SECTOR FOCUS: RESIDENTIAL In the wake of Abenomics, Tokyo’s housing market is being boosted by a number of factors. Harry Tan explains
It was a year of transition – for the better – in Japan. in 2013, the many forces unleashed by Abenomics strengthened exports, boosted domestic demand sharply and revived output beyond the growth trend of 1.5%. Can the outlook for 2014 and beyond be even better? Yes, as the same growth underpinnings will continue to strengthen the cyclical recovery, ensuring that Japan will stand out as the prominent global and market theme again this year. There are also other structural tailwinds that will drive sustainable and strong growth over the medium term.
In Grosvenor’s view, Japan’s new era of growth will persist from the more stable political environment and proactive economic management and reforms. The sun will continue to shine brightly on Japan and the Tokyo housing market. Compared with the upturn between 2004 and 2006, which reflected a sizeable lift in growth from pent-up external demand and strongly emerging China, economic growth looks to be deeper and more broadly based. improving Us growth and the weaker yen has helped to raise exporters’ margins and profits. The forceful determination to push through an aggressive stimulus programme to reinvigorate the economy has also led to a strong renewed sense of hope.
Companies are expanding, hiring and raising wages, share buybacks have risen to a six-year high and consumer spending is accelerating. Domestic confidence is near an all-time high in Japan. Finally, fiscal and monetary stimulus will stay very accommodative for a long time. As other nations approach the limits of policy, Japan still has considerable firepower at its disposal and looks set to deploy it. Japan is at a nascent stage of a multi-year cyclical recovery. Behind the economic turnaround also lies a real structural story. An ageing population is mitigated by the increasing proportion of women in the workforce and an extension of the retirement age, resulting in labour-force expansion until 2020. Tokyo will fare even better – intra-migration into Tokyo from other provinces is rising at close to 1.5% a year. Japan will also continue to benefit from China’s growing economic clout. China is projected to overtake the Us as the world’s biggest economy as soon as 2016, and long-term prospects for exports and tourism will fare even better than the 50% and 75%, respectively, increase over the past 10 years.
Hosting the olympic games will add 0.7-1.0% in gross output – around ¥4trn (€28.5bn) – to the economy in the years to 2020. The government is planning to spend around ¥409bn on construction, which it estimates will create 150,000 jobs. Consequently, the economy will be boosted by infrastructure investment (particularly for construction and building-related industries), better business conditions, tourism and, of course, consumer sentiment. Finally,planned reforms to lower corporate taxes and improve labour market flexibility will bring about greater vibrancy to the domestic economy. entry into the Trans-Pacific Partnership (which accounts for 40% of world gDP and 30% of global trade) will further boost exports, open up the domestic sectors to competition and raise domestic productivity.
While post-2004 recoveries were short-lived and driven by shallow, suppressed demand following two decades of declining prices, the current turnaround reflects a confluence of broader positive factors.
Demand is firing on many fronts: interest in the Tokyo housing market has picked up since the beginning of 2012, from signs of bottomish pricing amid renewed domestic demand. A bullish medium-term macro outlook and still attractive pricing levels have also led to improved buyer appetite in 2013. Demand remains robust, with the contract rate for new residential developments exceeding 70% for more than a year now. Repricing will also benefit from rising institutional demand, reflecting the near-70% increase in stock prices and record amount of equity raised by Japanese real estate investment trusts (J-REITs) at the beginning of the year.
Furthermore, foreign demand is also rising. The richer housing valuation across many Asian cities has made buyers consider alternative investment locations, and Tokyo is high on their shopping list. According to a survey by the Urban Land Institute, Tokyo housing is deemed the most attractive investment target this year. Overseas interest will stay strong due to the near-20% depreciation of the yen, low borrowing costs that are creating a wide yield spread, and strong property rights from a transparent legal system and freehold ownership.
Supply continues to lag: Compared with the most recent peak in 2005, housing starts in Tokyo were down by 25% last year after falling by close to 60% in 2009 at the peak of the financial crisis. Housing starts built for sales only in Tokyo averaged 53,000 units since 2009 compared with the near 75,000 units between 2005 and 2008, a drop of around 29%. The pace of development suggests that future supply will stay limited, especially in the core ‘3-kus’ central business district. it is estimated that the ratio of property construction started on housing for sale stands at around 24.6% since 2008, compared with 26.9% from 1997 to 2003 and 29.0% from 2004 to 2007 (the last cyclical housing recovery).
Strong housing tailwind: Compared with the previous two housing cycles following the Asian financial crisis, the current cyclical upturn has more legs to stand on. Past cycles have mainly been due to factors not directly tied to an obvious turnaround in Japan’s economic fortunes. This time there are political, policy and macro forces converging to underpin the Tokyo housing market. Capital markets will play a strong part too, with J-REITs planning to raise ¥800bn (€5.7bn) this year. The lack of investable assets and the strong firepower of J-REITs suggest that ongoing re-pricing of residential assets will persist.
The sun is shining on Tokyo’s housing market. The forces behind the current economic growth and property market are uniquely powerful. There is still time to jump on the housing bandwagon.
Harry Tan is head of research for Asia Pacific at Grosvenor
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