Compact-type apartment market rebounding after 7 years

The compact-type apartment market in Tokyo is rebounding after seven years, but is it sustainable?

Sales of compact-type apartments (those with a floor area of 30 ~ 50 sqm) in Tokyo’s 23 wards are reaching levels not seen since the mid-2000s. According to consulting firm Total Brain, the average purchase application ratio (the percentage of apartments that received applications to purchase within the first month of sales) was 71.3% for apartments released for sale between January and August 2013. This is the first time that the ratio has reached the 70% range since 2006 and is edging closer to the record high of 71.4% seen in 2005. 

Improving supply and demand

Greater Tokyo went through a mini property bubble in 2007 ~ 2008. The average price of a compact apartment in Tokyo’s 23 wards had increased from 757,600 Yen/sqm in 2005 to 878,800 Yen/sqm by the peak of this recent bubble.

When the bubble burst in 2008, the purchase application ratio dropped to 49.6%. It hovered around the 60% range for the next few years, but started to pick up again in 2012. 1-bedroom apartments were the first to see a rebound in sales. This year, sales of 2-bedroom apartments have also started to pick up.

Compact apartments Tokyo 2013

The reason for the improving application ratio is due to a better balance between supply and demand.

Compact-type apartments are more suited to central Tokyo, or areas that offer convenient access to central areas. Total Brain says that for conditions to be in balance, 10% of the new apartment supply should be compact-type apartments. This means that the annual supply of compact apartments across greater Tokyo should be around 4,500 ~ 5,000 units. Between 2010 and 2011, the supply within Tokyo’s 23 wards exceeded 6,000 units, but by 2012, the figure dropped to 4,849 units. The total supply between January and August 2013 is just 2,674 units.

While one would assume that these compact-type apartments are sought out by investors, the majority of buyers are single owner-occupiers in their 30s and 40s – many of which are women.

Properties that have been marketed to female buyers have seen strong sales. One example is Crevia Shin-Nakano in Nakano-ku. Apartments in the 10-storey building have an average size of 49.55 sqm (533 sqft). Although completion is not expected until February 2014, all 42 apartments sold out within the first six months of sales. With an average price of 850,000 Yen/sqm, it was a little more expensive than other apartments in the neighbourhood.

The developer, Itochu, held focus group sessions with women to find out what they valued most in an apartment. They found out that practical features were preferred over a high-grade finish.

Crevia Shin Nakano
Sold Out: Crevia Shin-Nakano

However, single female buyers are not in huge supply and pricing is imperative to attracting them. Single female buyers tend to have an annual income between 4 ~ 6 million Yen. A representative from Itochu said that pricing anything over 35 million Yen would mean losing out on this market.

The managing director of Total Brain said that compact-type apartments have a price ceiling of around 1,000,000 Yen/sqm.

However, the improving property market may push prices over the limit.

The average price of a compact apartment in Tokyo’s 23-ku exceeded 900,000 Yen/sqm in 2013, and is now higher than it was during the last mini-bubble.

Compact apartments Tokyo 2013 2

The latest increase in prices is due primarily to a turn around in land prices after years of decline as well as a steep jump in construction costs. Furthermore, increased stock prices and an expectation of rising property prices has led many wealthy investors to purchase apartments for investment-use or as second homes. Foreigners seeking capital gains have also been active in the market.

Despite growing demand, rising construction costs may push apartment prices closer to their limit and the main buyers of these compact-type apartments could eventually be priced out of the market.

Source: Toyo Keizai, November 14, 2013.

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