Japan Land Prices Rise for First Time in 16 Years

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Japan Land Prices Rise for First Time in 16 Years (Update2)

By Finbarr Flynn

March 22 (Bloomberg) -- Land prices in Japan rose for the first time in 16 years as overseas and domestic investors competed to acquire properties in the country's three biggest cities.

Gains in Tokyo, Osaka and Nagoya compensated for a drop in regional areas. Average commercial land prices in the three cities rose 8.9 percent and residential 2.8 percent in the year ending Dec. 31, the Ministry of Land, Infrastructure and Transport said in report released today.

``Japan is becoming a country of cities, and those companies leveraged to urban real estate will do best,'' said Eric Starr, a Japanese stock portfolio manager at Connecticut-based Forest Investment Management LLC, which manages about $820 million in assets. ``I see real estate as a multi-year trade in Japan.''

Land values are still recovering from the collapse of an asset bubble at the start of the 1990s and the ensuing decade of declines. Overseas investors continue to pour money into Japanese real estate, attracted by low interest rates, economic growth and new securitization deals. The investment rush has sparked fears that a new land bubble may emerge in certain areas.

The Bank of Japan said in its Financial System Report last week that it was ``necessary to carefully watch future developments in the real estate markets and their effect on the financial system.'' Japanese interest rates are still the lowest among developed economies after the bank raised rates to 0.5 percent last month.

``The possibility of the Bank of Japan raising interest rates faster than the market expects has emerged with this data,'' said Yoji Otani, an analyst at Credit Suisse Securities Japan Ltd. in Tokyo. ``The current phenomenon in land prices is becoming a problem. The BOJ has good evidence of that now.''

Japan's increasing land prices are a reflection of the economy and don't indicate an asset bubble, Vice Finance Minister Hideto Fujii said after the figures were released at 4:50 p.m. in Tokyo.

Signs of Peaking

Commercial land in and around Tokyo, Osaka and Nagoya rose for a second straight year, after rising 1 percent in 2005. Residential land prices in the cities increased for the first time in 16 years, up 2.8 percent.

The ministry's land report, based on appraisals of 30,000 locations across the country, is used as a benchmark for determining land values in the private and public sector.

Demand for office space in city centers and for condominiums in expensive districts pushed up prices, according to the ministry report. Japan's economy continued its longest extended period of postwar growth, expanding by an annualized 5.5 percent in the three months ended Dec. 31.

The steepest gains were seen in areas near Omotesando Hills, a retail and residential development in central Tokyo which opened on Feb. 11 last year. Both commercial and residential land prices rose by as much as 46 percent near the project. High-end retailers such as Louis Vuitton, Christian Dior, Armani and Polo Ralph Lauren have opened stores in the area in recent years.

High demand for office space in developments near Osaka and Nagoya railway stations resulted in advances of over 40 percent in those cities, according to the ministry.

Urban prices may have already reached a short-term limit, according to Credit Suisse's Yoji Otani.

``Real estate prices listed on the Internet and in newspaper ad flyers have shown signs of peaking,'' Otani wrote in a note to investors last week.

Prices fell at 55 percent of all surveyed locations, and property values outside of Japan's three major metropolitan areas declined for a 15th consecutive year, dropping 2.8 percent. Exceptions included rising prices in the northern island of Hokkaido and its biggest city Sapporo, and in Fukuoka, the major city in the southern island of Kyushu.

Residential land prices nationwide are still half of what they were at the height of Japan's bubble economy in 1991, and less than a third in the case commercial property. Commercial land prices in Tokyo's central wards are now the same level they were in 1980.

Tallest Building

Japan's two largest developers will open major developments in central Tokyo in the next month. Mitsui Fudosan Co. will unveil its Tokyo Midtown project on March 30, featuring the city's tallest building and a mixture of commercial and residential properties on a 69,000 square meter site. Mitsubishi Estate Co. is scheduled to open a new 42-story skyscraper in front of Tokyo Station in April.

Share prices for Mitsubishi Estate and Sumitomo Realty & Development Co., Japan's third-largest developer, have risen by half in the past year.

Tokyo office vacancies fell to 2.87 percent in January, the lowest monthly level in at least six years, according to Miki Shoji Co., a privately held office brokerage company. Mori Building, Japan's largest privately held real-estate developer, said last month it expects office supply in Tokyo to fall over the next five years, putting upwards pressure on office rents.

`Dangerous Situation'

Japanese real estate investment trusts have also benefited from rising land prices, with the Tokyo Stock Exchange REIT Index climbing 40 percent in the past six months.

The market capitalization of Japanese REITs has risen 23 times to about 6 trillion yen ($51.1 billion) since September 2001 when Japan's first two REITs listed. Net purchases by overseas investors of the trusts more than quadrupled to 262.3 billion yen last year, making them the largest investors. There are now over 40 listed REITs in Japan, having a market value equal to about 1 percent of the benchmark Topix index.

As money floods into Japanese real estate, regulators are tightening oversight. The Financial Services Agency issued business improvement orders to seven REIT management companies last year, and ordered two others to suspend operations for improper due diligence on properties they bought.

``Even prices for properties with low appeal are rising due to intensifying bidding,'' said Tomohiro Makino, president of Nippon Commercial Investment Corp., Japan's 10th largest REIT. ``That is a very dangerous situation. You'll fail if you make the wrong move.''

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