Japan

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Reports have pointed out that property in Japan is currently a very popular with global investors, with 2.2 billion US Dollars already invested this year. Residential property in Tokyo is being noted as among the most popular, alongside hotels and offices in Tokyo.

“Hotels, Tokyo offices, Tokyo residential, I would say, will be the three specific sectors and opportunities that are being most sought after by international investors,” said Alistair Meadows, Asia Pacific director for International Capital Group at global property services firm Jones Lang LaSalle.

The list of buyers that have already declared interest is like a who’s who of global property investment’s biggest players, featuring: Blackstone Group and Fortress, Germany’s Deutsche Bank, US-based Jones Lang LaSalle’s funds arm LaSalle Investment and Franklin Templeton, as well as Mapletree investments, which has earmarked almost $1 billion for Japanese investments, including office buildings, data centres, and R&D facilities.

Meanwhile Franklin Templeton is interested in the loans market; specifically the firm is hoping to get a good deal (discount) on a large portfolio of Japanese loans. It is thought that the intention of the investment would be to earn attractive returns, whilst also giving the firm access to physical assets in Japan.

Given that the global financial meltdown was caused by investments in mortgage backed securities going tits up because many of the mortgages in the packages defaulted, this is a sign that either that international investment is getting back to normal, and/or that Franklin Templeton and its analysts have a great deal of faith in the Japanese economy.

Blackstone plans to buy Morgan Stanley’s Japanese loans, which are securitized by commercial real estate such as office buildings.

The sector is really taking off, after years in the doldrums; travel agencies are even offering “Buy Japanese Property Tours” to wealthy Chinese investors.

According to international realtors, on top of the 2.2 billion already invested, foreign private equity groups, REITs and brokers have earmarked a further $6.6 billion est. for Asian investments, with a particular interest in bricks and mortar assets and property debts in Japan.

“While we are cautious around the country’s fundamentals, we do believe that the sheer size of the market allows for opportunities,” said Peter Kim, Managing Director, at ING Real Estate Investment Management, which has funds invested in Japan.

Japan was not hit by the financial crisis, per se, but in a strange irony is now actually benefiting from it. The Japanese economy and property market crashed and bottomed over a decade ago, in what is termed an L shaped recovery (where the market bottoms and doesn’t come back up). Now that the global crisis zeroed the clocks, Japan has a chance to stimulate and grow in line with its regional neighbours and allies, and is benefiting from trending investments in distressed and discounted residential and commercial assets.

A bottoming out of real estate prices and a recovery in the debt market are some positives investors are buying into, according to analysts.

Distressed or marked-down properties in Japan, such as debt backed by commercial real estate, are also emerging on the radars of foreign buyers.

“We are finding a degree of success in finding deals through trust banks or lenders who have taken control of over-leveraged assets,” said Jacques Gordon, global investment strategist at LaSalle Investment Management.

As foreign money pours in, the real surge in buying may just be starting, predicts Mark Brown, a real estate analyst at researcher Japaninvest.

The gap between what distressed property owners are asking and the amount buyers are willing to pay is closing fast, he notes, adding that would lead to plenty of new deals.

Photo credits: Chris Robinson via Flickr

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Land prices in Japan have seen the biggest drop in five years as more discouraged buyers and tighter markets cut off funding to developers. In the 12 months leading up to June this year the average price has dropped 4.4 percent. This reflects an 18 month spell of decline said the Ministry of Land, Infrastructure, Transport and Tourism in a report.

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A chaotic start in Fuji gave Fernando Alonso the chance he was hoping for after winning last years Japan Grand prix. While Kubica took the lead early on, Alonso used the first pit stop to pass Kubica with his decision to take less fuel and from then on, he led the race without ever feeling threatened again.

Lewis Hamilton wasn’t so lucky. He took the lead right at the start with a feisty move which was said to have put Raikkonen off the road on the first corner and that maneuver earned him a penalty.

