Real Estate

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Back in the 1980s, it was said that the grounds of Tokyo's Imperial Palace were worth more than all the real estate in California. But who'd want exposure to the Japanese property market now? The population is in decline, 13 percent of homes stand empty, and prices peaked at about the same time that Imperial Palace factoid started doing the rounds.

Don't scoff. In fact, four of the 10 most richly valued housebuilders in developed markets right now are in Japan:

Who Would Live in a House Like This?
Japan has some of the most richly-valued housebuilders among developed markets, based on EV/Ebitda
Source: Bloomberg data
Note: Shows 10 most highly-valued housebuilding stocks in North America, Western Europe, and developed Asia-Pacific countries. Valuation based on enterprise value as multiple of forecast blended forward 12 months Ebitda

Shares in Sekisui House, the world's biggest residential construction company by revenue, rose to their highest level since 1990 in December before dropping back about 11 percent this year. The nation's stocks have started to recover from the jolt of the Bank of Japan's decision to introduce negative interest rates, with the Topix index moving to within 5 percent of a bull market last week. Like other sectors, homebuilders stand a good chance of benefiting from the strange economic times they find themselves in.

For one thing, those declining interest rates mean that it's cheaper than ever to finance a home purchase. Japanese buyers, like their U.S. counterparts, can get multi-decade fixed-rate mortgages thanks to government support. At the moment, borrowers pay just 1.25 percent for a 35-year loan, well below Tokyo's 5.2 percent capitalization rate, a measure of the rental yield on a typical property.

Years of deflation also have their benefits. Housebuilders tend to be valued more highly than conventional construction companies because they're not just doing low-margin construction work. By buying land and holding onto it until they complete a project, they're also speculating on prices.

That's working rather well at present. Tokyo's residential land prices were stuck deep in deflation for much of the past decade, but are looking buoyant these days. Land that developers purchased when the market was looking weak is being turned into homes now, in time to catch the upturn.

It's All About the Costs
Year-on-year growth in house prices has been rising. Land prices have been in deflation
Source: Bloomberg data

Sekisui House, which forecast record net income of 111 billion yen ($978 million) for the coming fiscal year in its annual results today, has also benefited from unintended consequences of the government's attempt to set its fiscal house in order. The country's inheritance tax has been broadened in an attempt to chip away at the national debt. That's increased the attraction of buying real estate, which is entitled to a range of loopholes and exemptions that retirees can use to help pass their wealth to the next generation.

Sekisui has also taken steps to adapt to Japan's aging population, with a business unit set up to build homes with on-site care for elderly residents, and a remodeling division to renovate vacant homes or turn existing properties into multi-family homes where grandparents can live alongside their children and grandchildren.

Despite the demographic decline, Sekisui has had a wind at its back in recent years thanks to continued growth in major urban centers, which has put continued demand pressure on key markets. Tokyo's population will peak in about 2025, according to a company presentation, five years after the Chubu and Kinki regions that surround its other main bases of Nagoya and Osaka.

It's hardly the golden state of the 1980s asset bubble, but Sekisui should have a few good years of profitable building ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net