The 2011 Japan earthquake and what it means for the real estate market

One month has passed since the March 11 Tohoku earthquake and tsunami. With strong aftershocks continuing and a nuclear disaster that was just upgraded to the maximum level, uncertainty remains over what will happen to the Japanese economy in the short and medium term.

Aftershocks are expected to continue for at least a year, with some experts suggesting increased earthquake activity to continue for the next 10 years.

So what effect has this disaster had on the Tokyo and Japanese real estate market?

Foreign buyers of real estate

More than 531,000 foreigners left Japan in the 4 weeks from March 12 to April 8. The total included 185,000 Chinese, 107,000 South Koreans and 39,000 Americans.

The crisis gripping northern Japan is expected to dampen the flow of money going from China into Japan’s property market.  Michael Cole, director of research at Colliers International in Shanghai said “We can expect Chinese interest in buying homes or other real estate in Japan to drop off precipitously in the near to mid-term.”

Demand for Earthquake-Proof Buildings

Many are predicting stronger demand for earthquake-proof buildings, both residential and commercial. Until now, buyers of second-hand apartments in Tokyo had prioritized value for money or relatively low-cost properties. However, the Nikkei Shimbun reports a predicted shift of priority towards earthquake-resistant buildings which are typically more expensive than older properties.

Earthquake-resistant may refer to buildings built to the latest building codes. In 1981/1982 the biggest change in building codes was made. Buildings built prior to this change are called “kyu-taishin” and those built afterwards are called “shin-taishin”.

A new meaning to ‘location, location, location’

Properties in central Tokyo may see an upswing in demand. Why?

Transport was shut down on the night of the earthquake, forcing everyone to walk home from work. For many who live in the suburbs, this was a 3.5 – 5 hr walk. Scheduled power cuts are not expected to include Tokyo’s 23 ku’s. Furthermore, the quality or stability of the land underneath the apartment building, or house will become more of a priority to buyers.

Avoid reclaimed land

Higher priority will be placed on apartments and houses built on stronger ground. Tokyo bay has 24,955 hectares of reclaimed land. Several areas of low-lying reclaimed land along the bay of Tokyo suffered from liquefaction. Approximately 1,100 homes and buildings were damaged or destroyed. This included the newly developed Toyosu area and other areas of Koto-ku. In Edogawa-ku, 8 homes were left leaning. Liquefaction also caused cracks in parks and roads in Minato, Chuo and Ota-ku. An apartment building suffered subsidence-related damage in Kanazawa-ku, Yokohama.

Developers of new apartment buildings in these areas, such as Nomura’s planned 52-storey 600-unit Shinonome Tower near Toyosu Station, have halted sales for a few months. Developers may be reluctant to lower apartment prices due to the high cost of land and construction, leading to an increase in inventory, said Akio Fukuda of the Real Estate Economic Institute.

Miyoshi Kaido, a manager at Sanyu Appraisal Corp, is expecting to see a lot of second-hand apartments in these areas put up for sale by owners who have been reminded of the danger and risks. Kaido also said some sellers were willing to sell for as low as 50% of their purchase price.

Shinkiba Liquefaction
A sunken police box in Shin Kiba
Shin Toyosu Liquefaction
Liquefaction at the site of the new Tsukiji Fish Market in Shin-Toyosu

The hardest hit was Chiba Prefecture’s Urayasu area where 85 percent of the land was affected. Severe liquefaction can cause underground water pipes to burst, shutting off the water supply to residents. It can also cause land subsidence which can cause homes to collapse. “Even at half the current price, it would be hard to sell properties in Urayasu because no one would want to buy in the area,” said Satoshi Kawahara, president of Real Bois Co., a realtor based in the city.

Developers of new apartment buildings in these areas have halted sales for a few months.

Masahiro Mochizuki, an analyst at Credit Suisse Securities Japan, said the March earthquake and tsunami will probably put an end to last year’s recovery in apartment prices in Tokyo. In the Tokyo bay area, prices may drop 10% in 3 to 6 months. Mochizuki also added that there may be a problem with demand in the future as some people may not choose to live near the harbor despite improvements in landfill technologies.

