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Danger ahead for booming Japanese
real estate
TOKYO - An
increasing number of analysts are warning that a
mini-bubble in Japan's real estate industry is
being formed, and that the overheated market may
collapse when the real estate investment trusts
(REIT) sustaining the current real estate boom
come to their maturity in 2007 and 2008.
So far, however, things look good, defying
worries of pessimists who predicted a glut of the
office space leasing market in 2003. The vacancy
rate for large office buildings in Tokyo has been
falling for six months, to 6.01% in late January.
The demand for office space in large,
technology-friendly buildings located in prime
business districts is particularly strong despite
their high rents.
According to office
broker Miki Shoji Co, the vacancy rate for office
buildings with floor space larger than 330 square
meters in Tokyo's five central wards has fallen by
2 percentage points from more than 8% in 2003,
when many large buildings were completed.
Corporations seem eager to relocate their
headquarters to these posh buildings.
The
Softbank Corp group, which has been aggressively
expanding its business through mergers and
acquisitions, has moved its offices and some
10,000 employees from about 20 locations around
the city to the 37-story Tokyo Shiodome Building,
which was completed in late January in the
Shiodome urban redevelopment zone near JR
Shinagawa station. Softbank group companies occupy
all office space up to the 26th floor of the
building whose leasing price is one of the highest
in Tokyo.
Still, Softbank President
Masayoshi Son reportedly decided on the property
during his first look at the complex when it was
still under construction, convinced that the gains
in productivity from a centralized operation would
more than offset the higher overhead. Fuji Photo
Film Co has also decided to lease an entire office
building in a Roppongi redevelopment project.
Comprising five 54-story towers, the construction
project is due to be completed in spring 2007.
Earnings at major real estate companies
are showing growth as a result of increased
commissions from their brokering of real estate
deals as well as building and asset management
operations. Mitsui Fudosan Co's operating profit
from real estate brokering is estimated to have
risen 21% to 17 billion yen (US$160.8 million) in
the year ended March 31. It expects to increase
that figure to 20 billion yen this fiscal year.
The company's commission income in fiscal
2004 is believed to have increased 50% to around
15 billion yen. As a result of growing commissions
from its brokering of buildings for clients such
as real estate funds, Mitsui Fudosan's commission
income is expected to reach 20 billion yen this
fiscal year. Its assets under custody, such as
buildings placed under Mitsui Fudosan's management
as of December 31, was up 17% from fiscal 2003 at
1.68 trillion yen. The company plans to increase
that to 3 trillion yen in fiscal 2008.
Likewise, Tokyo Tatemono Co's brokering
and management operations have developed into
earnings pillars alongside the company's rental
and condominium businesses. The firm has pared
down the number of buildings under its ownership,
but it expects to increase the number of buildings
that it manages for its corporate customers by
five units to 90. Tokyo Tatemono's use of
special-purpose companies is also contributing to
its earnings. "Our dividend income from
special-purpose companies this fiscal year should
rise 50%," says Tokyo Tatemono president Keisuke
Minami. Tokyu Land Corp sold the nine-story
Shibuya Tokyu Plaza in Tokyo's Shibuya to a
special-purpose company for 29.4 billion yen,
which resulted in a 7.3 billion yen extraordinary
profit for the firm in fiscal 2004.
Seeing
the upscale segment of the real estate market
burgeoning, fund managers are throwing their idle
money at premium real estate. The domestic REIT
market is likely to hit 3 trillion yen in fiscal
2005 and the Financial Services Agency has already
given approval to six REITs to go public during
fiscal 2005.
As these new REITs rapidly
expand their asset holdings, they must compete
fiercely with existing REITs to acquire
investment-grade properties, pushing up the price
of available qualified properties. This, in turn,
is lowering yields from these properties. Lowering
return from investment in real estate has been
making REITs and other property investment
vehicles less attractive to investors. If the
risks inherent to property investment are taken
into account, a yield of 5% is considered the
minimum. But currently, many investors are seeing
the returns from their property investment sinking
to 3-4%.
One reason for the volatility of
the current real estate market boom is that the
properties sought after by investors are limited
in their availability. Most funds are funneled
into land and large, high-function buildings in
central Tokyo. In contrast, with the exception of
Nagoya and Fukuoka, the regional real estate
markets are left out in the cold.
Even in
central Tokyo, vacancy rates for mid-size
buildings with 165-330 square meters of floor
space and for smaller buildings stood at 8.39% and
7.13%, respectively, as of the end of last year -
almost unchanged since 2003. Some vacant office
space is being converted into condominiums or
warehouses. But in 2007, when many REITs come to
maturity and the baby-boomers begin to retire in
Japan, there will be excess office space
equivalent to 20 Marunouchi Buildings over the
next 10 years in Tokyo alone, some real estate
market analysts are warning.
On February
25, the government's Central Disaster Management
Council released a report warning that an
earthquake of 7.3 magnitude hitting Tokyo could
cause a loss of as much as 112 trillion yen (US$1
trillion) in economic damage and displace up to 7
million residents. This is about 20% of Japan's
gross domestic product in fiscal 2003 and 40% more
than the fiscal 2004 national budget. The quake's
effects on interest rate, consumer psychology,
online transaction, stocks and commodities are
excluded from the estimate. Thus, the actual
impact of a Tokyo earthquake could be much
greater. Quake projections are important and
should be taken into account when assessing
property values in Tokyo.
(Asia
Pulse/Nikkei) |
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