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Announcement:

Moody's changes outlook for Japan real estate industry to negative

 The document has been translated in other languages

16 Dec 2011

Tokyo, December 16, 2011 -- Moody's Japan K.K. has changed to negative from stable its outlook for Japan's real estate industry for the coming 12-18 months.

The change in outlook reflects Moody's view that it will take a while for Japan's real estate market, especially the Tokyo office leasing market, to stabilize and recover.

This view is based in turn on expectations of a continued sluggish Japanese economy combined with increased supply due to the completion of new office construction.

For instance, a slow recovery in the Japanese economy and the yen appreciation have suppressed domestic investments and employment, resulting in high office vacancies in central Tokyo.

In addition, the completion of construction projects is expected to generate significantly greater supplies of large-sized office buildings throughout calendar 2012.

As a result, Moody's expects that vacancy rates in the office leasing market in central Tokyo's five wards are likely to remain around 8-9% in 2012 with the possibility of a slight decline after 2013 due to low supplies of new offices.

Because of the high vacancy rates, office rents are expected to continue declining at least throughout the first half of 2013. However, Moody's expects the pace of rental declines to slow when compared to that seen in the last two to three years.

Moody's rating universe for the industry comprises four Japanese real estate operating companies (J-REOCs) and 18 real estate investment trusts (J-REITs). The major business for this industry is office leasing in central Tokyo. These companies also manage retail and residential properties. But the J-REOCs develop and sell residential real estate as well.

Moody's also notes that the demand for earthquake-resistant buildings has risen after the March 11 earthquake. This could help leading J-REOCs and J-REITs with newer office buildings mitigate the negative impact on their vacancy rates and rent to some extent, but not without rent declines in older, less desirable properties.

The weak economy will also weigh on the other real estate markets. For example, the profitability of retail properties in Japan is likely to remain weak due to low personal consumption. This could lead to requests for rent discounts and/or the cancellation of leasing agreements by retail tenants.

Although occupancy rates and rents for residential properties have stabilized after a downward trend in the last few years, a significant recovery is considered unlikely, given weak employment conditions.

Low interest rates and government tax incentives continue to support the sales of condos in Tokyo. However, weak economic conditions may negatively affect sales and prices in this sector.

Apart from the possible negative effect on the sales and prices of condos, we do not expect the earnings of specified Residential REITs to further decline. Thus we keep the industry outlook for these issuers as stable.

Because of these weak market conditions, Moody's expects challenges for some issuers with respect to a timely recovery of earnings and a reduction in their current high leverage. Such a recovery will depend on a number of factors, including the quality of leasing assets, the make-up of business portfolios, and the liquidity of each issuer.

But the most important factor for an improvement in leverage will be the investment and financial policies of each issuer. From this view point, Moody's will continue to monitor whether issuers will leverage as the means to continue investing in the current market, or whether they will use cash flow to reduce leverage and bolster earnings.

Moody's is concerned that a sluggish stock market, low interest rates, and plentiful liquidity from lenders could encourage the J-REITs to purchase new assets, and so maintain or even raise the leverage of some.

An additional concern is the possibility that lenders may require greater risk premiums on loans to J-REITs with less diversified or less attractive assets because of possible declines in earnings from these assets and the subsequent decrease in their appraised loan to value.

In Moody's view, low interest rates have played a central role in supporting the real estate markets in Japan. Thus, should Japan's interest rates increase in the medium to long term, rated issuers may need to reconsider their financial strategies.

Although a significant rise in interest rates is not our central scenario, and J-REOCs and J-REITs borrow most of their loans at fixed-interest rates, Moody's will be mindful of the potential impact of a significant rise in interest rates as it is one of the major risk factors over the medium to long term.

Moody's will continue to examine the potential negative impact of weak market conditions, such as a decline in earnings from leasing portfolios, and/or increased interest rates. In addition, Moody's will evaluate the investment and financial policies of rated issuers as well as their liquidity management. As a result of such assessments, the ratings of some issuers may face downward pressure.

The industry outlook for Japan's real estate sector -- excluding specified Residential REITs -- could change to stable if the vacancy rates in major office leasing markets decline significantly, for example, to 5-6% in Tokyo's central five wards, and if market rents stabilize on a sustained basis.

The report entitled "Outlook Update: Japanese Real Estate" can be found at www.moodys.com.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Richard Bittenbender
Associate Managing Director
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Koji Kumamaru
MD - Structured Finance
Structured Finance Group
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's changes outlook for Japan real estate industry to negative
No Related Data.
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