Vital Signs in the Japanese Property Market

Vital Signs in the Japanese Property Market

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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.

The Topix Real Estate Index had fallen 27% since 10th June as investors worried that problems in the US market would mean that foreign investment in Japan’s property market would dry up.

So where is the Japanese real estate market heading? The Japanese angle on the problems in the financial markets is different in important ways. For example, the Yen carry trade, which has been so important for private equity investments, is probably coming to an end, and thousands of Japanese investors switching back to their own currency could be a good thing for the country’s real estate sector (they certainly weren’t going to buy any of it with New Zealand dollars). This could also start to benefit from the characteristic Japanese saving habit if higher interest rates make the Japanese feel richer and more confident.

Even in the middle of last month’s panic the Tokyo office vacancy rate fell to 2.98%, it’s lowest level for 15 and a half years.

A week ago Bloomberg reported that the impact of the sub-prime mortgage crisis on property investment in Japan was likely to be muted. Kathleen Chu pointed out that higher interest rates would mean that investors would need to pay lower prices to achieve the same level of return but, possibly, that interpretation fails to take account of future positive sentiment about Japanese real estate. She also pointed out that the country was at a different stage of the economic cycle from the US (which is certainly true). It seems that there are reasons to be hopeful that property in Japan will ride out the storm although there may be some peril further off as no one can yet foretell the impact of economic problems in China on the Japanese economy. Last week’s gloomy analysis by Ambrose Evans-Pritchard in the Daily Telegraph was impressive but more recent news gives grounds for hope.