Trending: Opportunities in Japanese Office Market as Tokyo Prices Soften

18 Jan, 2021 –

Japan Real Estate

A North American fund manager recorded a hit deal at the end of 2020, picking up the Tokyo headquarters of a Japanese entertainment conglomerate for JPY 72 billion ($693 million) to add to a $1.6 billion opportunistic vehicle. BentallGreenOak has agreed to purchase the Avex Building in the Japanese capital’s Omotesando area from Avex Group, a one-time J-Pop powerhouse which announced the sale to the Tokyo stock exchange on 24 December.

In a statement issued on the same day that it announced the sale of its 18-storey headquarters, Avex Group, which has been offering early retirement buy-outs to its staff, announced that, due to the impact of COVID-19, it expected to suffer operating losses for the year, but that the company should realise a gain due to extraordinary income.

While the coronavirus has struck low corporates like Avex, which once ruled Japanese airwaves with hits by stars such as TRF, Namie Amuro and Ayumi Hamasaki, BentallGreenOak’s leadership sees opportunities in Japanese offices. Although Klebes declined to comment on fundraising, by May last year the company had raised $697 million for its GreenOak Asia III fund, and the vehicle reached a final close of $1.6 billion in October.

Going Long Japan

“Near term there will be some softening in Tokyo due to COVID-19, presenting some very good opportunities over a five year hold period,” said BentallGreenOak head of Japan Dan Klebes, who has been focused on the country’s real estate market since the late 1980s. The agreement to purchase the 28,000 square metre (301,389 square foot) office tower was among seven major Asia deals signed by BentallGreenOak during 2020, and provides the fund manager with control of the commercial asset fronting Aoyama-Dori, just a few blocks from Tokyo’s Omotesando shopping street and the Omotesando subway station.

Although Klebes declined to comment on the specifics of the transaction, at the compensation cited by Avex in its announcement, BentallGreenOak is paying the equivalent of JPY 2.6 million per square metre for the tower at 3 Chome-1-30 Minamiaoyama in Tokyo’s Minato Ward. Avex had recently redeveloped its corporate home, with the reconstruction having been recognised for its design quality in the Nikkei New Office Awards in 2019 after the company finished the reconstruction two years earlier. According to local news reports in Japan, the sale agreement includes Avex continuing to lease the building following the closing of the transaction, which is expected during the first quarter of this year.

BentallGreenOak, which began operating in Tokyo in 2010 when GreenOak Real Estate was first established, has historically focused 70 percent of their East Asia activity on office or mixed-use commercial projects in Japan. GreenOak merged with Canada’s Bentall Kennedy in 2019 to form BentallGreenOak. The firm is focusing primarily on Tokyo, Osaka, Nagoya and Seoul, while also looking at projects in Fukuoka, although Klebes estimates that Tokyo and Osaka have accounted for 75-80 percent of their past projects.

Having invested in Japan over more than 30 years, Klebes doesn’t find his faith in the office market shaken by the current public health crisis. “Tenants see a lot of uncertainty, so it can be challenging to get new leases signed, but looking at the Class A markets, vacancy rates have stayed relatively constant,” he said. “Vacancy is at 1 percent or less in the big cities such as Tokyo, Osaka and Nagoya, and we see that as an opportunity.”

Benefit for a Music Titan

One element of the Avex opportunity may have been the music group’s financial stress, with the company led by impresario Max Matsuura having stated in November that it had suffered a net loss of JPY 3.2 billion for the six months from April through the end of September. During December, Ayumi Hamasaki, who released a series of platinum albums for the Avex in the early years of the century and still records for the company, performed a pair of benefit concerts to help raise money for her label, including one each on Christmas Eve and New Year’s Eve. Now 42, Hamasaki, whose hits include Seasons, M and Jewel, performed the two shows despite being pregnant with her second child.

Booking Gains in a Downturn

While Avex appears to have been highly motivated to dispose of assets, BentallGreenOak sees trend towards Japanese corporates disposing of assets that began well before the pandemic, and is likely to continue beyond the current crisis, as companies move into new industries or refine their businesses. Overall, Klebes does not note significant amounts of stress in the Japanese market, although he does see the current market encouraging some corporates with their core business in other sectors to rethink their involvement in real estate.

“What we’ve seen is not so much distress, but seeing more corporate management teams saying they’ve been thinking of getting out of real estate for some time now, and the COVID-19 crisis is a catalyst for them to make a decision,” Klebes said. By selling off assets amidst the current operating challenges, companies could also be booking extraordinary profits at a time when there are losses elsewhere in their business, with Avex announcing that it would book a gain of JPY 29 billion on the sale.

(Source – Mingtiandi, Pic – Avex Building / “Naohisa TSUCHIDA“)

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