How Japan’s current property market differs from the 2007-2008 mini-bubble

In 2013, Japan’s real estate market began to awaken after a long slumber. This was later confirmed in March 2014, when the latest data on assessed land values (chika-koji) showed that commercial and land values in Tokyo, Osaka and Nagoya rose for the first time in six years.

Many real estate experts are suggesting that the real test, however, will be whether Lone Star Funds can offload the Meguro Gajoen banquet facility in Tokyo for the minimum asking price of around 110 billion Yen. Recent reports suggest that the Government of Singapore Investment Corporation are close to acquiring the property for 134 billion Yen.

Tokyo’s leading indicator of a market recovery can be seen in the Ginza district. With an assessed land value of 29,600,000 Yen per square meter, the land underneath the Yamano Music Ginza Store is the most expensive commercial land in Japan. It increased in value by 9.6% from the year before. Five of the ten commercial land survey sites with the highest gain in land values were located in Ginza.

Shigeko Mizutani, Executive Director of Valuation and Advisory Services at CBRE, said demand is strong from retail stores wanting to be in the Ginza area, and building vacancies are dropping significantly. The driving force behind this has been the increase in the number of foreign tourists. The total number of foreign visitors to Japan in 2013 broke through 1 million for the first time. Retailers aimed at the tourist market are scrambling to open up new stores and are pushing up rent, which then pushes up land values.

Nagoya, meanwhile, is benefitting from the development of three major projects – the Dainagoya Building, JR Gate Tower and JP Tower Nagoya – which are helping to push up commercial land prices.

Residential land values in the bayside areas in Koto-ku and Chuo-ku have seen an increase following the announcement of the 2020 Summer Olympics. Six of the 10 sites with the highest increase in residential land values were in these areas.

Regional areas, however, are still struggling. In the past, land values outside of major cities tended to increase when values in Tokyo did. This time is different and the difference in land value movements is being more distinct between the cities and countryside.

Rather than wait for an economic recovery to extend across the entire country, smaller cities and towns have to be creative to survive. Nagaizumi Town in Shizuoka Prefecture has managed to boost its local population by offering free medical services for children up to the age of 14. The increase in demand from new residents has helped to improve land values.

Improving rents and occupancy rates could encourage land values to increase further in 2015, but experts say the current property market is different to the mini-bubble in 2007/2008.

One of the main differences is the current shortage of bargain properties. During the last mini-bubble, major funds made their profits by buying and selling large-scale properties in the short-term. Nowadays there are fewer properties hitting the market. The market is being dominated by pension and insurance funds looking to hold their assets for the next 10 years.

Property financing has also seen a complete change. Where foreign banks were once the major source of finance for major deals, the past year has seen the market taken over by Japanese megabanks.

Meanwhile, foreign funds have turned their attention away from direct real estate investment and are instead focusing on acquiring companies with vast real estate holdings. For example, railway companies, storage and logistics companies tend to own a lot of land as part of their balance sheet.

The rising construction costs could hamper the recovery. If developers are unable to increase the final selling price of their apartments, retail or commercial buildings, they are forced to find contractors who can do the job for a cheaper price. This, however, is proving more and more difficult.

Major developers have a bit more clout in the industry, but the small to medium-sized developers are facing an impending crisis. We are now starting to see development sites sit idle while developers scramble to find construction companies who can do the job without going over budget. The second half of 2014 could see an increase in the bankruptcy rate of smaller developers.

The current property market is expected to remain relatively stable, but the sudden jump in construction costs is creating a bottleneck for some projects.

Source: Shukan Diamond, April 7, 2014.

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