Japan Property Market Largest in the World After the U.S.

Japan Real Estate

Japan’s Rising Property Market

1 Jul 2015 –

Record Japanese property lending is driving such a strong recovery in the world’s second-largest real estate investment market that policy makers are flagging risks. Loans to the property industry, excluding those to individuals, reached 3.82 trillion yen ($31 billion) in the three months ending March 31, central bank data show. The average price of new condominiums sold in central Tokyo has climbed to 62.2 million yen in the first four months of 2015, 26.5 percent more than the average price a decade ago, according to the Real Estate Economic Institute.

The Bank of Japan’s efforts to end 15 years of deflation are bearing fruit, with land prices in the nation’s three largest metropolitan areas gaining for a second year after five years of decline. The central bank said in April that the revival in the property loan market should be monitored because more companies with low credit scores are accessing funds. “We’re seeing an increase in risk-taking activities that’s leading to an inflow of money,” said Yasunari Ueno, an economist at Mizuho Securities Co. “It is fair to say that the loan market for the industry is reaching a significant level.”

Japan ranks as the largest real estate investment market in the world after the U.S., with about $2.7 trillion accounting for 10 percent of global institutional-grade real estate, according to Nomura Research Institute.

Cutting Taxes

Owners of mid-to-small sized businesses seeking to skirt inheritance taxes as well as high-net-worth individuals are among those contributing to the increase in demand for property-related loans, said Nana Otsuki, an analyst at Merrill Lynch Securities Co. in Tokyo. Japan changed its inheritance levy rules in January this year, prompting some to convert their wealth into real estate holdings to help cut taxes.

Local banks extended 1.1 trillion yen in loans in the January-March period to individuals seeking to purchase condominiums and then rent them out, the most since the BOJ started compiling the data in June 2009. The central bank said in its Financial System Report in April that property transactions and financial activities in the market have been gradually increasing, mainly reflecting the economic recovery.

‘Careful Attention’

“Overall, real estate prices currently show no signs of overheating, unlike in previous real estate booms,” the BOJ said in the report. “Nevertheless, careful attention should be paid to future developments in the real estate market,” it said, citing factors including rising transaction values and increases in real estate investment trust prices.

Governor Haruhiko Kuroda tripled the annual pace of J-REIT purchases to 90 billion yen in October last year as the BOJ expanded its already unprecedented stimulus that also includes buying bonds. The trusts invest in properties ranging from office buildings and apartments to logistics centers, shopping malls and nursing homes, giving the central bank a channel to influence prices in the real estate market.

The recovery has just started. Japan’s real estate market was a key part of the asset-price bubble that burst in the early-1990s. The Nikkei 225 Stock Average is still at about half of its peak in 1989, and residential land prices in Tokyo are one-third of their high in 1991. The benchmark 10-year sovereign debt yield was 0.475 percent on Friday, compared with 8.69 percent in September 1990.

The BOJ’s easing “is cutting borrowing costs, leading to excessive money and that’s flowing into property investments,” said Hideyuki Shinkai, a fund manager at Norinchukin Trust & Banking Co. in Tokyo. “The BOJ is going to continue its stimulus and while people may feel caution about high prices, land prices will probably continue to rise until the 2020 Tokyo Olympics.”

(“Bloomberg Business“, Pic – Japan’s Residential Market/ “Tokyo Premium Real Estate“)

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