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Weak Revenue Dampens Growth For Retail and Hotel J-REITs

The office property sector was also seen struggling, while construction for residential was strong

September 14, 2022 – The lingering effects of the global pandemic on the retail and hotel sectors have slowed the growth of these assets in Japanese real estate investment trusts’ (J-REITs) portfolios, as seen in the data for the first half of the year. 

Data from the Association for Real Estate Securitisation (ARES), as reported by Nikkei Real Estate Market Report in their September issue, showed that while the assets under management of J-REITs have been on an upward trend, the growth of retail facilities and hotels in their portfolios was “sluggish”.

According to the data, the volume of retail facilities as of June 2022 was 3,465.8 billion yen (US$24 billion), down 41.8 billion yen (US$290 million) from the most recent peak of 3,507.6 billion yen (US$25 billion) in September 2021. 

The volume of hotel assets decreased by 1.6 billion yen (US$11 million) to 1,637 billion yen (US$11.50 billion) in June 2022, after reaching a peak of 1,638.6 billion yen (US$11.51 billion) in December 2021.

The report attributed the sluggish growth to the prolonged spread of the Covid-19 virus.

As the revenue from these assets stayed weak for longer than expected, the number of cases of property sales and replacements to other types of assets has increased,” Nikkei said. 

The report also said there is a rising trend of suburban retail facility divestments, mainly due to weaker demand and the rise of e-commerce during the pandemic.

“Suburban retail facilities are struggling due to the spread of online shopping. Since the Covid-19 crisis occurred when REITs were struggling with what to do with them, movements to part with such assets have accelerated,” the report said. 

For example, KKR’s Japan Metropolitan Fund said it is proactively promoting the sale and asset replacement of suburban and low-profit urban retail facilities by positioning them as the “target of transfers.” 

Kenedix Retail REIT has also positioned retail facilities such as food supermarkets as its core investment target while excluding large-scale suburban and urban retail facilities occupied by luxury stores.

Office Sector Also Struggling

Meanwhile, Nikkei reported that the office property sector – particularly in Nagoya – has recovered slowly. 

The report said office demand in the area continued to shrink due to the economic downturn and the spread of remote work.

Data showed that the vacancy rate of new office buildings had reached almost 50% as building owners struggled to attract tenants.

“Many new and upcoming buildings have been developed based on the pre-coronavirus market,” says a local real estate player. Consequently, their rents exceeded tenants’ budgets, making it hard to find decisive tenants. Many new buildings are lowering their advertised rents, but office demand is generally weak, he added,

Residential Market Bucks The Trend

While retail, hotel, and office spaces struggled to recover, the report survey said the residential sector stayed strong with more projects under construction. 

Of the 154 projects filed in the year’s second quarter, residential had 91 projects, followed by 30 office projects, seven retail projects, two hotel projects and 24 other projects.