The leasing markets and real estate fundamentals remain healthy across most sectors in Japan as of March 2020, according to a report by DWS Group dated May 2020. Office vacancy is stable across all major markets, but over the course of the year, there could be a gradual increase, says the asset manager. Rents at residential and logistics properties have also posted healthy growth and are expected to receive resilient demand, even amid Japan’s economic downturn.

Commercial real estate transaction volumes in the rolling 12 months to March 2020 have dropped by 20% from the previous year, says DWS. However, cross-border investment activities remained relatively strong across the residential, hospitality and industrial sectors.

Particularly, the luxury retail and hospitality sectors are expected to be severely impacted in the coming months following the government’s restrictions. Tourist consumption in Japan has posted a sharp decline in the first quarter of 2020.

The J-REIT index experienced a historic plunge in March 2020, making the steepest 49.5% decline in one month, or 28% in total since the end of 2019. The decline is consistent with major global listed REIT indices. In Singapore, REITs have declined by 22%. In the US, the decline was 24% and in Australia, 33%.

The Japanese economy, which has been negatively impacted by an increase in consumption tax from 8% to 10% in October 2019, has been further ravaged by Covid-19, says DWS. To combat the pandemic, the Japanese government only allowed essential businesses to open under a state of emergency declared for April 7 to May 25. It is looking at gradually allowing more businesses to resume operations.

As such, Japan’s real GDP is estimated to decline by 1.8% in the first quarter of 2020 and is expected to decline even more sharply as the global supply chain and trade disruption continues through the second half of the year, says DWS.