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March new housing starts down 15.6% nationwide, 11.7% in Tokyo

Last week, the Ministry of Land, Infrastructure, Transport and Tourism released its figures for March housing starts. Last year, we saw a huge decline in the number of housing starts as new government regulations threw the industry into a state of limbo. From July to December, new housing starts fell by 23.4%, 43.3%, 44.0%, 35.0%, 27.0% and 19.2%.

At the start of 2008, conditions became a bit better, with new housing starts falling only 5.7% in January and 5.0% in February. In March, however, housing starts took a tumble once again, falling 15.6% to 83,991 new units.

Of these new units, 24,500 were single family dwellings, down 6.1% from a year before. 30,949 were rental housing, down 22.0% from March 2007, and 27,492 were multi-unit structures, down 18.0% from a year ago. In the Tokyo area, single family construction starts were down 4.7% in March, rentals down 15.1% and multi-unit structures down 13.6%.

For fiscal 2007, which ended March 31, housing starts fell 19.4% - the first drop seen in five years. Because last year’s figures for April, May and June were driven up by the expectation of tightened regulations, it looks like there are at least three months to go before we start seeing some growth in Japan’s housing starts, which will be made possible due to the excessively low level of starts seen from last summer.

Tokyo area condo sales down 17.9% in FY2007 as prices rose 9.3%

According to research data released by the Real Estate Economic Institute today, 58,156 new condominium units were sold in the Tokyo area in fiscal 2007, marking the first year since 1993 that the number of new units sold dipped below 60,000, while the number of sales was 17.9% lower than the previous year. In the greater Tokyo area (including Tokyo, Saitama, Kanagawa and Chiba), the average new condo sold for 46.98 million yen last year, which was up 9.3% from FY2006.

If only central Tokyo is considered, the average price shot up 16.0% as higher land and construction costs combined to push up retail prices. Nationwide, land prices rose 1.7% in 2007 after having risen 0.4% in 2006, which was the first increase seen in 15 years.

At current unit prices, it’s getting tougher to close deals, as only 66.3% of new units were sold within one month of coming online, for the lowest figure since 1991. At the same time, 10,837 units remained unsold at the end of FY2007, which was the first time since FY1992 that over 10,000 new condos remained empty at the end of a fiscal year.

The effect of revised building laws, which went into effect in June of last year, continue to crimp the supply of new condos, as sales of new condos in the Tokyo area this past March dropped to their lowest level in 15 years, falling 17.8% on the year to 4,490 units. At the same time, the average sale during March stood at 49.98 million yen, showing the 16th consecutive month of price increase.

What effect could all this have on the market? Just a few weeks ago, Mori Trust CEO Akira Mori told Bloomberg, “Condo builders are facing a severe situation. There is a high probability for bankruptcies among condo builders.”

While many small developers are apparently already feeling the pinch, those developers who manage to hold out may be in for a windfall, according to Mori: “Sellers couldn’t rid themselves of the vision that real estate prices would increase. In about six months, they will probably rush to sell at a loss. Many transactions may take place in half a year.”

Shinsei Bank sells Tokyo headquarters, joining Citibank; Resona announcement due by the end of the month

Apparently burdened by heavy subprime-related losses, Shinsei Bank has announced the sale of its Tokyo head offices to a real estate fund connected with Morgan Stanley. About a month ago, Morgan paid about $440 million to acquire Citibank’s Tokyo headquarters in Shinagawa. Shinsei’s headquarters, located across from Hibiya Park, went for about $1.18 billion.

Shinsei appears to be in a bit of trouble, with a steadily eroding share price - down about 34% since the end of January - and about $2 billion still owed to the Japanese government, thanks to a bailout about a decade ago, when the bank was known as Long Term Credit Bank.

Shinsei apparently intends to remain in the building for now (and hopefully they keep that Starbucks on the ground floor), but will be looking to move to a new location in about three years.

Earlier this week, it was announced that Resona Bank would also be putting their Tokyo headquarters up for sale, at a price in the $1.75 billion range. Resona is also burdened with repayment obligations to the government, and also intends to move office within the next few years. Resona’s share price has fallen about 16% since the beginning of 2008.

But back to Morgan Stanley, who certainly has been buying up a noticeable amount of Tokyo property. The Financial Times asks:

What we want to know is what drives Morgan Stanley’s seemingly unshakable faith in the value of Tokyo commercial property. As Bloomberg noted, Morgan Stanley has invested more than $18bn in the Japanese real estate market in the past decade and continues to buy property in the country even after reporting a fourth-quarter loss of $3.56bn, the first in the investment bank’s history.

We might find part of the answer in the fact that Morgan Stanley’s recent sale of the Tokyo Westin hotel to the Government of Singapore Investment Corporation for about 77 billion yen brought a return of over 50% in under four years.

Japan General Estate to provide management with allowances for eating and drinking sessions with subordinates

While we learned yesterday that increased bonuses in January helped push average salaries up 1.0% against a year ago, today we’ve received news of one firm in Japan that is taking a decidedly unique approach in its attempt to promote better communication in the workplace.

Condominium marketer Japan General Estate announced today that it will “attempt to smoothen communication with subordinates” by providing a monthly “Subordinate Allowance” ranging from 100,000 to 300,000 yen per month to members of its management team. Those who oversee 20 or more subordinates will be eligible for the 300,000 yen allowance.

