Tuesday, November 26, 2013

Japan's Real Estate Bubble is Back in 2014

I agree when taxi drivers start talking about investments with customers in the cab there is a bubble brewing. Right now in Tokyo, the initial steps are now beginning again. It is deja vu all over again. Now, about 5 times your annual income around 30M yen or US$300K, is the current sweet spot in metro centers. The overview is simple for the Japanese retail investor; since Lehman you tried FX online, followed by commodities like oil or coal, then gold for a while, and recently Japanese equities. With a consumer tax increase now slated for April 2014, it seems like now is the time to buy new real estate units. 

All over Tokyo, and other urban areas in Japan new condo construction is rampant with billboards everywhere showing new units for sale. These are not big units; 25-75 square meters, but they are new and well designed. As parents get older a big decision is being made; If we have an empty nest, is a single home really worth keeping? Perhaps it is time to sell the land underneath and buy a condo before the new tax kicks in? This may not make sense to other real estate markets overseas, but in Tokyo, Yokohama, Osaka, Kobe, Kyoto or Nagoya, it certainly does.

In Japan there is a depreciation driver with tax incentives that helps many locals, and the single house. Often wood built, it is soon worth nothing in accounting terms after 25+ years but the land still has worth. Last weekend, new projects in Tokyo to help build earthquake firewalls was complained about by many on some investigative talks show. It is now building price pressure due to the Olympic building boom that is driving new rail and expressways links already. As a result the city is changing fast and hopefully within 7 short years.

For non-residents not familiar, central Tokyo, still has single homes. You would not expect to see them in New York's Manhattan, or London's West End, terrace homes rule there, but not in Tokyo. In fact, that is what billionaire's live in. Many billionaires live in single home buildings. Abenomics; from a price-low December 2012, land prices in central Tokyo, (Hiroo or Azabu) are up as much as 44% on specific lots in less than a year. The average price today is still very low compared to the bubble peak prices of 1991, often no more than 30% of its former peak, so plenty of room to grow from a purchase today. The math is not complex, just do the numbers. Japan's farmers are old, office workers are young, and they work in big cities. The Japanese nation's population is shrinking, especially the countryside, 
but not its cities. 

There are NO nationality restrictions on ownership for these homes. Cash is all you need, unlike in other parts of Asia. There is NO real estate restriction based on an owner's passport, anybody can buy anything legally in Japan. Many Asian investors have clued in and are now buying land from older homes, putting up parking lots in the interim or a higher yielding convenience store, then waiting for the full bubble fever prices to return. With so many new maps with zones of specific lots to investigate (or avoid) from recent Olympic plans, a fascinating maze of profits (or problems) awaits the on the ground investor. To sell in future for 30-50% more in 3-5 years or less can be pretty compelling. The good old 10% return a year retail investor rule is back. So maybe retail investors have it right, again!

For more Buy-Side and Sell-Side roles in Asia-Pacific, contact our TMJ Partners Japan & Asia Finance team.

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