Warning signs as Ginza Land prices pass bubble-era highs

[TOKYO] Land prices in Tokyo's central Chuo ward, home to the famous Ginza shopping district, have jumped by 51 per cent in four years. In Osaka, they are up by nearly half.

Booming construction of hotels, office buildings, shopping centers and apartments, financed by record lending for real estate by Japanese banks, has driven the gains. Now some investors surveying Japan's property market are anticipating price corrections.

Satoshi Horino, president of Mori Trust Asset Management Co, said he is hearing stories about appraisers calculating returns based not just on purchase price and income, but by adding further price gains, a bold assumption in a country afflicted by price declines for years. He sees this as a contrarian indicator, another sign a reversal is coming.

"It shows land prices have come to a pretty good level," Mr Horino said. "Prices will fall but I just don't know when. There is an oversupply of properties - no doubt." The long period of rock-bottom interest rates that followed the global financial crisis fueled huge rises in property markets from Hong Kong to Sydney to London. In Japan, the gains began after the Bank of Japan launched its quantitative easing in early 2013, seeking to sink already-low interest rates and revive investors' "animal spirits." As the yen fell, foreign visitors began rushing to Japan, their numbers about tripling from 2012 to a record 24 million last year, just as preparations began for the 2020 Olympic Games in Tokyo. It was a potent combination for the property market. Investors piled in.

Supply and prices have surged in the markets for offices, hotels and housing. Office prices in Tokyo are at their highest since 1994, with a land ministry price index having risen 48 percent since 2012. Office space in large buildings in central Tokyo will expand by nearly half in the next three-plus years, putting downward pressure on prices, according to Sanko Estate Co, an office leasing and consulting firm.

CBRE Group Inc, a global commercial real-estate services company, said in a report last September that hotel transaction volume had more than tripled from 2012 to 2015. New hotel development was accelerating and the supply of rooms would increase as much as 30 per cent in both Tokyo and Osaka by 2018, it said.

The BOJ has also helped pump up the whole market by directly buying shares in Japan's real-estate investment trusts. The central bank held 390 billion yen (S$4.91 billion) of the 16-trillion-yen J-REIT market as of May 20, with a standing pledge to buy 90 billion yen a year.

Many hotel developments are now being carried out with plans to sell to J-REITs or other investors either immediately after the completion, or once occupancy has stabilized, CBRE said.

Still, CBRE warned of an acute shortage of rooms if the government's target of 40 million inbound tourists by 2020 is realized.

Investment has also poured into shopping districts in Tokyo and Osaka. Home to luxury brands such as Hermes and Gucci, Ginza boasts the most expensive single piece of property in Tokyo, at 50.5 million yen per square meter, according to the land ministry. That is nearly double the price of the most expensive property just four years earlier, and nearly a third more than the priciest at the peak of the bubble in the early 1990s, according to ministry data.

Hiroshi Kodama, president of Kodera Co, a 100-year-old property agent located in Ginza, said it is a "commonly shared view" that selling will begin next year, with land prices gradually declining, possibly as much as 50 per cent from their peak, based on past price patterns.

"There is no doubt that land prices will fall," Mr Kodama said.

The BOJ said in an April report that Japanese banks' "lending stance is the most aggressive since the bubble era." While the real-estate market warrants close monitoring it isn't overheating, the BOJ said.

BOJ Governor Haruhiko Kuroda has said the bank will continue to closely monitor the effects of its stimulus on markets. About 40 percent of the nation's smaller regional banks could suffer losses if Japan's commercial land prices drop about 20 per cent, the BOJ said in a financial system report in April.

Signs of excess supply are already appearing in Tokyo's housing market. Unsold new apartments and new housing for rent in Tokyo both reached multi-year highs last year. Deutsche Bank real-estate analyst Yoji Otani has forecast that housing prices in Tokyo will fall more than 20 per cent in the next two years.

Some are already selling Japanese real estate. Foreign institutional investors were net sellers by 150 billion yen in fiscal 2016, after selling a net 580 billion yen the previous year, according to a survey by Urban Research Institute Corp., a unit of Mizuho Financial Group Inc.

To be sure, even at elevated prices Japanese commercial real estate offers attractive yields. The yield on Tokyo office properties, for example, offered a spread of more than four percentage points over the benchmark 10-year Japanese government bond, Deutsche Bank said in an April report.

CBRE said in an April report that capital-raising by J-REITs during the first three months of the year was the third-highest for the first quarter since its survey began in 2005.

Shinichi Hasegawa, the head of the Singapore office of real estate consulting firm B-Lot Co., whose clients are mostly foreign investors, shrugs off any pessimism over Japan's property market.

"Japan is very cheap from a global perspective," Hasegawa said. "It's true that some areas like Tokyo are becoming expensive but if prices go down, foreign buyers will see it as a chance to buy and more properties will be owned by them." "I have no complaints about the BOJ's monetary stimulus," he said. "They are just so helpful."

BLOOMBERG