Overseas investors eye Tokyo
No one doubts that 2013 was a wonderful year for the real estate market in Tokyo. The J-REIT Index of listed real estate investment trusts saw a near 27% YoY increase. In the office market, the vacancy rate continued to decline, and rents started to rise.
In the condominium market, the number of units newly supplied reached one million, marking a 10.6% YoY increase and the first YoY increase to exceed 10% since 1987, when Japan was in the throes of a bubble economy.
Further, sales of new condominiums were particularly good in 2013, with some prices 10–20% YoY higher.
The 2013 mood still prevails, despite the April consumption tax rate hike—from 5% to 8%. The aftermath of last-minute purchases before the increase had a major effect on sales of new condominiums, and the counter-effect can be seen in today’s market.
Yet, condominium prices are still rising, according to published price indices, such as the Tokyo Stock Exchange Home Price Indices (representing used condominium price trends in the Tokyo metro area) and the Ministry of Land, Infrastructure, Transport and Tourism’s Residential Property Price Index (based on actual transaction data).
With both the price of land for development and construction costs continuing to rise, it seems that condominium prices will remain high, even should demand weaken.
A further rise in the consumption tax rate—from 8% to 10%—is scheduled for October 2015, although this is yet to be finalised. The real estate industry is hoping for another last-minute boom in condominium sales.
The price of a condominium in Tokyo is still relatively lower than that of a similar structure in any other major city around the world.
Global non-institutional investors thus are eyeing the Tokyo residential market, and an increase is expected in the acquisition of condominiums by these investors, particularly those from other Asian countries.
Were the domestic condominium market again favourable, as in 2013, domestic investor interest would be of little concern to those selling condominiums. However, were there a deterioration in the domestic demand–supply balance, overseas investors would play a major role in stabilising condominium prices.
Though Japan’s economy has experienced several pick-ups since the collapse of the bubble economy, land prices have been declining for a couple of decades. As a result, people started to believe that asset prices would continue falling, and domestic real estate investors sought income gains, but merely for capital gain.
By contrast, during those same decades, overseas investors in cities abroad became wealthier from capital returns, particularly in London, New York, Hong Kong and Singapore.
Now, however, these same overseas investors consider Tokyo to be one of the best locations for capital gains.
The present attraction of Tokyo’s condominium market lies not only in the fact that such property is relatively inexpensive compared with that in other major world-class cities, but also in the expectation that Prime Minister Shinzo Abe will achieve his 2% inflation target.
Many investors presume that both Abenomics and the 2020 Olympic and Paralympic Games will boost demand.
Further, the limited restrictions on non-nationals owning real estate in Japan is seen as a big chance for overseas investors to put money into property. The final push in support of Tokyo real estate often comes with recognition of the benefits presented by the ongoing weaker yen.
However, a serious threat to the real estate market could come from a rise in interest rates for debt financing. Currently, Japan has the lowest bank interest rates in its history for home loans (for non-investment purposes).
But, should inflation reach its target, interest rates are likely to climb. And, according to a projection by the Sumitomo Mitsui Trust Research Institute, a 1% interest rate hike would cause the purchasing power of Japan residents to drop more than 10%.
However, as purchasers from overseas intending to invest do not enjoy such a low interest rate at present, their motivation and purchasing power will not be affected by a rise in interest rates.
Japanese buyers should have greater confidence in the direction residential property values are likely to take in the foreseeable future.
When purchasing a condominium, they would do well to set aside the belief that real estate prices will never be higher than they are now.
Moreover, although most Japanese do not invest in real estate for the purpose of capital gain, at least now they can buy a condominium and know it will retain its value. But the Japanese market must open up completely and be transparent, based on fair valuations given by professionals.