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Saitama.jpgSaitama, a prefecture of Japan located on the of island of Honshū is according to this source becoming more foreigner friendly. A government initiated project which has drafted over 113 agents, prepares pamphlets that explain the rules of renting and living in an apartment in Japan in Chinese, English, Portuguese and Spanish as well as offers telephone advice on finding guarantors.

This “foreigner-friendly” policy is also helping boost business for the participating agents.

Here is a breakdown of the 479 enquires in 2007; 153 from Chinese (32 percent), 54 from Brazilians (11 percent) and 49 from South Koreans and ethnic Koreans (10 percent).

It is an interesting assessment of migration to this Japanese level.

Photo credit: airthru takashi [via flickr]

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We took a look recently at the “Ups and Downs of the Indian Property market,” and felt a closer look at the situation was in order.

According to a recent report by the Financial Times, the real estate sector in India has seen tremendous growth over the past year; property prices have soared and the number and scale of projects has increased.

To fund these projects, developers are looking to investors, both domestic and foreign, through avenues such as listings on London’s Alternative Investment Market, domestic initial public offerings, private equity participation and the setting up of joint ventures.

The Indian government is now allowing foreign investment in townships, housing, built-up infrastructure and construction projects without prior approval from the exchange control regulator.

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JapanThe knock on effect of the US sub prime mortgage crisis seems to be having an effect on Japan’s housing market.

Japan’s Ministry of Land, Infrastructure and Transport, released a report last week, stating that the seasonally adjusted annualized housing starts have been pushed down to a record-low of 720,000. Housing starts have shown steep year-on-year declines each month, with a 23.4 per cent drop in July followed by a 43.3 per cent plunge in August. Construction starts for owner-occupied homes dropped 21.6 per cent, while those for rental homes tumbled 51.3 per cent. Building starts for homes for sale fell 55.6 per cent, with condominiums falling 74.8 per cent.

In the third-quarter GDP estimates they had released by Wednesday, eight private-sector economic research institutes saw an average 9 per cent decline in housing investment, the largest drop since the 11.1 per cent slide in the April-June quarter of 1997, when the consumption tax was raised. A 9 per cent decrease in housing investment translates into a 0.3 per cent drop in quarterly GDP. “Construction investment cannot be ignored because it accounts for roughly a quarter of capital investment,” an analyst at NLI Research Institute said.

Many pundits are putting the bleak housing figures down to the sub-prime mortgage problem in the U.S, but there were a few positive comments coming from the Land and Industry Minister, Tetsuzo Fuyushiba, who said, “housing starts will head toward a recovery in one or two months.”

But some within the industry, including an official at the Japan Association of Architectural Firms, do not agree or expect a recovery this year. We are leaning this way also, because the US’s problems have a long way to go before reaching rock-bottom; the Japanese market is only just beginning to feel the effects.

Onigashimasu!

The Official website of The Japanese Ministry of Land, Infrastructure and Transport

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Overseas Property Mall was cautiously optimistic about the Japanese real estate market when we last covered the subject in mid-May. In June, the FT reported, the J-REIT index dropped 12% because income from REITs was comparing unfavourably with the rising coupon on government bonds. Roko Izawa, director of structured finance ratings at Standard & Poor’s estimated that investors typically required an extra one percentage point on this kind of commercial investment in comparison to sovereign debt.

Other news on the property front was more encouraging with the land price index continuing to rise, averaging an increase of 3.65 in Tokyo, Nagoya and Osaka in the year to July.

More recently, the markets story in Japan has been in alignment with the performance in Europe and the US, with the Nikkei beginning to fall in the second half of July. Japanese investors do not share the gravity defying confidence of less experienced investors in Mainland China. Property companies shared in the general malaise but today has seen a marked recovery as investors looked at the sector’s fundamentals and market sentiment decided that the sell-off had gone too far.

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japan

Like the Tokyo stock market, the Japanese property market has seen many false dawns since the country’s boom years ended at the start of the nineties. Now Japanese markets seem to have bottomed out finally and yet investors are still wary of disappointment.

