As most people will probably know, real estate prices in Japan collapsed in the early 1990’s as part of the damage caused by the bursting of the infamous Japanese bubble economy. Sadly for the Japanese economy, there was no magical recovery and the dizzying prices seen in the late 1980’s were never seen again. Prices dropped for years and Japan entered a period often labelled as “the lost decade”. (although the term seems a little harsh to me)
However over the last few years land prices in the major cities in Japan have actually been creeping upwards and this has been seen as an indicator by some of the overall health of the Japanese economy. People even dared to dream about a real estate market in Japan where capital gains are normal and perhaps where owning your home may actually be a good investment. In the office real estate market rents over the last few years have been increasing and in Tokyo the vacancy rate has been below 2%.
All was looking quite good until the subprime crisis came along and seized up the credit markets. Suddenly it seemed Real Estate Investment Trusts (REIT’s) were no longer buying and as they were squeezed by the credit crisis they actually wanted to offload properties. (especially the foreign REIT’s) Times also became tough in 2008 for real estate developers in Japan and a number of them have fallen on tough times and filed for bankruptcy. I guess this story has been repeated in many other developed countries as well.
The question now is what will 2009 bring real estate investors in Japan? But before any forecast for the real estate market in Japan for 2009 is made I believe we need to take the following points into consideration:
1. The population of Japan is around 127 million (as it has been since around 2000) and if something is not done about improving the birth-rate, the population is forecast to be below 100 million by 2050. Clearly a declining population is hardly going to drive demand for residential or commercial real estate across the country.
2. Unless something is done to address the declining population issue then we are going to have areas in Japan that may gain in value, and areas that will may go backwards in value. In other words, the way for prices to increase will be for demand to shift and this has already happened in Tokyo for example, which has seen some gains in land prices whereas some areas on the fringes of Tokyo have seen declines.
3. There is some demand being created because of the trend away from extended families living together. Simply put this means instead of say two families living in the one home, the two families now live apart and thus two homes are needed.
4. There are a few residential/resort real estate hot spots in Japan such as Niseko in Hokkaido. Although some of these areas have seen apparently good capital gains I remain sceptical in regards to their long term investment prospects.
So what does all this mean looking forward into 2009? Well in my opinion (and remember this is just my opinion) I would guess we will see the real market in the major cities in Japan for both residential and commercial/office move sideways or down a little but I am not expecting any major declines as seen in other developed economies.
Office vacancy rates will creep up in Tokyo I guess as some of the foreign investments banks etc. scale back operations or exit altogether, but this will probably be just a short term glitch. Outside the major cities I have less of a feeling for what may happen although I would not be shocked by major price corrections in some of the resort towns that have seen significant development over the last few years. Remember this is my outlook for 2009 as I am assuming (hoping), that most of the damage to the Japanese property sector is being done now during 2008.
Finally in the interests of disclosure I need to mention I hold an indirect interest in two Australian property investment trusts that have invested heavily in Japan namely Galileo Japan Trust (GJT) and Rubicon Japanese Trust (RJT). Both of these stocks have been savaged in a big way this year and so if you are thinking of investing in Japanese real estate, tread very carefully!