Are the Olympics artificially pushing up property prices in Tokyo?

When it was announced that Tokyo would host the 2020 Summer Olympics, owners of high-rise apartments in Tokyo’s bayside area (an area will host the Athletes Village and several sporting events) were naturally excited by the news. Apartment sales offices saw a dramatic increase in demand from buyers who feel certain that the Olympics is going to push up real estate values in the area.

In an article in the Nikkei Business publication, Eugene Oki from Attractors Lab suggests that recent price rises in the bayside islands may lack the substance to continue at current rates, and urges buyers to take a careful look at the factors behind market trends.

The Olympics will bring much needed infrastructure such as sports facilities and a bus lane to the bayside area of Ariake, Harumi and Kachidoki, but the Olympic games alone are not going to be a strong enough reason for the extension of a subway or train line. Retail and other facilities that improve the quality of life will also take some time to create. As such, it is difficult to say whether the current increase in real estate prices can be maintained after the Olympics are over.

Price growth is heavily dependent on trains and subways, not buses

The biggest influence on price growth in a particular area is the development of train or subway lines. In Japan, a bus route or buss rapid transit (BRT) has rarely been shown to improve property values.

There are plans to introduce a BRT that would connect Harumi Island with the Ginza district. While access to Ginza may sound appealing, the majority of residents in the island areas need access to business areas such as Otemachi, Marunouchi, Shinagawa and Shinjuku. Rather than stopping at Ginza, a bus to Yurakucho Station on the JR Yamanote Loop Line would at least provide commuters with an easier switch to the train system.

Local school and education options are also important for future property values. The quality or reputation of a school is often linked with the income of the students’ parents. If an area lacks reputable schools or convenient access to good schools, it may be difficult to attract families.

As long as there is no easy access to a station on the Yamanote Line and a lack of quality schools, it is difficult to say that prices in this area will continue to rise.

Will the Olympics push prices up? 

There are people who believe that apartments with views of, or access to the new sporting facilities will see prices rise. But this was not the case for the 1998 Winter Olympic Games in Nagano. The facilities built for the Nagano Winter Olympics are now a drain on government finances as they require a huge upkeep. There are very few stories of surrounding real estate values increasing due to the proximity to the Olympic facilities.

The only exception has been Karuizawa which benefited from the high-speed Shinkansen line which has made the popular summer vacation spot just one hour from Tokyo Station. Prices have risen in Karuizawa due to the added convenience the train station brought, but there has been no direct correlation with the 1998 Winter Olympics.

Others might argue that the boost in population following the conversion of the Athlete’s Village in Harumi into private housing following the Olympics will spur development and create more retail facilities. This, however, is limited. An additional 10,000 residents in the Athlete’s Village site might not be enough to meet the requirements of major retailers and retail developments. If access is also poor, it may be difficult to attract consumers to the area, which limits the potential revenue for retailers.

For example, one might assume that a convenience store located within an apartment block with several hundred residents would be able to cover its expenses. However, not every resident in the building is necessarily going to shop at that convenience store. Stores in this situation can often end up running at a loss and in some cases moving out.

Toyosu is a rare case. With the creation of Toyosu Station, the area saw development of retail, commercial and residential projects. A small group of large landholders meant that the area could be redeveloped in a quick pace and on a major scale in accordance with the new subway station. Again, the driving force was the creation of rail transport.

What if you purchased an apartment in the bayside area in 2011?

Demand for apartments in the bayside area is currently high, but what was the situation like three years ago? Following the 2011 Tohoku disaster, the market for apartments on the islands in Tokyo Bay crashed as the risk of living on man-made land in waterfront areas became apparent. Sales in Proud Tower Shinonome Canal Court began just after the disaster and the developer was careful to price apartments at relatively low levels. The average price in this building when new was 710,000 Yen/sqm.

Fast forward to June 2014, and off-the-plan apartments in Bayz Tower & Garden in Toyosu were hitting the market with an average price of 840,000 Yen/sqm.

Even if the boost in prices following the Olympics announcement is only temporary, buyers must consider the possibility that current high prices might also be temporary. It is important to understand whether the current demand is real or an illusion. If Tokyo was hit by an earthquake that caused a tsunami and liquefaction, demand for apartments on these man-made islands could easily vanish as it did in 2011.

There are over 10,000 apartments in the pipeline for the bayside area. In the event of a disaster, buyers for new apartments would drop sharply, and buyers of second-hand apartments would be in even shorter supply.

High construction prices causing buyers to consider second-hand apartments

The recent rise in construction costs is forcing developers to try various ways to limit price increases that are passed onto consumers. Some developers have been forced to shrink apartment sizes so the final end price still fits within their buyers’ budgets.

New apartment prices are comprised of construction costs, land prices and the developer’s profit margin. Rising land and material prices can easily influence the price of a new apartment.

A steep rise in construction cost can lead to some risky cost-cutting by developers as they opt for cheaper earthquake-resistant construction methods. Buildings on reclaimed land are more susceptible to damage from earthquakes due to the soft soil, and buyers must beware of developments using cheaper earthquake-resistant construction methods.

As new apartment prices rise, they tend to drag up the price of second-hand apartments. However, the second-hand market, considered to better reflect actual market conditions, has not seem the same rate of growth. Buyers who have been priced out of the new apartment market are shifting their attention to existing buildings, which are relatively cheaper than new ones and have already passed a real test of earthquake-resistance during the 2011 earthquake.

Redevelopment projects lead to price rises

Environmental factors, such as major redevelopment projects that completely change the neighbourhood, can lead to a rise in property values. Redevelopments can bring new social infrastructure such as retail and commercial facilities around train stations. Such improvements are often reflected in rising real estate prices.

The flurry of activity in the bayside islands is focused on providing necessary infrastructure primarily for the 2020 Olympics. Instead of new train stations, bus lanes will be extended, and instead of retail/commercial facilities, sports facilities (some of which are only temporary) will be built.

While prices have risen over a short period in the area, buyers must be aware that in the absence of the factors mentioned above any price rises could be short-lived. There is a risk that the area could see re-sale values fall, especially if it follows the path of the ‘new town’ developments that relied on bus transport.

Olympic-effect on inland areas only

One factor that can completely de-rail the property market is a natural disaster, such as an earthquake. The bayside islands are particularly liable to price fluctuations as liquefaction and tsunamis can wipe out demand in an instant.

Recent property price rises in the Tokyo area have not been limited to the bayside area and it is unlikely that apartments on the man-made islands will ever exceed prices for similar apartments in more central Tokyo locations. Since the positioning of prices relative to the area has not shifted, in order for property prices in the bayside areas to increase, prices in central Tokyo would have to increase by a larger amount. Central Tokyo has higher demand for residential property, and due to the elevated and strong ground it sits on, it also offers better protection in a disaster.

Source: Nikkei Business Online, August 19, 2014.

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