Takashi Nonaka, President of Mizuho Trust & Banking, said there was an instantaneous drop in demand for real estate in areas that had experienced liquefaction. “Buyers’ enthusiasm has fallen sharply after they saw buildings fall, cracks in walls and liquefaction of area with reclaimed land,” Nonaka said in an interview with Reuters.

“There are also suspicions about damage done by the quake to properties people were planning to buy,” he said.

Mikihisa Hirai, president of Atlas Partners Japan, predicts a drop in waterfront property prices. “If it was just an earthquake, things would probably go back to normal. With the tsunami, it’s a different story. What’s more of a concern is that with seashore properties, there is nowhere to escape.”

Energy Crisis

The TEPCO scheduled rolling blackouts currently do not include Tokyo’s 23 ku’s. Central Tokyo areas such as Minato-ku, Shibuya-ku, Shinjuku-ku are essential commercial and economic areas and will not be subject to scheduled blackouts, while outer areas that are mostly residential are experiencing electricity cuts.

This may result in a decline in popularity for apartments on very high floors. Residents living on high floors (eg. 50th floor) were stranded when elevators shut down during the quake. Some are choosing to move to mid-level or lower floors where it is easier to use the stairwell to evacuate in emergencies.

The power cuts mean that transport such as trains are stopped and traffic lights do not work.

The power crisis is also having a negative effect on business and is making an economic recovery difficult. Power shortages likely to continue for some time, putting strain on companies and factories in and around Tokyo. In the hot summer months, peak demand for power is feared to outweigh supply despite energy-saving measures.

Shift away from Tokyo to Osaka

Many offices temporarily shifted operations to Osaka and many workers and executives followed. Some may consider setting up permanent offices in Osaka to diversify risk. Serviced office provider, ServCorp, and recruitment company, Robert Walters, are both anticipating business in Osaka to pick up as a result. In fact, ServCorp’s Osaka office spaces are now fully occupied. Mitsubishi Estate has reported a significant increase in inquiries for office space in Osaka, mostly from non-Japanese companies.

Decline in Office and Residential Rents and Returns

The President of Atlas Partners Japan said property owners may see a reduction in rental income as rolling blackouts force many stores to close early. Tenants affected by rolling blackouts may ask for a lower rent.

A representative of Ken Corporation, an expat real estate agency in Tokyo, reported only a small number of apartment contract cancellations since the earthquake, but a surge in inquiries about the terms of breaking a lease from their expatriate clients.

Miki Shoji Co., reported office vacancies in Tokyo for the end of March, 2011, hit a record 9.19%. This is the highest rate since Miki Shoji began compiling data in 1990. The effect from the quake has caused some companies, including foreign businesses, to cancel plans to move.

Prudential Financial Inc. is cautious about investing in Japan and is taking a ‘wait-and-see’ approach until the situation appears to have stabilized. Although they had previously set aside a large amount of capital to invest in Japan,  the fund is taking a ‘step back’ on Japan for the moment.

The Wall Street Journal reported that property values throughout the country could tumble, if economic repercussions result in lower demand for office space, stores and hotel rooms.

DTZ, a UK real estate advisor, has estimated prime Tokyo office rent to fall 9.1% in 2011. Their initial estimate for 2011 was a 6.5% fall, but following the earthquake they have revised this estimate downwards to 9.1%.

Direct hit to the tourism industry

As mentioned above, over 531,000 foreigners left Japan in the 4 weeks following the earthquake. A total of 244,000 foreigners left Japan in the week after the quake – compared to 140,000 who left in the week before the quake. Many foreigners and Japanese also left Tokyo and Eastern Japan for Osaka and areas further away from the disaster and aftershocks. On March 18th, the Kansai International Airport departures wing was crammed with travellers leaving the country. The airport hotel quickly became fully booked.

