Japan's Property Market Comes Back to Life
Move over, Mickey and Minnie: On Odaiba, a man-made island in Tokyo Bay, a 59-foot-high statue of the robot Gundam threatens to usurp the Disney couple’s role as the most popular cartoon hosts in the Japanese capital. Gundam, an anime TV and movie character, is the star at DiverCity Tokyo Plaza, a 2.2 million-square-foot complex that’s become the city’s hottest shopping area since it opened in April, with stores including Coach, H&M, and Zara. More than 4 million people flocked to DiverCity in its first two months. The complex’s developer, Mitsui Fudosan, expects 25 million visitors a year, the same number that went to Tokyo Disneyland and DisneySea combined last year.
Successes like DiverCity are giving investors confidence that the post-financial-crisis slump in Japanese real estate is turning around. “The recovery trend in land prices has become clearer,” Mitsui Fudosan President Masanobu Komoda told reporters in September. DiverCity has lifted the stock price of Mitsui Fudosan, Japan’s biggest developer by sales, 53 percent this year, compared with an 11 percent gain for the benchmark Nikkei 225 index. The company announced Nov. 2 that profit for the first half of its fiscal year had increased 62 percent, to 26.9 billion yen ($328 million), thanks to DiverCity and another Tokyo Bay-area shopping complex, Mitsui Outlet Park Kisarazu. (The second complex has no giant robot.) The company’s residential business was strong, too, earning 6.8 billion yen compared with a loss of 790 million yen during the same period a year earlier.
Mitsui and two other property companies, Sumitomo Realty & Development and Tokyo Land, are among the top seven performers on the Nikkei this year, and other big Japanese developers also are enjoying a renaissance. Mitsubishi Estate, the Japanese developer with the largest market value, on Oct. 30 reported that earnings almost tripled in the first half of its fiscal year, on strong apartment sales and rising office rents. On the broader Topix stock index, real estate companies are up 46 percent this year.
“We have been pretty positive on Japanese developers since the beginning of the year,” says David Fan, who helps manage $2.5 billion at CBRE Clarion Securities in Tokyo. Average monthly rents in Tokyo’s central business district, which were 22,900 yen per tsubo ($8 per square foot) in 2008, before the global financial crisis, are now 16,600 yen and probably won’t fall further, says Bank of America Merrill Lynch analyst Toshiyuki Anegawa. He sees average rents starting to rise again in 2014.
Some companies have felt greater urgency to move since the earthquake and tsunami that devastated much of northeastern Japan last year, according to Keisuke Yanagimachi, head of Japan research in Tokyo with Cushman & Wakefield. Others are taking advantage of lower rents to get more space in better neighborhoods: Morgan Stanley is a major tenant in a new Mitsubishi Estate building at Tokyo’s center. Companies are feeling cramped, says Yanagimachi: “They want to add floors.”
The Bank of Japan plans to spend 30 billion yen ($365 million) next year to boost its holdings in real estate investment trusts to 130 billion yen, a 30 percent increase over the central bank’s holdings at the end of September. Intended to fight deflation, that sort of support has also helped Mori Building, Daiwa House, and other developers with REITs refinance debt at record-low yields. “Banks are becoming very bullish on real estate financing,” says Michimasa Naka, the Japan head of securities dealer StormHarbour Partners.
Although Japan’s leaders have a long track record of fumbling efforts to revive the moribund economy, the Dec. 16 election may offer another lift for the property market. With the Liberal Democratic Party favored over the ruling Democratic Party of Japan, investors are encouraged by talk of more stimulus from LDP leader Shinzo Abe. Although Abe did little to jump-start the economy in 2005 and 2006, when he briefly served as prime minister, investors hope things will be different this time. “The LDP is making the right noises about tackling deflation,” says Fan. “You will have a new government that is willing to do more public work to stimulate the economy to end deflation.” By the end of next year, he sees Tokyo’s vacancy rate dropping to 7.4 percent from 8.7 percent.