Japan Condominium Market Has Deteriorated

March 26, 2008 - Japan’s condominium market has “deteriorated” after building code changes last year delayed projects and construction costs soared, said Akira Mori, chief executive officer of closely held developer Mori Trust Co.

“Condo builders are facing a severe situation,” Mori said in an interview on March 24. “There is a high probability for bankruptcies among condo builders.”

The collapse of the subprime market in the U.S. has made it harder for Japanese developers to borrow at the same time as building materials and land have become more expensive, Mori said. Sales volumes may extend last year’s drop and Japan’s slowing economy will make it harder to increase condominium prices.

The government’s changes to building regulation last June produced a bottleneck in applications and sent housing starts to the lowest in 40 years in September. Housing starts started to recover this year, falling 5.7 percent in January compared with 44 percent in September.

Residential land in the Tokyo, Osaka and Nagoya regions gained 4.3 percent, the Ministry of Land, Infrastructure and Transport said in Tokyo on March 24.

Japanese condominium sales may fall for a third year in 2008, according to the Real Estate Economic Research Institute, a Tokyo-based industry publisher.

Total condo sales dropped 14 percent to 133,000 units in 2007 as the average price per unit rose 7.1 percent, the institute said. Sales by value fell 8.1 percent to 5.1 trillion yen ($47 billion).

Higher Cost

Condo builders tend to borrow at a higher cost than larger rivals such as commercial real estate developers. As projects have been delayed, condominium builders must renegotiate terms with lenders who are tightening credit after banks and securities firms booked more than $195 billion of losses worldwide related to the U.S. subprime mortgage market collapse.

Japan’s benchmark of corporate bond insurance costs rose to a record 210 points in the week ended March 14, according to Morgan Stanley, showing companies will have to pay more to issue debt. The Markit iTraxx Japan index of 50 investment-grade Japanese companies, including All Nippon, has risen fivefold this year.

Some smaller real estate companies are already struggling. Reicof Co., which operates real estate investment funds, filed for court protection from creditors on March 20 owing more than 42 billion yen. The company said it was having difficulty obtaining bank loans as financial and real estate markets deteriorate amid U.S. subprime mortgage problems.

Mori expects to be able to buy up properties at lower prices in the second half of the year.

“Sellers couldn’t rid themselves of the vision that real estate prices would increase,” Mori said. “In about six months, they will probably rush to sell at a loss. Many transactions may take place in half a year.”

Japan Condominium Market Has `Deteriorated,’ Mori Chief Says
By Kathleen Chu and Katsuyo Kuwako | Bloomberg