The Shangri-La Hotel in Tokyo temporarily closed until April due to the impact from power shortages and food supplies. With the majority of hotel patrons being foreigners, the sudden drop in tourists has resulted in almost no hotel guests.

Airlines have significantly reduced the number of flights to Japan due to a drop in demand following the quake.


Although properties owned by funds only suffered cosmetic damage, many of the publicly listed Real Estate Investment Trusts (REITS) have lost between 10~20% of their share value. Mori Hills REIT Investment Corp. shares fell 20% following the quake.

Global Logistic Properties, a Singapore fund, suffered USD 38.8 million in damages to their Japan property portfolio. This is only 0.6% of their total portfolio value. They have also estimated a loss of rental income of USD 10.8 million. They are, however, expecting an increase in demand for more modern logistic facilities that are less prone to earthquake damage.

A recession or recovery?

Some experts are predicting a high chance that the economy will fall into a recession, while others believe that the economy will recover later this year or in 2012.

Morgan Stanley predicts annualized GDP to fall by 6% from April – June. Goldman Sachs lowered its forecast for annual national GDP to from 1.3% to 0.7%. The IMF revised their forecast from 1.7% down to 0.8%, but are expecting the economy to recover in 2012.

While Japan’s economy typically rebounds after natural disasters, the ongoing crisis at the Fukushima Nuclear Plants could potentially have a long-lasting effect on the economy.  Foreign countries have taken an over-cautious stance against possible radiation fears, causing further damage to Japan’s image as a relatively safe country. China reportedly turned away a Mitsui OSK container ship that had ‘higher than normal radiation’ after stopping in Tokyo Bay for a few hours. Countries have stopped imports of produce from Japan. These fears will have a disastrous effect on Japanese exporters for some time to come.

With disruptions to the supply chain and power shortages set to continue for a while, the short to mid-term outlook is not a positive one.


“Japan quake spooks its property recovery” The Wall Street Journal, March 16, 2011.
“Shangri-La shuts Tokyo hotel following quake” The Vancouver Sun, March 22, 2011.
“Japan earthquake damaged US$38.8mn worth of Global Logistic Properties’ total portfolio” Singapore Business Review, March 14, 2011.
“Japanese Investment In Chinese Real Estate Poised To Fall On Rebuilding At Home” Forbes, March 16, 2011.
“DTZ forecasts extended drop in rents due to earthquake” Nikkei Real Estate Market Report, March 24, 2011.
“Tokyo residents weight exit options” The Financial Times, March 25, 2011.
“Disaster in Japan: Come back in 10 years time” The Economist, March 24th, 2011.
“Japan shipper mulls future of vessel with “abnormal” radiation” Reuters, March 29, 2011.
“Japanese treated for radiation in China” Reuters, March 25, 2011.
“Crisis Prompts Exodus of Executives From Tokyo” The New York Times, March 17, 2011.
“Japan’s Factory Output Rises, Evidence of Economic Resilience Before Quake” Bloomberg, March 30, 2011.
“Asian Stocks Fluctuate as Earnings Temper Goldman Sachs Cutting Japan” Bloomberg, March 29, 2011.
“Osaka may trump Tokyo as energy surplus meets quake risk” Bloomberg, March 30, 2011.
“Office vacancies in Tokyo, Osaka rise to record after worst Japan tremblor” Bloomberg, April 7, 2011.
“Liquefaction damage widespread” The Yomiuri Shimbun, April 10, 2011.
“Prudential Real Estate Reconsiders Japan Investment After Quake” The Wall Street Journal, April 11, 2011.
“Strain from Japan earthquake may lead to more seismic trouble, scientists say” The Washington Post, April 11, 2011.
“IMF cuts Japan growth forecast in wake of quake damage” BBC News, April 12, 2011.
“Tokyo Bay Home Demand to Drop as Quake Turned Land to Mud, Shattered Pipes” Bloomberg, April 13, 2011.
“244,000 foreigners leave Japan in week after quake” The Mainichi Daily News, April 16, 2011.
The Nikkei Shimbun, March 30, 2011.
Reuters, April 5, 2011.

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