Record property loans drive Japan real estate recovery

[TOKYO] 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 (US$31 billion) in the three months ended 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 per cent 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 declines. 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 US, with its about US$2.7 trillion accounting for 10 per cent of global institutional-grade real estate, according to Nomura Research Institute.

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.

"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.

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