Office market face off: Sydney versus Tokyo

When investors think of Japan, their minds turn to a moribund economy, negative interest rates and a declining population, all symptoms of a country that is yet to fully recover from the huge asset bubble of the 1990s. It’s therefore understandable why investors may question the asset allocation of APN’s Asian REIT Fund, which has 41%1 invested in the country. As we said in Why would anyone invest in Japan?, “an ageing, declining population and long periods of low economic growth and deflation are hardly the stuff of investment fairytales.”

But there’s a bigger picture, one best viewed through a lens that compares Australia’s biggest commercial office market with the planet’s. Yes, Tokyo is the world’s biggest office market and, whilst Japan may have its problems, Tokyo is doing rather well.

The sheer size and quality of the office assets in Tokyo is difficult to comprehend. The city’s three central wards are a whopping nine times larger than Sydney CBD and the total office market contains over 93 million square metres of office space, twice that of New York’s Manhattan Island and four times that of London.

Sydney vs. Tokyo – Office Markets Metrics*




Total Stock (sqm)



CBD Stock (sqm)



New Supply (sqm)



Supply % of stock



Total Vacancy (%)



Prior Vacancy peak

10.7% (2013)

9.5% (2012)

Rent (A$ psqm)



Rent Growth (%)



Cap Rate (%)



Sources: APN, BAML, Credit Suisse, JLL, Miki Shoji, Mori, Tokyu
*As at September 2016. Rent growth is 12 months to September 2016.

The fact that Tokyo’s population is only three times larger than Sydney’s but its office market is nine times larger points to Tokyo’s role as the global leader in commercial real estate. For these reasons, local AREIT investors looking to diversify their property portfolio away from an over-reliance on Australia should have Tokyo at the top of their list.

Additional metrics add to Tokyo’s allure, as the table shows. The city’s forthcoming new supply is around 65% of Sydney’s entire CBD but represents less than 4% of its total stock. Not much danger of over-supply here. Sydney vacancy rates at 7.2%, down 33% from the prior peak, are higher than the comparative figure for Tokyo at 3.7%, down 61% from the prior peak, an indicator of strong demand for Tokyo office space.

While rents in Tokyo’s CBD are higher, growth over the past year has been stronger in Sydney, which is benefitting from significant stock withdrawal due to the light rail and residential/mixed use re-development. Still, we believe the outlook for rental growth in both markets should be above trend.

Sydney vs. Tokyo


Source: ABS, Bloomberg, IRESS, Metro-Tokyo. ^ As at 30/09/16

As one might expect, with the 10-year bond rate in Japan lower than it is in Australia, capitalisation rates in Tokyo are lower due to the lower cost of debt. That explains why asset values are significantly higher than in Australia.

As the chart above shows, whilst unemployment is lower in Sydney and population growth higher, Tokyo’s respective figures are impressive, highlighting the different economic performance Tokyo has experienced compared with the rest of the country. It remains a very good place to invest in commercial property, a genuine home for global capital with a dynamic and growing local economy.

That’s the reason for a 41%1 allocation to Japan in APN’s Asian REIT Fund, currently yielding 6.47%2. For Australian property trust investors dependent on regular income and stable, attractive yields, Tokyo commercial real estate offers a lot more than many investors appreciate, and a comparison with Australia’s biggest office market suggests as much. 



This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.

  1. As at 31 October 2016
  2. As at 11 Nov 16. Current running yield is calculated daily by dividing the annualised distribution rate by the latest entry unit price. Distributions may include a capital gains component. Past performance is not an indicator of future returns.