Article

Compact city scheme opens the door to the future for Osaka and Kansai region

November 27, 2019

Osaka and Kansai area always significant potential with the 7th largest GDP and 16th largest population in the world. However, it was constantly compared to Tokyo and the metropolitan area and may not have been given the appreciation it deserves in Japan. Now, Osaka is finally ready to present its full potential. Effective city planning is attracting residents as well as inbound tourists, which in turn resulted in rapid increase in commercial real estate, and the rents are rising in all directions. In addition, there are a series of developments and events that are expected to have large economic impact, such as hosting of the World Expo; development plan for integrated resort (IR); and phase II of Umekita development, arguably the last of the prime development areas available in Japan. Let us look deeper into the source of appeal of Osaka, which is about to flourish.

One of the key features that define Osaka is just how compact it is geographically for a city with population over 2 million. Network of roads called “Suji” and “Tori” run through a neat grid of town districts, with the convenience further enhanced by subway and bus routes. Foundation of this orderly development is said to have originated in the 16th century when Hideyoshi Toyotomi built the Osaka castle and the city thrived as the “Kitchen of Japan.”

The main districts in central Osaka are located very close to each other, highlighting its compactness. “Kita” area surrounding Umeda and “Minami” area surrounding Namba are the two main commercial districts representing Osaka, and they are only four subway stations or 5km apart, reasonably within walking distance. Although the two areas have very different characteristics, their geographic proximity makes them appear as an integrated commercial district. This is why Osaka central district is known to be an easy stroll.

It is easy to imagine this convenience has strong appeal for inbound tourists. Indeed, many have noted enjoying shopping, restaurants and sightseeing within short distance from the accommodation in their praise of Osaka. The ratio of inbound tourists visiting Osaka also shows a significant trend. The number of inbound tourists for 2018 exceeded 30 million for the first time in history, of which about 40% visited Osaka. This places Osaka ahead of Tokyo and Hokkaido as the dominant destination prefecture. Osaka is no longer a side-trip from Tokyo; it has become the main destination. One of the factors supporting this popularity is considered to be the compact city planning.

Compact geography has also affected real estate development. In recent years, older office buildings are being replaced with hotels and residential buildings, reflecting the increase in inbound tourists and demand for housing located closer to work. Consequently, office floor space has decreased, and shortage of office space is becoming evident. Unit price of JPY 30,000 per tsubo was once considered a dream for Osaka Grade A office buildings, but with the sharp rise of rent, value of office space has increased, and many cases where the dream became a reality have been reported. Increase in residents and tourists in the central area is also creating demand for commercial tenants, and retail rent surrounding Shinsaibashi has risen sharply in the past several years. In particular, drug stores have become a staple as tenants with the highest rent payment capacities, supported by the robust demand from inbound tourists.

Against this strong performance, the number of domestic and overseas investors including funds investing in Osaka commercial properties have increased significantly. Only a few years ago, Osaka real estate market was viewed as an alternative to Tokyo where the investment opportunity was severely limited. However, Osaka is now recognized as an attractive market with significant upside in terms of rent growth. Increased popularity is reflected in the rise in price and fall in investment yield, and some transactions have recorded investment yields similar to that of Tokyo with investors are keenly interested in the Osaka real estate market.

Osaka was built on the foundation created by Hideyoshi Toyotomi and maintained its feature as a compact city whilst undergoing drastic development through the modern history of Japan. It is now preparing for development of large complex facilities. Osaka should thrive as a global leader, projecting its success as a new type of compact city that captures the trend of the times while maintaining its universal appeal.