The measure of one's worth: real estate: Japan has always been heavily populated and short of land. Only about 28 percent of Japan's land mass is inhabitable, so it's no surprise that one of Japan's most precious commodities today is real estate - Relocations

Japan, Inc., Dec, 2003 by John Dodd

IT COMES AS SOMEWHAT of a surprise that such a precious resource could devalue so drastically in just 12 years. From a peak in 1990, property prices in Japan have plummeted over 60 percent on average, and have dropped almost 80 percent in Tokyo. Given these precipitous declines, we wondered if real estate prices in Japan have hit bottom and whether it is once again safe to think of investing in a Real Estate investment trust (REIT) or an office--or even to buy a house.

Stabilization

Experts in the Japanese real estate market agree that the rapid rate of decline in land values is flattening out. Koji Takeda of Yamate Homes, a local real estate agent, tells us, "The price of real estate has dropped every year for 13 years due to the recession and delayed disposal of Non Performing Loans (NPLs) held by major banks. Now that land prices are at a 20-year low, investment yields from real estate leasing have become quite attractive, even compared to yields from other cities around the world."

In fact, according to the Tokyo Government, nationwide commercial land prices were down 7.4 percent over last year and residential land was down 4.8 percent, so it depends where you are looking before one can say that the price drops are over. In Tokyo at least, the decline seems to be easing. Residential pricing was down just 1.8 percent and commercial properties down 3.1 percent.

TP Publishing's Steve Mansfield confirms the bottoming out: "The market appears to be bouncing along the bottom. There may be further dips but these will most likely be short lived, also there is little to suggest there will be significant price appreciation of Japanese real estate over the next few years."

Specialty values

While the bottoming out may be true for real estate in general, there is still scope to improve property investment returns by applying some thought to investment. For example, the apartment conversion business in Tokyo is undergoing a renaissance. Space Design's Haruka Yamaji tells us: "There are some real estate investors who are doing well, such as those providing serviced apartments, and those involved in apartment conversions [from office space to apartments] and refurbishment. We expect that the demand for such value-added properties will peak in a few years' time. But right now demand remains ahead of supply."

One company that knows all about serviced offices is Servcorp, a leading serviced office company with operations in 11 countries. Servcorp is bullish on Japan and already has nine building locations at present, with another two--one in Tokyo and one in Osaka--opening up in the next few months. Servcorp's General Manager, Susie Martin, says: "We are experiencing increased demand from foreign companies entering the Japanese market and expect that external demand for Japanese real estate will increase."

The typical profile for a Servcorp client is a small advance group that comes to Japan to develop its business and finds within two years that it has grown to 10 to 15 people--at which point it starts to think about branching out on its own. This prompts an expanding demand for office space.

Should you bug a house?

It has been well publicized that a whole generation of home buyers (and 60.3 percent of Japanese do own their own homes) has been sucked into debt and a downward spiral by falling house prices. There are numerous cases (including the wife of this writer) of people buying very average houses in the early 90s for [yen] 50 million and seeing their properties today worth less than [yen 30 million. Meanwhile, their 30-year bank mortgages are still up in the [yen] 35 to [yen] 40 million range--meaning the investment is under water.

The pressure of falling prices on existing domestic housing stock appears to be ongoing, especially at the higher end of the market. Century 21 Sky Realty's Ken Arbour tells us: "Rental prices on higher end apartments are still dropping, as much as 10 percent this year, so we assume that the value for such property is still declining as well--although not as much as last year. We think that the correction still has a little way to go, and we're not optimistic that it's over." He goes on to say: "If you are a prospective tenant, take advantage of the situation by asking your landlord to do proper renovations. We're seeing a lot more extensive work--not just wallpaper and carpeting--being done these days. Some landlords of more expensive properties will even pay for your move-in costs and other related fees. It pays to ask."

New housing stock in downtown areas, however, seems to be enjoying somewhat of a renaissance, as Coyo CEO Yoichi Mizukami comments: "The trend is for retired couples to sell up the family home out in the suburbs and move back into the center of Tokyo. They want the convenience and entertainment that the city can offer. This has fueled the demand for office conversions to apartments and new condominiums." A recent Forbes article confirms this: "Behind the slowing decline in central Tokyo residential land prices is continued demand for condominiums and other dwellings in the city center, with prices now at more affordable levels and convenience increased by redevelopment projects."