Japan’s Land Prices Climb for a Second Year, Growth Set to Slow

March 24, 2008 - Land prices in Japan rose for a second year in 2007 after a 15-year slump, as private funds and real estate investment trusts competed to acquire properties in the country’s largest cities.

Prices increased 1.7 percent on average after climbing 0.4 percent a year earlier, the Ministry of Land, Infrastructure and Transport said in Tokyo today. Average commercial land advanced 3.8 percent from 2.3 percent in 2006, and residential land rose 1.3 percent from 0.1 percent.

Commercial land values are still less than a third of what they were at the height of Japan’s bubble economy in 1991, while home land prices stand at half the peak. Growth in values may slow as $195 billion of losses and writedowns related to the U.S. subprime mortgage collapse makes it more difficult for lenders worldwide to finance real estate purchases.

“Uncertainties in Japan’s real estate market are increasing,” said Hiromichi Iwasa, president of Mitsui Fudosan Co., Japan’s biggest developer, and head of the Real Estate Companies Association. “Commercial land prices have started showing signs of a slowdown and the residential market is entering an adjustment phrase in central city areas.”

Commercial land prices increased 10 percent on average last year in the Tokyo, Osaka and Nagoya regions, while residential land value in Japan’s three largest urban areas climbed 4.3 percent, the ministry said.

ANA Hotels

The prospect of an end to Japan’s property-price deflation attracted Morgan Stanley to invest more than 2 trillion yen ($20 billion) in real estate since the late 1990s. In April 2007, Morgan Stanley bought 13 hotels from All Nippon Airways Co. for 281 billion yen, the nation’s largest real estate acquisition.

Japanese real estate investment trusts purchased 1.46 trillion yen in property in 2007, a 26 percent increase from a year earlier, according to STB Research Institute Co. Assets in private real estate funds rose 61 percent to 9.8 trillion yen.

Land prices in Tokyo may resume falling this year as the subprime crisis reduces investment from abroad, according to Akiyoshi Inoue, president of Sanyu System Research Institute, an independent appraisal company.

“We should be prepared for another round of real estate deflation that may last for some time,” Inoue said.

The boom has already started to cool. Growth in residential land prices in Tokyo’s 23 central districts slowed to 10 percent in 2007 from 11 percent a year earlier. In Osaka’s six wards, residential land rose 4.4 percent last year, slowing from 5.5 percent in 2006, and growth in commercial values also waned.

Sale Scrapped

Lone Star Funds, the Dallas-based buyout firm, canceled plans to sell more than 50 Japanese hotels because it couldn’t get its asking price of as much as 170 billion yen, two people familiar with the proposals said March 11.

Higher condominium prices together with stagnant wages are sapping demand for residential property. Average wages fell in 2007 and condo prices increased as developers limited supply and passed record steel and copper costs to home buyers.

“Home prices are likely to drop within several months due to an oversupply of condominiums and declining affordability for households,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. “It’s natural to see a drop in demand.”

Consumer confidence is at a five-year low. Household assets fell for the first time in five years last quarter as shares slumped, a Bank of Japan report showed last week. The Topix index of stocks has tumbled 17 percent this year after a 12 percent drop in 2007.

Building Regulations

A change in building regulations may also be curtailing gains in residential land prices, according to Sato. The government’s introduction of stricter building-permit rules last June produced a logjam in applications that “deteriorated the cash position of condo developers,” making them less able to pay higher prices for new sites, Sato said.

Housing investment plunged 9.1 percent last quarter. Housing starts have since begun to recover, falling 5.7 percent in January compared with 44 percent in September.

Ginza, a Tokyo shopping district, had the most expensive commercial space in Japan for a second year, surging 28 percent to 39 million yen a square meter, today’s report showed.

Gobancho, in Tokyo’s Chiyoda district, was the costliest residential area for the 12th year, with land climbing 16 percent to 3.37 million yen a square meter.

Japan’s Land Prices Climb for a Second Year, Growth Set to Slow
By Kathleen Chu | Bloomberg