On November 23, it was announced that Osaka will host the 2025 World Expo. This is a heaven-sent opportunity to raise Osaka’s profile internationally. The news is expected to not only boost the area’s real estate market, but also help build an economy to rival Tokyo’s.
Hosting the world expo promotes improvement of urban functions
Osaka has won the bid to host the 2025 World Expo. Under the theme of “Designing Future Society for Our Lives,” Osaka Expo aims to be a “People’s Living Lab,” a vision of a society that has been optimized through innovative technologies like IoT, AI, and Big Data and so on. The Expo will last 185 days, from May 3 to November 3, during which it is expected to draw 28 million visitors, including 3.5 million from overseas—10% of the total expected visitors. Risona Research Institute estimates that the event will have an economic effect to the tune of 2.2 trillion yen.
What impact can we expect the World Expo will have on Osaka’s real estate market? Holding major international events like the Olympics and the World Expo always involves improvement and renovation of the host city’s functions— or, as it is generally called, infrastructure development. This includes developing public infrastructure such as railways, roads, and ports, as well as real estate, which is an essential infrastructure for the functioning of a city. In fact, when Tokyo won the bid to host the 2020 Olympics, major developers rushed to launch large-scale redevelopments one after another. Needless to say, these developers were encouraged by the relaxed regulations in the Tokyo area due to its status as a National Strategic Special Zone. Not only that, but with Tokyo being the subject of growing global attention thanks to the Olympics, the Games are seen as the perfect opportunity to present the appealing points of Tokyo as an international city and attract “Capital”, “Business” and “Talent” from around the world.
In all likelihood, the same will go for the Osaka-Kansai Japan Expo. The Expo will take place in Yumeshima, a man-made island located off of the western end of Osaka. With hopes of attracting IRs (integrated resorts) in the future, the city plans to build a station at the site of the Expo and extend the Chuo Line of the subway from Cosmosquare Station, its current last stop, to the new Yumeshima Station (name not yet finalized), but the capacity of the subway is hardly big enough to transport the expected volume of visitors to the World Expo. It is hoped that the JR Sakurajima Line will also be extended, but if railways alone turn out to be unable to meet the demands, other forms of transportation, such as a light rail, bus rapid transit and monorail are likely to be introduced. It is highly likely that the new transport infrastructure development will stimulate real estate development. Turning to Tokyo, we see developers working to make the city more attractive through redevelopment—Mitsui Fudosan in Nihonbashi, Mistubishi Estate in Marunouchi, Tokyu Group in Shibuya, and MORI Building in Toranomon, to name a few examples. This is the result of competition principle among developers. Meanwhile in the Kansai region, there are a number of key developers. Big-name general contractors and general trading companies with roots in Kansai want a piece of the pie, as do local companies—of the companies playing the development game, those that call Kansai home include railway companies such as JR West, Hankyu Hanshin Holdings, Nankai Electric Railway, Kintetsu Railway and Keihan Electric Railway, energy companies such as Kansai Electric Power and Osaka Gas, house manufacturers such as Sekisui House, and local developers such as Daibiru and Keihanshin Building. It is also unlikely that major developers based in Tokyo will just stay put and look on in envy. Redevelopment projects that involve negotiation with administrative authorities take at least five years, but we have seven years until the World Expo. It is expected that urban renewal driven by private capital will further increase the value of Osaka’s real estate market.
There will be enough demand to fill more space created by redevelopment
The World Expo lasts longer than the Olympics, but will redevelopment projects for the purpose of about a six-month event really lead to demand for real estate? Some may be concerned that the answer is no. Considering the current state of Osaka’s real estate market, this concern is likely to prove unfounded. There are only three large-scale redevelopment projects currently planned in Osaka—Orbic Midosuji Build, scheduled to be completed in 2020, Osaka Umeda Twin Towers South, scheduled to be completed in 2022, and the Umeda 3-chome Project (the name of which has not yet been finalized). The estimated supply of grade A office space in Osaka for 2018 to 2025 is a mere 257,000 m2. This is only 47% of the average for the past 10 years. Meanwhile, the vacancy rate for the third quarter 2018 is 1.1%, and rent has increased by 11% year-on-year. It is evident that the city is suffering from a shortage of office space. As a side note, vacancy rate of grade A office space in Tokyo is 1.8%, and the rent there hasn’t increased by more than 2.9%. In comparison, the growth in Osaka is outstanding. This boom has drawn the eyes of investors to Osaka. In 2018, the Osaka area witnessed 15 mega-deals involving more than 10 billion yen, and transactions in third quarter 2018 have reached a record-high amount. The buyers were mostly foreign investors. Tokyo will see a large supply of grade A office space in 2018 to 2020 and level off afterward. On the other hand, Osaka has limited amount of new supply, and investors in and outside of Japan see it as a promising market with potential for further growth. They can expect enough demand from tenants even when they have more new supply of office space as a result of redevelopment, as well as buyers who wish to buy that real estate.
