Recent conditions in the Japanese real estate market
Japan’s property market has been steadily improving since 2013. Although nationwide land prices are not yet rising, land prices near major metropolitan areas such as Tokyo and Osaka, are gaining momentum. Even some of the regional cities such as Fukuoka are seeing strong property buying interest thanks to attractive yields.
Clearly one of the main reasons is the widespread perception that Japan’s government is determined to boost economic growth via higher prices of assets, including real estate. Prime Minister Mr Abe and his advisors are convinced that deflation has kept back Japan’s growth potential in the last couple of decades, and if inflation rises – as symbolized by rising property prices – Japan’s GDP will bounce back strongly.
Although property prices in Japan peaked in the early 1990’s, there have been two strong upticks in Tokyo land prices over this period; with the dot.com bubble in the late 1990’s~2000, and in 2006~2007. It would seem pretty evident that another uptick phase is starting, and this time, the 25 year bear market in Japanese property might finally be over for good.
For the first time since the bubble at the end of the 1980’s burst, the Bank of Japan governor, Mr Kuroda, is a major dove. He is strongly committed to keeping interest rates low until deflation is crushed, or until Japan’s CPI hits 2%, which is more or less the same thing. Aggressive and sustained monetary easing is very helpful medicine for the real estate market in Japan.
Moreover, although fiscal policy is being tightened via the increase in consumption tax, it is being partially offset by large scale spending on public works projects for the upcoming Olympics, as well as the extension of tax cuts on housing and housing-related investment. The Bank of Japan has also maintained its REIT investment program. So a very supportive environment is now in place for the Japanese property market.
As in the two most recent property market recoveries in Japan, foreign investors have been participating. This time around, Tokyo looks especially attractive relative to the two other major Asian financial centers, Singapore and Hong Kong, both of with which cities it competes. Unlike Singapore and Hong Kong which have been forced to introduce property market-cooling measures to curb runaway prices, Tokyo has no particular restrictions on buying by foreigners.
COMMERCIAL REAL ESTATE IN JAPAN
According to a recent report from Deutsche Securities, the total volume of commercial real estate transactions in Japan in 2013 was up 64% year on year, at almost Y4 trillion, which is the highest level in 6 years.
Taking each market segment in turn, there are healthy green shoots everywhere. Office buildings were up 82% versus a year ago, while warehouses saw an 80% jump as the growth in online retail lead to a surge in demand for storage from companies such as Amazon Japan. Construction is underway of the largest single retail building complex in the Ginza in Tokyo.
It is the redevelopment of the old Matsuzakaya Department Store into 250 shops and restaurants, and will be completed in 2016. This massive 1.4 hectare site will apparently have no problem finding tenants – a good indication of the firmness of the central Tokyo commercial real estate market.
With Tokyo condominium sales, although they peaked in September 2013 as buyers took advantage of the lower 5% sales tax, nevertheless both older and newer condo sales have been continuing to hold up quite well. Contract rates of new condos have remained above the 75% boom/bust level, while prices are also steadily trending upwards.
The number of new residential construction units, having bottomed at 681,000 units (annualized) in 2009 after the Great Financial Crisis, has picked up to 919,000 units (annualized) as of February 2014, according to the Ministry of Land, Infrastructure, Transport and Tourism.
J-REITs have been benefitting from these positive conditions, and with funding relatively easy, have been ongoing buyers of all property types. So even taking into consideration the April 1 tax hike, the real estate recovery may continue. In a report in February this year, the Bank of Japan pointed out that average property prices are still 71 percent below their peak in 1991. With Japan’s economic policies under Prime Minister Shinzo Abe having raised expectations for higher prices ahead, there is a good chance that the long bear market in Japanese property is finally ending.