Industry February 2013

Watch This Space

Japan’s real estate market is moving forward

The global economy faced serious problems after the 2008 Lehman Shock, causing the Greek debt crisis that created credit insecurity for all countries in the European Union. The US economy weakened, while a slowdown was evident in China and the emerging economies.

In addition, the volume of industrial production and trade shrank globally, and there was a drastic decline in the asset prices of many regions and countries.

Due to many factors—including the strong yen, the downturn of the global economy, the 2011 Tohoku earthquake and tsunami, and political friction with China—the rate of growth in Japan’s gross domestic product (GDP) since 2008 had remained low—less than 1%—with negative growth barely having been avoided.

Today, there are some indications of improvement in the global economy, such as the tentative settlement of the euro crisis and the provisional evasion of the fiscal cliff in the US.

Nevertheless, the degree to which the mood here has changed is surprising. Yet, all that has happened in Japan is that there has been a change in the governing party and prime minister, as a result of last December’s general election.

The market reacted as soon as Japan’s new prime minister, Shinzo Abe, announced a bold monetary policy, flexible fiscal policy, and growth strategy. The yen dropped about 10% during January and the stock market saw a continuous rise. It reached its highest level since the Lehman crisis.

The 2% inflation target was set in order to break away from 20 years of deflation, and various economic policies will soon be implemented to stimulate the economy.

At the same time, the political climate of other countries this year is expected to affect the economic mood here in many ways. The newly elected leaders of influential countries—such as China’s Xi Jinping, South Korea’s Park Geun-hye and Barack Obama of the US—are expected to help enhance Japan’s overall growth as well as maintain regional stability.

Japan’s real estate market is expected to move forward. However, there are fundamental issues that Japan can’t avoid over the long term. These include a decline in the size of the labour force; the growth in the number of people aged over 65 to some 40% of the population; a 30% decrease in the overall population; and the worst government debt in the world.

The long history of real estate in developed countries has shown that property is a target for investment, once inflation is reasonably expected.

Although there is a huge amount of pooled money for investments in the world, there are a limited number of investment-grade real estate opportunities. As the global economy starts to improve, equity flows into stock/bond markets, followed by real estate.

Some investors may prefer a higher yield from either the fast growing countries of China, India and Brazil, or the emerging countries, where substantial capital appreciation can be realised, despite the need for investors to be prepared for certain risks.

Other investors may prefer safer, long-term investments where stable cash flows can be constantly generated. The US, the UK, Germany and France are typical Western countries offering stable investments, whereas Singapore, South Korea and Japan are the few countries in Asia with such investment criteria.

Singapore is the wealthiest country in Asia, with the highest per capita GDP in the region. South Korea’s electronics, motor vehicle, steel and shipbuilding industries, meanwhile, have caught up to or surpassed those in Japan.

Nevertheless, Japan was attracting sophisticated global real estate investors even before Abe came to power.

As one of the world’s leading economies, Japan has long boasted substantial and quality office space in its major cities.

During the worst period after 2008, the average vacancy rate of offices in Tokyo rose to 7% or more. However, the rate has gradually declined, and is forecast to reach 5% this year. As a result, a rise in office rent is expected soon in major cities.

Demand for residential properties in Tokyo has been constant, with no drop in rents for relatively new units. Residential building construction that began in FY2012 was reported at 890,000 units nationwide—up 5.8% year on year—while the 2013 fiscal year projection is for 930,000 units (up 4.5%).

Based on the nation’s recovery mood, consumer spending is expected to increase and, it is to be hoped, will result in high performance in retail properties, as well as in hotel and hospitality operations.

High-quality logistics properties have enjoyed high occupancy rates. These facilities in particular are meeting the needs of e-commerce industries, and their good performance is expected to continue for the foreseeable future.

One reason investors find Japan’s real estate attractive is that the yield gap remains steady. The average yield rate of a 10-year government bond is about 1%, whereas the overall cap rate of investment properties is 3–5% higher.

Until the value of the yen rose, the resort real estate market in Niseko, Hokkaido and Hakuba in Nagano was heavily influenced by skiers from Oceania. Now, as the yen declines, many foreign investors and skiers will be motivated to return to Japan.

Thus, it would be beneficial to carefully monitor Japan’s real estate market this year.