Wednesday, May 8, 2013

BOJ's Easing Floods Tokyo Real Estate With Cash

Tokyo is an important investment area. We are actively acquiring luxury condominium complexes," said Managing Director Koshiro Hiroi at Grosvenor Group Ltd. of the U.K., which in March acquired the Park Habio Azabu Tower, a high-rise condominium complex near Tokyo Tower.

Grosvenor is a prestigious realty firm, privately held by a British ducal house, that owns many properties in London's Mayfair district. It has been investing in and developing real estate mainly in Europe and North America, but is shifting toward Asia, where it can anticipate future growth. Working to increase Asian assets from 8% now to 15% of total assets, the firm has established a joint investment program with an Asian partner. Its direct investment is Y25 billion ($252 million), but total investment is projected to be Y100 billion eventually, including additional funds procured through loans and other financing.

Real-estate investment funds

Grosvenor is not alone in the growing trend to invest in Asian properties. A number of companies have set up investment funds targeting Japanese properties. Fortress Investment Group LLC of the U.S. announced in December 2012 that it had gathered enough investors to close its yen-denominated fund at its cap of Y130 billion. Over the next two years, the fund will invest in real estate and real estate-related debt.

Also worth watching is what individual Asian investors have been doing lately. In January, a Hong Kong investor purchased a commercial building in Tokyo's Omotesando district, a commercial area popular among young people, for Y1.4 billion. Richwood Capital Partners Asia Ltd. plans to put Y20-30 billion gathered from well-to-do individuals in Asia into properties in Japan. It has reportedly already invested Y3 billion in an office building and condominium complex in central Tokyo.

The most prominent and data-driven indication of the bullishness of the real-estate market in Japan is the flood of funds coming back into Japanese real-estate investment trusts (J-REITs). On March 27 the Tokyo Stock Exchange REIT index, which tracks trends in J-REIT investment, reached 1,700 for the first time since January 2008. This six-year high is all the more remarkable considering that the index was at 1,100-1,200 at the end of 2012.

Taking advantage of the phenomenal improvement in financing over the past three months, J-REITs are taking over one large property after another. For example, Nippon Building Fund Inc. and a partner recently bought the Sony Corp. office building for Y111.1 billion and the Panasonic Corp. office building for Y57 billion.

Unleashing change

Behind the recent bullishness of the Japanese real-estate market is change at the top. Beginning last December, the Shinzo Abe administration has introduced a series of economic measures, collectively known as "Abenomics," based on bold monetary policy, agile financial policy and growth strategies to stimulate private-sector investment.

Bank of Japan Gov. Haruhiko Kuroda, inaugurated on March 20, announced further monetary easing both quantitatively and qualitatively toward a price-stability target of 2%, and historically low interest rates will likely remain in place. This offers an ideal environment for real-estate investment, which generally seeks to increase profits by expanding funding through loans.

Abenomics has brought a steep depreciation of the yen and now sustains the earnings recoveries of Japanese exporters. Another notable effect of a weaker yen is that it makes dollar-denominated investments more attractive. "Investors with a specific country allocation will have more room to invest in Japan as the yen becomes weaker," said one global investor. Funds that become available with easing in Europe and the U.S. are seeking investment targets furnishing higher yields than bonds and the like. This also favors the real-estate market.

The growing understanding that the rental market has bottomed out is also a positive factor for the future profitability of real estate. Since last fall, when the supply rush ended in Tokyo's rental market, more property owners have been raising rents, mostly in high-performance, well-equipped grade-A buildings.

In a recent survey of leading securities analysts and real-estate brokers by the Nikkei Real Estate Market Report, the majority of those polled see "rents starting to rise in the latter half of 2013 and continuing to increase in 2014."

New stores, new vigor

Tokyo land prices had fallen 0.3% on the year as of Jan. 1, down for the fifth straight year. But more importantly, the pace of decline slowed by 1.0 percentage point from the previous year.

Prices rose at 84 of 2,606 locations in Tokyo covered by the Land Ministry survey, up by more than 10 times from just eight locations last year. Meanwhile, land prices in 1,014 locations remained unchanged or stopped falling, a significant increase from 100 spots the year before.

Some areas are already enjoying a welcome revival. The opening of the Tokyo Skytree tower last May has contributed to a jump in the number of people visiting the Asakusa area, which is just one station away from the city's newest landmark.

Proximity to the new Tokyo Skytree tower has made the Asakusa district more attractive for business -- about 100 new restaurants opened in Asakusa last year. Reflecting the area's popularity, land prices in the Asakusa 1-chome neighborhood, to the east of Sensoji Temple's Kaminarimon gate, rose 9% on the year for the biggest jump among all commercial districts in Tokyo.

Residential land prices in the Tama area, in western Tokyo, are also rising. For example, the area near JR Tachikawa Station is attracting many new residents because a number of major commercial complexes -- including a LaLaport shopping mall and a big-box store of Ikea, the Swedish furniture brand -- are set to open there.

Demand for housing is also improving in central Tokyo. The price of land in the Toyosu 4-chome area in Koto Ward, where many high-rise condominiums overlook Tokyo Bay, rose by 2.8% on the year. This represented the biggest increase in Tokyo's residential areas.

Goldman reawakens

Noting the market recovery for office space in Japan, Goldman Sachs also appears to have resumed its search for investment targets with attractive returns. In December its private-placement fund acquired an office building on a back street in Tokyo's Ginza commercial district.

While the building is far behind the main street that hosts designer-brand stores such as Tiffany, Louis Vuitton, Chanel and Gucci, Goldman is thought to be gunning for high returns with renovations or rebuilding. Goldman has also acquired two office buildings in central Tokyo that are over 40 years old, presumably with the same intentions.

In the investment market, the names of investment firms that once swept the Japanese market, such as Morgan Stanley and Lone Star Fund, are again coming up in conversations.

Leading real estate service firm Jones Lang LaSalle's "property clock" aggregates trends in office rents in the world's major cities. It plots rental property markets, which tend to be cyclical, as is the stock market. The fourth quarter of 2012 saw the Shanghai and Beijing markets on the cusp of a decline, following on the heels of Hong Kong and Singapore, where rents have fallen further. Tokyo, on the other hand, was identified as a market poised for growth. Moving past a long period of falling rents, the Tokyo market is entering a recovery.

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