Terrie's Take 581 -- Time to Move Your Office, e-biz news from Japan

Sun Sep 12 21:27:01 JST 2010

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, September 12, 2010, Issue No. 581

+++ INDEX

- What's New
- News
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback
- News Credits

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+++ WHAT'S NEW

Walk along the streets of almost any inner city business or
shopping area of Tokyo, and you will quickly notice all the
"To Let" signs posted in windows and alongside doors. Some
areas are noticeably worse than others, but basically all
commercial real estate appears to be under pressure.

A Miki Shoji report confirms this. They say that in
August, office vacancies in central Tokyo rose 0.07% to
9.17% overall, and as a result, the average rent for the
innermost 5 wards (Chiyoda-ku, Chuo-ku, Minato-ku,
Shinjuku-ku, and Shibuya-ku) fell to JPY17,832 per tsubo
(3.3 sq. m.) -- 10.24% down on August of last year. Miki
reckons the reason for the current office glut is caution
by Japanese firms about the global economy, coupled
with an oversupply of new buildings coming on to the
market.

Our take is that the current situation is caused by the
fact that although 30% of Japanese companies are making
lots of money, mainly those who are exporting consumer goods,
components, and technology, the other more domestic 70% are
still suffering and are likely to continue doing so. Thus,
companies are going to keep cutting back on people and office
space requirements. Then, as the rents fall they are taking
advantage of price deflation by moving further out of town
and moving into buildings that are not so upmarket. The
deflationary spiral has seized other segments of Japan's
commercial world, and there is no reason we can see to not
expect it to spread to real estate -- particularly office and
retail property.

Here at LINC Media and Japan Inc., we have been in the
same Minami Aoyama building since 1998. For ten years we
had a low but fair rent, thanks to the fact that we are quite
some distance from the station and are in an older building.
Unfortunately, the hapless Japanese conglomerate that
owned the building knew more about running trains than
renting buildings and five years ago had to sell their real
estate holdings to a certain major American bank. It
didn't take long for that bank to realize they could squeeze
us for more rent -- especially since in 2006/2007 it seemed
like there was a recovery going on.

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[...Article continues]

And squeeze they did. First with someone who would have
done the yakuza proud, demanding an immediate 50% increase
in rent, then later and after some complaints by us, with
a smoother character who eventually got us to sign a 3-year
fixed term contract just before the Lehman Shock. Now,
almost 3 years later, it is time for us to re-sign the
lease agreement, and while we'd like to stay, we've been out
looking at the office rental market and have been surprised to
find that we're now paying at minimum 25% over market price,
if not more.

Probably we're not unusual in this respect. Many companies,
after committing to a location, are reluctant to move, and
would rather focus on the daily business of making profits
and growing the company. Since we don't want to move, we
approached the U.S. bank with a proposal for them to cut
our rent by 25%, based on what we found out in the market.
However, as a REIT, they say they are tied to financial
results in their business plans and can't cut us any slack.
As a result, we will probably move, and they can figure out
for themselves what happens when you lose a tenant in an
overpriced C-grade building in today's market.

Going out to the market, we found that there are dozens of
buildings around desirable parts of Tokyo which have been
empty for months and in some cases several years. We found
perfectly good 20-year old or younger buildings offering
rents of just JPY14,000/tsubo within 10 minutes walk of
major stations. Our current place is 35 years old, and is
at least 15 minutes walk from the station. In Japan,
buildings older than 1985 generally are considered
structurally inferior and therefore rent at 20%-30% lower
prices than newer ones with the same facilities. And in
Tokyo, office locations more than 10 minutes from the
station see a 10%-20% decrease in rent as well.

The real kicker for us is the fact that because there are
so many lower-grade but perfectly serviceable buildings
available inside the Yamanote line, landlords are
offering significant incentives, such as 6 to 9 months free
rent, and a reduction in deposits to 6 months, instead of
the usual 10-12 months. Of course the fit out and move also
cost money, so these reduced outlays really only go to
offset the cost of moving, but they are a powerful
incentive if you're spending some millions of yen a month
on rent and can suddenly chop 25%-30% off that amount and
not be out of pocket for doing so.

How long will this situation persist?

We believe that the current market is only temporary.
Essentially, we're seeing the overhang of the Lehman
Shock and its 2009 aftermath, and so companies are still
running their operations on a very tight leash. Those who
are exporting are expecting a double dip recession in the
USA, and it this happens the thinking is that there will be
a corresponding impact on China and thus Japan. These
companies are therefore mostly deciding not to expand
their white collar workforces in Tokyo, and are instead
socking away the cash to see them through the
downturn. Where they have surplus cash, it's going into M&A
of cash-flow positive investments abroad, and not into
fancy company headquarters buildings.

Thus, we expect fiscal conservatism on the real estate side
of things to continue at least until this time next year.

Our own decision to do an office search is probably being
reflected in the CEO's offices of lots of smaller companies in
Tokyo, and thus is the part of the iceberg you never really
see -- at least until realtor Miki Shoji comes out with its
monthly statistics.

Still, while the low end of the market is probably in bad
shape, there are some signs of let-up, particularly in the
more visible upmarket buildings and residential sector.
As far as we can see, there are two positive domestic real
estate trends in play:
1. Wealthier Japanese folks and even normal income families
are taking advantage of the record low long-term (35 years)
interest rates available for residential property purchases.
2.06% is the magic number for September, and is the lowest
mortgage rate offered by the government for more than 5
years. This is having a decidedly beneficial effect on the
sale of condos inside or convenient to downtown urban
areas, and indeed, in Tokyo condo sales have increased
27.1% over last year, hitting 24,299 units in the period
January through July.