Yumeshima Island, where the Expo will be held, is a symbol of suburban areas that were developed during the rapid economic growth, but at the same time it also represents a “bitter legacy” of developments that were set aside and became unprofitable when the bubble burst—other remainders of this bitter legacy include neighboring Sakishima (Nanko Port) and so on. Tokyo also has a similar past: redevelopment of the bay area stood still as a result of the bubble bursting. This unused land in the bay area will be used efficiently as the main venue for the Tokyo 2020 Olympics. Now, Osaka is provided with a golden opportunity to turn the tables and transform its Osaka Nanko Port area—including Yumeshima—into a true legacy. Former Olympic host cities London and Sydney successfully repurposed old warehouse and factory sites and contaminated land whose soil had been polluted through waste treatment in preparation for hosting the sports event. Osaka Expo is also expected to revitalize the city’s wasted land.
A one-in-a-million chance to let the world know the city’s brand
We've focused on the World Expo’s influence on the real estate market, but from a macro perspective, this event should be recognized as a one-in-a-million chance for branding—for Osaka to show the world its charms. As mentioned above, competition among the world’s cities is fiercer than ever, and the attractiveness of a city has become such a critical factor that a country’s economic situation depends on it. However, according to a JLL’s report, World Cities: Mapping the Pathway to Success, Osaka falls into the city group of “National Growth Engines,” and although it has both a big population and a big economy, its attractiveness as a city (and as an economy) is hardly understood sufficiently on a global level. Osaka has the eighth biggest economy of any city in the world, toe-to-toe with the “Big Seven”—seven global major cities including Tokyo. On the other hand, the city falls short in categories like “soft power,” which represents the level of global recognition, and “gateway function,” which evaluates connectivity with other countries. In short, Osaka’s weaknesses as a city can be summed up into two points: internationalizing the city and establishing its brand. Hosting this World Expo will be a golden opportunity to overcome both of these challenges.
Establishment of a shared economy with surrounding urban areas
Osaka should not monopolize the benefits of the World Expo. The event will also be a great opportunity to build the regional economy and strengthen ties with the surrounding core urban areas. Working together with surrounding urban areas like Kyoto and Kobe, Osaka could create a regional economy in Japan to match Tokyo’s. The idea of a regional economy comprised of multiple urban areas has already hit the mainstream in the world of urban development, and there are several well-known examples. The city of San Francisco and its neighbors, including Oakland as well as the area that has come to be known as Silicon Valley, form a tightly interconnected regional economy—the San Francisco Bay Area. Amsterdam, Rotterdam, the Hague, and Utrecht formed an alliance known as Holland Metropole. China's Greater Bay Area is made up of Hong Kong, Shenzhen, Macau, Foshan, and Guangzhou. Osaka is a commercial city. Kyoto is a major tourist destination that has been a host to a number of international MICEs. Kobe is a port city, and home to hubs of academic research and development, including advanced medical care. By complementing each other, these three cities have the potential to rapidly progress into an international urban area that stands out from Tokyo.
Osaka is planning a series of events from now until 2025 that will attract global attention. The city is a potential location for an IR, and will host the G20 Summit in 2019. In 2021, after the Tokyo Olympics, the Union of Kansai Governments will hold the World Masters Games, and an IR will open in 2024 at the earliest, after enactment of IR implementation act and approval as a business area.
Along with transportation and communication infrastructure, real estate plays an important part in urban functions and in urban competitiveness. It is not simply the physical material that a city is composed of, but a driving force to lead a city to success. Impressive, symbolic buildings that create the feeling of uniqueness, office spaces that enable flexible working styles for better quality of life, sustainable buildings built with aspirations for a low-carbon society, prop-tech that combines technology and property—real estate plays a major role in the future urban society. Therefore, the theme of 2025 World Expo, “Designing Future Society for Our Lives,” also echoes in the field of urban development. We expect that the whole city, filled with technology and ideas for a sustainable society, will showcase its vision to the world.