Apartment developers are facing an impending crisis as construction costs continue to rise.

The average cost per apartment has risen almost 20% to 23 million Yen in the past year. Average construction costs per square meter are now around 300,000 Yen.

To make things worse, land prices are now starting to increase. 

Developers find it helpful to calculate the cost of land by the total floor space that can be built on a site. For example, a 1000 sqm site may have a building volume ratio (yosekiritsu) of 300% which means a 3000 sqm multi-storey building can be built. If the total land price was 900 million Yen, the price per square meter of floor area would be 300,000 Yen. Land prices outside of the Yamanote Line are already exceeding this number.

If construction costs are 300,000 Yen/sqm and land costs are 300,000 Yen/sqm, the basic cost price would be 600,000 Yen/sqm. There are additional costs such as planning and engineering, fitting out a showroom, paying commission to the sales office, advertising fees, and of course, the developer’s profit margin of 15 ~ 20% which has to be tacked on to the final price.

By this stage, the minimum price offered to apartment buyers would reach 1,000,000 Yen/sqm.

For an average 76 sqm (818 sqft) apartment, this would amount to an asking price of 76 million Yen – exceeding the budget of the typical salaryman.

More and more developers are finding it hard to offer new apartments for less than 1,000,000 Yen/sqm, both in central Tokyo and in the outer suburbs. For many, their only option is to reduce their profit margins to between 5 ~ 10%. This is dangerously low as any unforeseen expenses or a shift in the local market could put their project in the red.

Following the Lehman Shock in 2008, a number of Japanese developers went bankrupt. Why? They simply built too many apartments that proved too expensive to sell.

Source: Zakzak, February 23, 2014.

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