Tokyo residential rents to stay ‘flattish' as the economy recovers: Savills

Meanwhile, occupancy should hold at the lower end of the 96%-98% range.

After achieving record highs in the previous quarter, Savills notes that average rents in the 23W saw a slight decline in Q2/2020 – an outcome that was not unexpected considering the robust growth witnessed to date and, of course, the COVID-19 pandemic. Indeed, after nearly seven years of economic growth, the longest expansion since the end of World War II, the combination of a consumption tax hike and a global pandemic have finally disrupted Japan’s historic bull run, placing the country into a technical recession.

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While Japan has a more stable labour market compared to other major economies – as of May, the national unemployment rate stands at 2.9% and the job-to-application ratio in Tokyo is at 1.55x – personal incomes will invariably take a hit. Rental growth, if any, should therefore be modest at best while the economy recovers.

Given the above, we predict that rental movements are likely to stay flattish for the time being, while occupancy should hold at the lower end of the 96%-98% range. With a larger number of listings than during the air-tight pre COVID-19 era, aggressive pricing is unlikely to be observed - even at brand-new apartments.

Encouragingly, even as Japan’s population is declining, Tokyo continues to buck the country’s demographic destiny, as youth continue to flock to the capital in search of education and employment opportunities. Despite the fact that Tokyo was the epicentre of Japan’s COVID-19 outbreak in April and May, and therefore under a “soft” lockdown during that period, young people continued to move to the prefecture in large numbers, driving the total population to the 14 million mark for the first time in history.

Further, five of the six outer submarkets in the Tokyo 23W, which tend to be more popular than the C5W amongst young residents, posted rental increases over the quarter. These favourable demographic drivers continue to make Tokyo multi-family residential a stable, defensive asset type. To be sure, the economic and social impacts of COVID-19, particularly on the wallets of Tokyo residents, may lead some to consider moving to peripheral areas of Greater Tokyo - such as the Tama Region, Kanagawa, Saitama, and Chiba – or even abandoning the capital region entirely.

That said, even if there is some reverse migration back to regional areas, Tokyo’s position as Japan’s top economic powerhouse is not going to change anytime soon. As such, we can expect to see younger residents, a key demand driver for midmarket, multi-family residential units, continue to set their sights on Tokyo for the foreseeable future, thus stabilising rents for the longer term.