. An expansion of the asset purchase program would likely have just continued to push bond sale proceeds into central bank reserves, so these measures were adopted more to incentivise bank lending and more importantly to ease buying pressure on the yen (following safe haven investors buying yen due to global market volatility). The yen has depreciated 2.2% already since the announcement on Friday to 121.1 to the USD.
  • The weaker yen will also support continued inbound tourism growth, and indirectly the hotels and retail sectors. Inbound tourism has been growing at over 30% per annum over the past three years, to reach just shy of 20 million in 2015.
  • Deposit rate spreads between Japan and other markets have widened further, making hedging out JPY through FX contracts even more favourable for foreign investors into Japan.
  • On the leasing front, absorption rates in the final quarter of 2015 were well above expectation despite some of the economic indicators. Tokyo vacancy rates (A grade central 5 wards) dropped significantly to 2.0% – lowest in 8 years. Corporates may now actually be better incentivized into R&D expenditure and business investment given the relative return on capital. Corporate sentiment should improve with lower interest rates and a weaker yen.
  • Japans REIT index has rallied by over 10% as of Monday midday local time, reaching a 9 month high. This is pushing unit values premiums to NAV (Net asset value) even higher, affording J-REITs a competitive advantage in market. This could incentivise REITs to continue to undertake secondary market offerings and subsequently be very aggressive on fresh acquisitions.

Nicholas Wilson, Associate Director, Japan Capital Markets at JLL
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