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Tokyo new condo supply down 30% in 2007, projected to decrease again in 2008; Talk of increased real estate investment warming up

Japan’s real estate market is about to get interesting. A few days ago, the Japan Real Estate Institute reported that the number of new condos placed on sale in the Tokyo area had fallen to its lowest number in 14 years. Within the 23 wards of Tokyo, the number of new units put on the market fell 30% against 2006. In the broader area in including Tokyo, Kanagawa, Saitama and Chiba, the number fell by 18.1 percent.

The number of units sold within the first month of hitting the market slumped to 59.3% in December, which is well below the 70% figure that Japan’s real estate industry sees as a minimum for turning a profit.

While supply fell, prices rose 10.6% over 2006, hitting an average of 46.44 million yen per unit.

On Thursday, Haseko Research Institute announced its prediction that the supply of new condos in the Tokyo area in 2008 would fall a further 1.6% against the figures from 2007. The telling figure, however, was that Haseko predicted a fall of 7.3% in the Osaka area, which had seen a slight rise of 0.2% in 2007.

At the same time, the Nikkei reported on Wednesday that Sumitomo Reality plans to increase the number of units built over the next three years to 19,000. And Sumitomo isn’t the only bullish party. It was also reported that real estate investment adviser DaVinci is planning to sink 200 billion yen into a fund aimed at investing in property developers, and possibly another 1 trillion yen fund.

DaVinci’s President, Osamu Kaneko, was quoted as saying:

In regard to Japan’s real estate investment trust (REIT) market, share prices of residential REITs have been in the doldrums, but I think that will give us a good opportunity to invest in condos…We are setting up a new real estate fund because we expect a flood of properties to be put on the market by their owners toward March because they are having difficulty obtaining refinancing loans due to the tighter lending policies at financial institutions.

Kaneko also says that DaVinci has no intention to get involved with the management of the firms it invests in, and intends to sell its investment stakes within 3-5 years.

As we also found out this week, as of March 2007, not a real estate firm listed on the first section of the Tokyo Stock Exchange had a price-to-earnings ration below 5. As of yesterday, 38% of those firms had fallen below 5. In the meantime, the real estate sector of the Nikkei had lost 45% since its 2007 high, which was in June.

Why does DaVinci’s move make sense? Given the recent fall in housing and construction starts being due in large part to new, stricter regulations, there is bound to be a bounceback in this market as firms have an easier time getting building licenses from the second quarter of 2008. And we’re willing to bet the house that the market players won’t be changing much when the share prices come charging back; the odds of a newcomer large-scale construction firm entering the market over the next 12 months are slim to none.

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