In the context of property investments a lot of significance has been attached to Japanese real estate investment trusts (REITs). Given the moribund state of Japan’s bank credit over so many years REITs have been seen as a welcome way for property holders to obtain some leverage and to get their investments working as collateral in a way that the banks hadn’t seemed prepared to encourage. MoneyWeek comments that funds such as Japan Retail Fund and Japan Real Estate Investment Corporation can be bought through the likes of Barclays Stockbrokers. Writing in the Motley Fool, Dan Caplinger highlights that property prices tend not to correlate with share prices as an attraction for investors in Japan. However, it should be remember that Japanese property did correlate substantially with other types of investment during the 15-year recession.

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Skiing in Japan

Colorado may be the destination most revered by skiers, but worthy competition appears to be emerging from across the pacific. Japan, with its 620 powdery resorts, is fast gaining a reputation for having some of the world’s finest snow. Dry and powdery with a whopping 45 feet per year, the quality of skiing more than makes up for what the slopes lack – altitude.

The tallest peak, Mount Fuji, rises only 12,385 feet, no match to Europe’s or North America’s.With quality snow available to skiers as late as early May, and off-season attractions becoming increasingly available, investors worldwide are seeing Japan as the next opportunity for profit. Citigroup, Inc from the US paid over $51 million to revamp 12 resorts, while Japanese-based Hoshino Resorts committed $84 million to restore two additional ones.

The primary focus is to attract skiers from outside the country, as the native skiing population rapidly diminishes. Massive growth in skiers from abroad was demonstrated when the town of Niseko saw a rise from 2,600 skiers in 2001 to a startling 13,000 in 2005 from mainland Asia. The neighbouring town of Hirafu saw an increase from less than 200 to over 7,000 from Australia. Skiers from South Korea rocketed from 5,000 to 15,000 in just one year.

With the growing popularity and future possibilities arising across Japan’s glistening slopes, cultural differences are becoming only a minor inconvenience. English is plastered everywhere from bus schedules to restaurant menus to aid foreign skiers. Mountain huts provide a complete array of Japanese culture for skiers, with native food, music, and traditions. Hot spring baths are even provided to offer a luxurious lull to the slope’s excitement.

For the serious skier, the quality that Japan’s slopes offer serve as an enticing opportunity, coupled by the excitement of foreign travel. As numbers increase, and the resorts continue to improve, investors look at the land of the rising sun and see what may become this generation’s next big international ski attraction. Read more about this at SFGate.

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Nothing symbolizes Japan’s bubble economy, or its subsequent long slump, more than real estate. Now, after dropping by as much as 70%, real estate prices are ticking up, signaling a renewed Japanese economy.

A major restructuring of the nation’s financial system, along with an injection of foreign capital and the introduction of publicly traded real estate investment trusts, are driving the real estate revival, according to Wharton faculty and real estate analysts working in Tokyo. “The no-growth swamp is over. Not only is real estate coming back, but it’s coming back strong,” says Wharton real estate professor Susan Wachter.

For the first time in 16 years, land prices rose in Japan’s top three markets — Tokyo, Osaka and Nagoya — during the 12 months that ended in July. Commercial land prices were up 2.6% while residential property was up O.4%. In addition, new development is visible in Tokyo, rents are on the rise and investors are returning to the market.

Speaking at the fall members’ meeting of the Samuel Zell and Robert Lurie Real Estate Center at Wharton, Michael Pralle, CEO of General Electric’s $48 billion real estate unit, said Japan is his top pick among current global real estate hot spots, including China, India and Germany.

GE has been in Japan since 1998 and owns $3 billion in real estate assets, including 120 office buildings and 9,000 residential units. Last year, it formed a partnership with Shinsei Bank to increase its holdings. “We like Japan a great deal,” said Pralle, noting that GE is drawn to Japan by strong yields, attractive land prices that are still near 25-year lows, tax advantages and improving economic conditions overall.

According to Wachter, because real estate is viewed as a long-term asset, renewed confidence in the industry reflects optimism about the long-term prospects for Japan’s economy. “The structure of Japan, Inc. has been substantially reformed and there is no going back at this point.”