2. Foreign investment funds, especially Asian ones, are
making increasing purchases of property here as part of a
more strategic play of catering to foreign tourists and foreign
condo buyers into Japan. By virtue of their focus, access
to funds, and willingness to buy outside the CBD, they are
pushing up prices in certain sectors. This appears to be
having a palliative effect on Japanese REITs, which are
also seeing the value of their holdings start to improve.
But as to how many foreigners will really want to buy
condos in Tokyo or Niseko, only time and the continuing
boom in China will tell.

So if you're looking to move office, there probably isn't
a better time to do so than now. And if you're looking to
buy a condo, we recommend holding off until the U.S.
economy decides what it is going to do, but certainly
before the interest rates start to rise again.

*************

In the next couple of weeks, the Metropolis Members Club
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-----------------------------------------------------------

+++ NEWS

- 234,000 oldsters may already have died
- Tabelog moves to subscriber service
- Japan's current account surplus up in July
- Heat drives Japan Aug power output to near record
- Rice glut is back

-> 234,000 oldsters may already have died

The lack of connected citizen registration systems between
central and local governments appears to be the main source
of blame for the revelation by the Justice Ministry that up
to 234,354 people registered as being older than 100 may in
fact have already died. The Ministry has just conducted a
survey and has found 77,118 cases of people who would be
over 120 years old, and even 884 people who would be at
least 150 years old...! ***Ed: This all goes to show that
for all the control Japan's various government bodies want
to have over their citizens' whereabouts, none of it counts
for much if errors of this magnitude can happen. We'll be
interested to see the world rankings for Japan as home of
the longest lived people after this is all sorted out.**
(Source: TT commentary from Japantimes.co.jp, Sep 11,
2010)

http://search.japantimes.co.jp/mail/nn20100911a1.html

-> Tabelog moves to subscriber service

After having built the eating out recommendation engine
site into a monster traffic magnet, operator Kakaku.com is
now planning to start charging users JPY315/month to use
the service, which will be upgraded to work on the iPhone.
Until now, the free audience-ranked restaurant site has
been attracting tens of thousands of visitors a week to see
the best places to eat out. Currently Tabelog has mainly
advertising income, amounting to JPY285m for the 3 months
through to June. ***Ed: It will be interesting to see if
users will continue to come to Tabelog if they have to pay,
or whether a free-to-view competitor will pop up to take
its place.** (Source: TT commentary from nikkei.com, Sep
10, 2010)

http://e.nikkei.com/e/ac/tnks/Nni20100910D10SS939.htm

-> Japan's current account surplus up in July

Although Japan is in a terminal state of decline and the
yen is at a record high, exporters appear to have enough
momentum and know-how to continue earning substantial
export earnings. The Current Account for Japan rose by an
impressive 26.1% in July compared with a year earlier. The
surplus amounted to JPY1.676trn (US$20bn). This result was
largely due to an increase of 24.7% in exports and a 15.7%
decrease in imports. ***Ed: With the high yen, imports will
start to gain in volume, pulling the numbers back down
again over time.** (Source: TT commentary from
channelnewsasia.com, Sep 8, 2010)

http://tinyurl.com/33pozw5

-> Heat drives Japan Aug power output to near record

Hot weather drives up the use of air conditioners and
therefore electricity. The nation's power companies cranked
up their coal, LNG, and oil fired power stations by 13.2%
to a near-record 96.17bn kw/hrs to meet the extra demand.
Most of the extra power came from the burning of 830
kiloliters of oil, up 74% over last year. ***Ed:
Expectations are that once the weather cools down next week
and the week after, demand for power will fall
significantly, since industry is not consuming at the rate
it did before the Lehman Shock.** (Source: TT commentary
from reuters.com, Sep 10, 2010)

http://af.reuters.com/article/energyOilNews/idAFTOE68901F20100910?sp=true

-> Rice glut is back

After the price rises in global wheat supplies last year,
and in advance of any possible shortage in the same crop
this year, it appears that Japan is headed for another
surplus in rice. Prices for early harvested Koshihikari
stocks has fallen by 8% below last year's prices, to JPY14,400
per 60kg on the wholesale market. Surprisingly, the
glut is occurring even as the government runs a new program
to reduce the amount of rice being planted by paying out
subsidies of around JPY15,000 per 1,000 sq. m. of rice
paddies left uncultivated this year. ***Ed: We find it
strange that speculators are not taking advantage of what
may be a global wheat shortage this year, due to the crop
failures in Russia.** (Source: TT commentary from
nikkei.com, Aug 30, 2010)

http://e.nikkei.com/e/ac/20100830/TNW/Nni20100830PR4RICEP.htm

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

***------------------------****-------------------------***

+++ CANDIDATE ROUND UP/VACANCIES

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- Data Center Engineer, JPY3.0m – JPY5m
- User and Network Support Engineer, JPY4.5m – JPY5.0m
- SAP Helpdesk, central Tokyo JPY3.5m – JPY6m
- Security Sales, Global Vendor, JPY8m – JPY10.5m
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-----------------------------------------------------------

***------------------------****-------------------------***

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-----------------------------------------------------------

---------------- ICA Event - September 16 -----------------

Speaker: Naveen Ravindran, CEO-Endeavor Japan
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Details: Complete event details at http://www.icajapan.jp/
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Date: Thursday, September 16, 2010
Time: 6:30 Doors open, Buffet Dinner included and cash bar
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- Corporate Tax Update
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-----------------------------------------------------------

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors at terrie.com.

*** No feedback this week.

***********************************************************
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+++ ABOUT US

STAFF
Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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