Boston, MA -- (SBWIRE) -- 02/20/2014 -- Japan's commercial real estate sector remains a regional outperformer, bolstered by substantial foreign capital inflows and ultra-loose monetary policy. However, with consumer spending levels and economic growth starting to show signs of retreating, we caution that the sector is likely to experience a more moderate growth trend in 2014.

2014 is shaping up to be a more sedate year for Japan's real estate market as the sector reacts to a more conservative business environment. The rapid economic growth witnessed in H113 has already started to slow with Q313 GDP growth estimated at 1.1% quarter-on-quarter (q-o-q), compared with the 3.5% q-o-q pace recorded in Q213.

Consumer spending growth is also expected to trend below the high levels witnessed in 2013 the cost of food and energy rises, eroding household incomes. Indeed, we expect the pace of growth in private consumption to continue in its downward trajectory, and even fall into contraction in Q214, given that the consumption tax hike to 8% from the current 5% is set to be implemented in April 2014.

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The long-term outlook for Japan's real estate sector nevertheless remain overwhelmingly positive as the market continues to reap the benefits of Prime Minister Shinzo Abe's economic stimulus plans, dubbed 'Abenomics'. Aggressive monetary easing by the Bank of Japan has driven a 20-25% devaluation in the value of the yen against the dollar, making real estate investments particularly attractive for foreign investors with a suitably long-term investment horizon. Bank lending continues to improve, with the average balance of lending increasing by 1.9% y-o-y in Q313, driven primarily by large lot loans for property, indicating a continued desire to increase their real-estate lending portfolio.

While inflation expectations are beginning to rise on the back of Abe's economic policies, 35 year flat mortgages rates remain low, standing at 1.93% in October 2013. While rising inflation expectations are likely to push mortgage rates higher, we emphasize that they are currently almost two standard deviations below their 10 year average.

Sales of offices, warehouse and retail space rose 85% to JPY2tn in the first half of 2013, with prices in Investment into commercial real estate portfolios is also supported by the growing real estate investment trust (REIT) market, which enjoyed unprecedented investor interest in 2013. While we see scope for this trend to continue in 2014, REITs remain highly sensitive to interest rates. In the unlikely event that the Bank of Japan were to tighten monetary policy, REIT share prices would face substantial downside risk, resulting in declining capital flows into the sector, and ultimately lower real estate prices.

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