JAPAN - Japanese real estate has delivered its first negative year-on-year capital returns, according to figures released by the Investment Property Databank (IPD) which run to the end of the third quarter 2008.

The IPD Japan Monthly Index has been recording the decline in the rate of capital appreciation since July 2007 and the fall of the capital return index since May 2008, but September 2008 was the first month to record a negative annual capital return, at -0.1%.

Toshiro Nishioka, managing director at IPD Japan, said: "While we have only published the capital returns for individual sector level, you can see +/- zero percent capital returns for retail and residential sectors up to May 2008. That said, it is likely that these two sectors can lead to the negative capital return for the year to September 2008 for All Property level."

Total returns for the year to September 2008 were 4.8%, down from 6.1% the previous month, and are now only being kept positive thanks to the income return.

The office sector remained the best performing sector, returning 10.8% for the year to May 2008, while retail property has replaced residential property as the worst performing sector, returning 4.7% for the year to May 2008. Residential property delivered returns of 5.1% for the same time period.

"The rent for retail assets was believed to be stable, based on its relatively long-term contract. However, it turned out that it can be rather volatile especially for shopping centres where their key tenant has stronger negotiation power," Nishioka told IPE Real Estate.

"Furthermore, consumer confidence in Japan has been deteriorating since last summer, which reflects the higher cap rates to be used for valuation of the asset," he added.

Tokyo offices recorded the highest returns, with a total return of 11.6% to May 2008. Nagoya offices' capital growth turned negative for the six months annualised to May 2008, at -0.7%, and the last three months' annualised returns suggest capital returns of offices in Yokohama & Kawasaki and Fukuoka are also turning negative.

According to Nishioka, the highly competitive nature of the Japanese real estate market in the last couple of years may have helped make it over-priced and the current situation is partly an "adjustment stage" in its cycle.

Commenting on what needs to be done to help the Japanese market, Nishioka said: "There is no magic to help the market and it will recover from the current situation only when players can identify the risk involved in the market more clearly and pricing is reasonable."

If you have any comments you would like to add to this or any other story, contact Poppy Sketchley on + 44 (0)20 7261 4629 or email poppy.sketchley@ipe.com