Central Tokyo Land Prices Rebound, Prompting Bubble Fears

Redevelopment is under way in Shiodome Area, Tokyo, while there is fear that bubble economy could re-burst

 

   Land prices in Tokyo have started rising again for the first time in 13 years. According to the National Tax Agency's August release of roadside land price figures (as of January 1, 2005; the indicator is used for real estate valuation for inheritance tax assessment), the average cost of 1 square meter of standard residential land in central Tokyo has risen 0.4% from 2004 to 458,000 yen. The climb is particularly striking in premium and redevelopment sites in the city centre. Ginza 5-chome, a leading central business area with top-grade commercial and office buildings, saw roadside land prices rise 9.9% to 15,120,000 yen-almost a return to the 15,200,000 yen high of 1987, at the peak of the bubble economy.
   According to one leading real estate company, "If there is good land for high-grade condominiums and office buildings, it is not surprising that city center roadside land transaction prices have nearly doubled."

A Rush of REITs

   The buoyancy of the real estate market is driven by the rush to establish real estate investment funds, which have attracted risk money with no other place to go due to protracted ultralow interest rates. According to Bank of Japan's survey of bank loans by borrower category, during fiscal 2004 banks in Japan increased new lending to the real estate sector by 15% year on year to ¥8.178 trillion.

   Currently, 17 funds have joined is known as the J-REIT market. Within the year, up to ten more funds are expected to join, almost tripling the total worth of this market compared with March 31, 2003 to 2.5 trillion yen. Since March 31, 2004, the rise has been 1.6-fold.
   The impetus behind this market growth is coming not from listed REITs and other investment vehicles that many different investors from all categories, but private funds with a clientele consisting only of financial institutions. Currently, over 100 private funds are jostling for place in the domestic market, including major real estate companies, foreign investors and trading companies, and small independent concerns set up by financial institutions. According to Mizuho Bank, the total of funding channeled by all these funds, including listed REITs, into Tokyo's central-area real estate market was 3.0 trillion yen in 2004 alone.

Private Funds Raise Concerns Over REITs

   However, the properties such private funds seek to acquire are limited to premium properties that can be resold at a high profit, and show stable rental potential (depending on how they are refurbished). Outside the city center, there are still areas where land prices continue to decline, despite the rise in average roadside land prices, and the market gap between winners and losers is widening. Many observers are concerned at the upward trend in land prices. Should long-term interest rates reverse course, money now channeled into REITs could follow suit and flow into other financial instruments. This would fuel doubts over the prospects of the real estate market. Currently about 50% of the owners of listed REITs are regional banks and other financial institutions. If they all rush to sell their holdings at once, this could trigger another collapse in land prices. Given that 70% of REIT financing by private funds is covered by borrowed money, an increase in interest rates would immediately rebound on portfolio yields and profitability. As land prices rise, so too do the apprehensions.