Friday, October 21, 2005

Next Up on Omotesando

Japan Retail Fund (ticker: 8953) announced redevelopment plans for the Esquisse Omotesando building. The 1982 building is to be demolished to make way for a larger edifice with a cutting-edge design (see above), increasing the leaseable space from 3,780 to 5,000 square meters. This is a surprise - although redeveloping properties is fairly common practice for US REITs, this is the first time for a Japanese REIT, and may portend more such projects by other listed funds.

The structure of the deal is also interesting. In May, JRF had bought an adjacent parking lot to add to the permitted floor area, allowing it to build larger. Next, JRF is actually selling the building (but not the land) to Takenaka Corporation, which will pay a ground lease to JRF during the construction period. In this way, the REIT’s earnings are not affected too much (JRF has cut its 2006 dividend projections by 2%, presumably to accommodate this loss in income). Finally, JRF has first right of purchase after the new building’s completion, slated for November 2007.

Takenaka buys the building for 1.2 billion, then they pay ground rent for two years, and in 2007, they sell it back to JRF for 6.0 billion yen, according to the Nikkan Kensetsu newspaper. That’s plenty of money for a fancy job.

Esquisse may be anchored by Gucci, Chanel, and YSL, but the rest of the building is undertenanted. Whenever I go it always feels devoid of customers, and the other tenants are less impressive. I’m sure a lot of people agree that the building is performing poorly, in spite of the polished façade. Their current occupancy is 92%, but this hides the fact that the average rent is only 18,650 yen per tsubo per month. On Omotesando, where ground-floor outlets regularly go for well above 50,000 yen/ts, that means failure.

To be fair, the current building is a lemon. Previously it was a youth-oriented department store called Vivre, but the owner, bankrupt retailer Mycal, closed it in 2000 due to falling sales. It was sold to Australian finance group Babcock & Brown and Mitsubishi Corp. for 11.4 billion the following year. The building was refurbished and retenanted - I was pretty impressed with the facelift. After a failed attempt to include it in their listing portfolio, JRF - which is also sponsored by Mitsubishi along with UBS - finally bought it for 14.5 billion in 2004, but tenants and customers apparently still think it's a dud. Well, let’s hope JRF gets it right this time.

The new structure looks set to be yet another ‘signature’ building on a street which is already chock-a-block with creations by the world’s most fashionable architects. JRF’s press release shows a computer rendering of the design (above); the Nikkan Kensetsu says that a “Dutch architectural firm” was hired. Does anyone know who this might be? It looks like an MVRDV job to me.

Update (10/23) - it is indeed MVRDV (thanks Jean Snow)

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エスキス表参道 再開発 日本リテールファンド 竹中工務店 三菱商事 バブコック&ブラウン


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