In addition to banking and other financial reforms, Wachter says a key element of today’s interest in real estate is the government’s willingness to abandon politically popular, but economically unjustified, public works projects in rural and agricultural areas. As a result, a drain on government spending has been eliminated, and more deserving projects in urban areas will receive more support. “There’s no more business as usual,” says Wachter. “This is a long-term structural reallocation that will not only affect Tokyo, but also the second-tier and even third-tier cities.”

The Rise of REITs

Another driver of the real estate recovery is the same cure that was used for the United States’ real estate crash following the savings and loan collapse of the 1980s: real estate investment trusts. Japan enacted new laws creating real estate investment trusts, known as J-REITs, in 2001. Now there are more than 30 J-REITs in operation with assets of $30 billion.

Nomura Real Estate Holdings raised the most money in an initial public offering of any Japanese company this year, trading up as much as 13% during its first day of trading in October. Nomura’s debut topped the record set a month earlier by the Nippon Commercial Investment Corp., a real estate investment trust of Pacific Commercial Management.

Andrey Pavlov, a visiting professor of real estate at Wharton, explains that because REITs can be exchanged at any moment, managers are responsive to the market. Better response to market conditions helps prevent disconnects between supply and demand that lead to boom and bust cycles in real estate. “REITs are a great source of capital because they provide fairly-priced financing and there is a lot of discipline due to that immediate and direct connection to shareholders,” says Pavlov.

Concerns are overblown that investors in REITs will be able to pull out abruptly if they unexpectedly need access to their capital, forcing REIT managers to unload long-term assets at what might be a low point in the market, he adds. “That’s typically not a problem. REITs get the money from investors to buy the assets but the REIT itself is unaffected. There is no cash flow change.”

REITs in Japan, and elsewhere, are a better way to finance real estate than bank lending, Wachter notes. Banks often structure deals with incentives or fees that encourage lending, leading to transactions that are often not aligned with market demand.

REITs also are structured with tax incentives that tend to draw international capital to Japan and other markets, she notes. REITs pool money from the sale of stock and use that to make investments in real estate. The shareholders then receive dividends paid out of profits earned by the REIT on rents or property sales. The dividends are not taxed.

For example, Nippon Building reported a 37% rise in net income to 9.85 billion yen ($84 billion) for the six months ending in June. The REIT paid out a record dividend of 19,391 yen, up from 17,046 yen for the same period a year earlier.

Wachter also points out that REITs are not closely correlated to the stock market and can provide balance for institutional portfolios, another draw for foreign capital. Finally, REITs bring transparency and better analysis to the market in which true value is often hard to gauge because shopping malls and office buildings, even homes, don’t come up for sale everyday. “Once the funds are large enough, then you can have analysis with an entirely new level of sophistication, which again brings discipline,” says Wachter.

The Japanese mortgage market is also moving toward greater securitization which will give investors another reason to invest, Wachter adds.

Following World War II, Japan created the Government Housing Loan Corp. (GHLC), to provide easy residential financing for homeowners. During the bubble years, as housing prices skyrocketed, Japanese homeowners were offered numerous types of exotic mortgages, including a 100-year mortgage to be paid off by the borrower’s grandchildren.

As part of the nation’s economic reforms, GHLC in 2001 was converted from an issuer of loans to a packager of mortgage-backed securities. By 2003, GHLC had securitized $8 billion in Japanese mortgages. Next year a new agency, the Japan Housing Finance Services Agency modeled on Fannie Mae in the United States, will begin securitizing loans written by private financial institutions.

Poised for the Future

Richard Georgi, a guest lecturer in real estate at Wharton and managing partner of Grove International Partners, a global private equity firm, estimates that Japan’s economy bottomed out in 2002 and 2003. While hopes of earlier recoveries based on fiscal and monetary stimuli were subsequently dashed, Georgi says the current optimism is deserved because the government and the Japanese people have made significant changes to their economic system. “We are now starting to see some emerging growth patterns that we think are sustainable because they are on the back of real reform,” says Georgi, who is based in Tokyo.

