Tokyo has been enjoying some major inbound investment from foreign players, attracted by Abenomics, but investment activity remained predominantly domestic in 2014. With prime cap rates approaching historic lows, questions are being asked about the sustainability of current conditions.

Nonetheless, rents remain well below their 2007 levels, lending conditions are favourable, and a cushion exists between headline office yields and the 10-year government bond interest rate. This means there is scope for Tokyo cap rates to move further into line with those of Hong Kong and Singapore; capital growth is expected.

"Momentum in occupier activity is expected to be maintained through 2015 and beyond"

The city continues to enjoy positive developer sentiment surrounding the 2020 Olympic Games, and the infrastructure boost and opening up of new dockside locations that will ensue. Mori Building, one of Japan’s biggest developers, intends to develop 10 mixed-use projects in central Tokyo worth an estimated ¥1 trillion ($8.3 billion) over the next decade. This is a confident move and a sign of faith in the future of the city’s real estate market.

Momentum in occupier activity is expected to be maintained through 2015 and beyond, on the back of cyclical and economic tailwinds. The volume of available space suitable for large-scale corporate relocations is dwindling. This will not only encourage landlords to demand higher rents for new leases, but also accelerate the absorption of buildings newly supplied to the market in the near term.

Rents are rising across the market as vacancy rates fall, with particularly strong growth recorded in the creative and tech sector over the past year.

Taken from
Savills World Research: 12 Cities - H1 2015