Monday, July 18, 2005

Japan's emerging property boom

Japan's emerging property boom
by Darrel Whitten, Whit Consulting, the JapanInvestor, July 18, 2005

While global strategists, economists and investors fret about a housing “bubble” in the US, Japan is just emerging from a 14-year bear market in property.
According to the national land survey, prices in central Tokyo in 2004 eased up 0.9%, for the first rise in 17 years. Signs that the luxury and commercial property markets are turning positive is the strongest evidence yet that the balance sheet deflation in Japan is essentially over.
The establishment of the J-REIT market in 2001 was the beginning of the turnaround, and was soon followed by a growing wave of foreign real estate investment funds seeking distressed property and uncommon yields.
Now that balance sheets have been cleaned up, Japan’s major banks as well as the regional banks that once virtually ignored the housing loan segment are now looking to housing loans as a source of new loan growth. Consequently given historically low interest rates and real estate investment yields of 4%‾5%, such properties are attractive as financial products and are drawing increasing numbers of high net worth individual investors. But TJI strongly believes the emerging property boom in Japan--while a growing tide that is likely to last for the next decade or longer--will not lift all boats because of increasing polarization.
TJI believes that the value of property that does not add value will continue to deteriorate going forward. Moreover, given the general reflation that is beginning to gain momentum in Japan, it is not likely that this recovery will be a temporary phenomenon. Rather it is likely to be a trend that remains in place for the next decade or more. Thus the key words for Japanese property going forward are the three “L’s” (location, location, location), plus community power and social level.
Investors can capitalize on this secular recovery through J-REITs, private real estate funds, new real estate entrepreneurs, and finally, conventional real estate companies. Currently, TJI prefers J-REITs and smaller cap real estate entrepreneurs.

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