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KEY EVENTS IN 2019
- The Nikkei 225 ended the year up 18%.
- On October 1, the consumption tax rate increased by two percentage points to 10%. This did not result in any noticeable last-minute rush in demand for new construction. Potential buyers seem unaffected this time around, possibly due to several government tax breaks introduced to offset the increase in consumption tax.
- Interest rates remained low, with 10-year fixed-rate home loans sitting around 0.57 ~ 0.86%.
- Nationwide, commercial Standard Land Prices increased for the first time since 1991.
- Commercial Government Assessed Land Values (chika-koji) increased for the 4th year in a row, with a 2.8% increase in 2019. Residential land prices increased for the second year in a row with a 0.6% increase. Regional residential land prices increased for the first time in 27 years.
In the six months from April to September, the average price of a brand-new apartment released for sale across greater Tokyo reached the highest level since 1991. In terms of affordability, a new apartment in Tokyo’s 23 wards was around 13 times the annual average income. In 2000 it was around 7 times, and during the peak of the asset bubble in 1990 it had reached a multiple of 18.
With prices remaining at high levels, some new projects are taking longer to sell than in the past. Developers, saddled with high development costs due to expensive labour, materials and land values, have little room to lower costs. It seems likely that the price of new housing will continue to remain high.
The supply of new apartments is shrinking. The number of new apartments released for sale across greater Tokyo between January and November reached 24,846 units, down 16.3% from the same period in 2018. A further 6,500 new apartments are expected to have hit the market in December, which would bring the annual total to 31,000 units. This is the lowest level seen since 1992 when 26,248 new apartments were supplied.
Domestic buyers who once would have only considered new construction, are increasingly turning their attention to the existing home market, with existing home sales exceeding new construction. In 2018, sales of existing apartments exceeded new construction for the third year in a row with 37,217 existing apartment sales and 37,132 brand-new apartment sales across greater Tokyo. Since the vast majority of second-hand apartment sales go unreported, the actual difference is likely to be much higher.
From January to November 2019, the monthly transactions of existing apartments in central Tokyo’s three wards of Chiyoda, Chuo and Minato were consistently higher than the 10-year average, in some cases between 25 ~ 55% higher.
Home loan interest rates remain low, with 10-year fixed-rate home loans ranging from around 0.57 ~ 0.86%. Low interest rates increase the borrowing capacity of homebuyers, supporting higher property prices.
DINKS are a growing presence. According to Recruit Sumai Company, the average annual household income of a buyer of a brand-new apartment in greater Tokyo in 2018 was 9.6 million Yen, up 30% from 10 years ago. Of the buyers, 37% had an annual household income of over 10 million Yen – a fifteen point increase from five years ago. While individual incomes may not necessarily be increasing, household incomes are. Two-thirds of the buyers were dual-income households – the highest share in history and a nine-point increase from five years ago.
Office vacancy rates for prime office space in Tokyo’s central five business districts reached a record low of 1.56% in November, while average rents have increased for 71 consecutive months.
Shibuya Scramble Square, a 230-meter tall skyscraper above Shibuya Station, was already fully leased upon its official opening in November. The building has a total floor area of 181,000 square meters (approx. 1.95 million square feet). Many of the tenants are big players in Japan’s tech industry. In mid-2019, Google Japan leased all 21 office floors in the recently completed Shibuya Stream, located across the street from Shibuya Scramble Square. The new head office now takes up 50,000 square meters, allowing them to double staff numbers.
According to JLL, the yield gap on prime office buildings in Tokyo in 2019 was 2.9%, exceeding London’s average of 2.5% and New York’s average of 1.0 ~ 1.5%. Tokyo’s yield gap has consistently outranked London, New York, and Hong Kong, hovering around the 2.5 ~ 3.0% range for the past decade.
Daiwa Real Estate Appraisal put the average purchase price of prime office in central Tokyo at 3,000,000 Yen/sqm in the second quarter of 2019, making it the highest seen since 2008.
The growing inbound tourism industry continues to underpin real estate values across the country, particularly the retail and hospitality sectors. In 2013, foreign tourist numbers reached 10 million for the first time in history, before surging to 31.19 million in 2018. The government is aiming to attract 40 million foreign visitors in 2020, and 60 million by 2030. Provisional data from the Japan National Tourism Organization puts inbound visitors at 26.91 million from January to October, up 3.1% from the same period in 2018, and likely to exceed 30 million for the year.
Japan’s luxury hotel market is, surprisingly, undersupplied, with just 32 five-star hotels across the country. This is far below London (79 hotels), Paris (61), New York (60), and China (137). CBRE has forecasted 80,000 new hotel rooms to be supplied across the country between 2019 and 2021, of which just 5% will be in full-service luxury hotels.
WHAT’S AHEAD IN 2020
New housing prices are expected to remain high. New housing prices are largely driven by the cost of materials, labor and land – none of which seem likely to drop anytime soon. Post-Olympic redevelopment projects are likely to sustain high demand for labor and construction materials, leaving little room for developers to offer cheaper homes.
Unsold new inventory is starting to become more apparent as buyers turn their attention to existing homes which can offer better value for money. The market for existing homes tends to follow that of the new construction market. When new home prices rise, they also pull up the price of existing homes.
40 million foreign tourists are forecast by the Cabinet Office to visit Japan this year. This has a high correlation to real estate values, as the staggering growth in foreign visitors to Japan has been supporting the retail and hotel industry, thereby driving up commercial land values in touristy areas.
Construction costs are likely to remain high due to high cost of labor and a shortage of construction workers.
Interest rates are expected to remain low, minimizing borrowing costs for developers, investors and home buyers.
Investors can expect yield compression to continue.
We may see a jump in the number of existing apartments listed for resale in high-rises on the manmade islands in Tokyo Bay as investors hope to sell in anticipation of the 2020 Summer Olympics.
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