Rents are starting to tighten in Tokyo, which Georgi notes is double the size of Manhattan and four times the value. “This is a supertanker economy, so small changes can result in huge movements of capital.”

As the nation’s deflationary spiral comes to an end, interest rates will likely continue to rise. As that happens, investors sitting on yen-denominated Japanese government bonds will seek new asset investments. The capital-starved real estate industry will make an attractive investment, Georgi predicts, adding that the rest of the developed world has been in recovery for some time and is now priced high. Other countries, he says, will need to work off a real estate bubble created after the sharp interest rate declines that followed the September 11 terror attacks. “Japan is poised for future growth, although it is still at a low base compared to historic norms.”

Foreign investment has played a part in Japan’s recovery, but will not be a dominant force going forward, Georgi suggests. Changes in the nation’s postal saving system, he notes, could free up vast pools of household savings that will flow into real estate. “Foreigners are here, and they have been playing a role in injecting liquidity into the market. But the most important transformation looking ahead will be the return of domestic capital to the real estate market,” says Georgi.

Yasuhiko Watanabe, senior advisor at Mitsubishi Estate Co., says the Japanese real estate revival started in spring 2005. Vacancy rates for Class A office space in central Tokyo are now less than 1%, compared to 4% to 6% a year ago. Rents in the desirable Marunouchi district, located between Tokyo Station and the Imperial Palace, are up 20% from a year ago. “Probably we are now in a position to worry a bit about too much too soon,” he says.

Japan’s strong corporate comeback and infusions of domestic and international capital are feeding the real estate resurgence, says Watanabe, who also cautions that excess liquidity in the global economy could set off a financial crisis if the system experiences a shock. “The market could lose its steam if, for any reason, today’s high level of liquidity becomes vulnerable. Geopolitical risks as well as financial and economic risks might play a significant role in the outlook for the market.”

In addition to the new REIT investment vehicles, Eric Perraudin, managing partner of Japan Management Consulting in Tokyo, says ultra-low interest rates are contributing to the recovery. Investors can borrow 80% of the value of a building with a non-recourse loan at a rate of 2%. At the same time, building regulations governing the density of buildings have been eased, allowing developers to build more space on less land.

Pavlov warns that despite confidence in the real estate turnaround, the Japanese economy is still in a delicate state and policymakers will need to steer a careful course between stimulating growth and guarding against inflation. “As the economy picks up there will be more demand for real estate,” he says. “It is very important that, in the face of the up-tick in demand, there is sufficient availability of funding, whether its bank loans, equity investment or private investment. You don’t want to be in a credit crunch. Even if people want to buy and develop real estate, if they can’t get the financing, nothing happens.”

According to Pavlov, there is often a fine line between too little credit and too much. “Let me emphasize that you should never stimulate or encourage policy with the availability of cheap or under-priced financing. It has to be fairly priced,” he says. “But you want to make sure lenders and other sources of capital don’t overreact to the previous crash and stop lending altogether. There needs to be a golden balance between sufficient financing and not under pricing…. It’s not an easy thing to do.”

Perraudin notes that prices for commercial buildings have recovered about 30% to 50% from the bottom reached in 2002-2003. However, the gains are concentrated in Central Tokyo, Central Osaka and Nagoya. In other major cities, the market is flat, and small cities and rural areas are still experiencing declines. “Demand for real estate in central areas is limited,” he says. “Demographics are bad, with the Japanese population and workforce shrinking.”

He points out that land prices in some regions are still artificially high, propped up by subsidies for agricultural use and ownership of property by debt-ridden public institutions and governments.

John Percival, a Wharton adjunct finance professor, says that despite all the reforms that have been made in Japan, real estate is likely to remain cyclical. While companies and financial institutions have undergone major reforms, there remains more cross-shareholding between banks and other businesses than in the United States and much of the rest of the world. “Real estate is coming back,” says Percival, “but that’s the good news and the bad news. If there’s another bubble, then we’ll go through this whole process all over again.”

Source: Knowledge@Wharton