What is the money to be used for? According to the press release, funds may be used for eating, drinking, weddings, funerals and so on. That comes out to 15,000 yen per month for an employee at a division with exactly twenty people. If they stick to the cheap spots, and manage to not drag things off to karaoke until 2am, this could subsidize a weekly drinking party for such a department. Read more

Commercial Property Transactions in Japan up 27 percent in 2007

According to the Nikkei Real Estate Market Report, 2,186 commercial property transactions were effected in Japan last year, up 27% from 2006. The report notes that transactions outside of Tokyo shot up 60 percent, accounting for 934 of the total sales. These sales were driven by sell-offs led by state-run enterprises such as the former Japan Post and the Federation of National Public Service Personnel Mutual Aid Associations.

At the same time, office building sales fell by 20 percent in 2007. Buyers, however, paid more for what they got last year, especially in downtown Tokyo. In 2007, the average purchase price for a square meter of office space within downtown Tokyo was just above 1.9 million yen, up from 1.66 million in 2006 and 1.46 million in 2005.

The highest purchase per square meter in 2007? Tokyu Fudosan paid 42.74 million yen per square meter to acquire the Ginza Toshiba Building back in September. Total purchase cost? 161 billion yen.

Other notable purchases in 2007 included Goldman Sachs’ acquisition of the Tiffany’s flagship store in Ginza for 37 billion yen, ING Real Estate’s purchase of a Yokohama shopping mall for 60 billion yen, and Morgan Stanley’s 280 billion yen purchase of 13 hotels from All Nippon Airways.

Foreign and Japanese REITs have both been active in the market, with Singapore’s Mapletree Logistics Trust Management pouring 27.38 billion yen into the purchase of five properties in Japan last year. On the other hand, Japanese REITs snapped up 549 properties, paying 1.68 trillion yen in the process and bringing the total of their holdings to just over 7 trillion yen.

As for 2008? Buying has continued apace, as REIT Japan Real Estate has bought the MM Park Building on the Yokohama waterfront for 37.4 billion yen, Morgan Stanley has picked up Citibank’s headquarters for about 48 billion yen, and the Government of Singapore Investment Corporation has purchased the Tokyo Westin for about 77 billion yen (from Morgan Stanley, who paid 50 billion yen or so for the property just four years ago).

As for the future, Mori Building Company said in a report released on Monday that the amount of newly available office space in large central Tokyo buildings is expected to drop by 45.3% in 2008. At the same time, it might be hard for office rents in Tokyo to be pushed any higher, as some tenants already appear to be fleeing the city. We also expect to see the China Investment Corporation, as well as other Sovereign Wealth Funds, begin to take direct real estate investments in Japan, possibly from the third quarter of this year.

Are soaring Tokyo office rents starting to drive tenants out of the city?

We’ve been watching the Tokyo office rent situation with great interest over the past year or so, as prices seem to climb into areas where it is soon going to become prohibitive for firms to rent prime space in downtown Tokyo. Last week, Miki Shoji reported that rents had increased another 2.2% in January, while Ikoma Data reported rents were up 0.7% and Building Kikaku declared that rents had climbed 0.9% over the same time.

Vacancy rates, however, remain low: 2.55% according to Miki Shoji, 1.7% by Ikoma, and 2.83% according to Building Kikaku.

Of course, this time of year is when office (and residential) rents tend to climb; February and March are prime moving seasons in Japan. On Monday, the Nikkei reported that “the office rental market in downtown Tokyo is showing signs of reversing course, with some corporate tenants being forced to move to more inexpensive areas due to the 10-30% annual spike in rents in the capital’s busiest business districts.”

This is hardly surprising, and something we’ve been predicting for some time, though we assumed the true pain in the market is still some time away. Nonetheless, the Nikkei reports that Mori Trust has not yet begun to seek tenants for its Marunouchi Trust Main Building, which is slated to open in November. Why is this important? A few years ago, the Marunouchi Trust North Tower opened at “nearly full occupancy.” Should the situation be different this time around, people will take notice. Read more

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. Read more

Central Tokyo office rents up 13.36% over a year ago

Late last week, real estate consulting firm Miki Shoji released their quarterly Tokyo Office Building Market Research Report for January 2008. The report covers the five central wards of Tokyo (Shinjuku, Shibuya, Minato, Chiyoda and Chuo Wards). It surveys 2,619 office buildings (35 new and 2,584 pre-existing) that have at least 330 square meters of office space for rent on each floor. New buildings are defined as having their office space come online after January 1, 2007.

The first thing we notice is that the number of “new” buildings has increased by ten since the last report was issued in October. With rent at new buildings being exceedingly higher than that of older buildings, the addition of ten new buildings pulls the increase in average rent noticeably above the increase in rent at existing buildings. Read more

Condo builders in ‘crisis mode’ - debt at top five real estate firms up 17%

Albrecht Stahmer, a good friend of Japan Economy News and the creator of BizCast Japan, has long been saying that there is a bubble in Tokyo’s condo markets - but we haven’t seen much of anyone listening to him just yet. That’s about to change: The Nikkei tells us today that not only is interest-bearing debt at Japan’s top five real estate development firms projected to jump 17% in the current financial year, but that condo builders are now in ‘crisis mode’ as demand for new condos has dried up.

The Nikkei tells us that according to the Real Estate Economic Institute Company, “Inventories as of Nov. 30 stood at 8,669 units, up about 30% year on year, and 70% of them are in suburban areas in Saitama, Chiba and Kanagawa prefectures.”

Perhaps more significantly, the Nikkei tells us that a sea change is going on in the way that new condos are being marketed. One very popular way of advertising new developments is to build ‘model rooms’ that potential customers can check out before they decide to put down a down payment - in fact, customers can check them out before building itself even starts. However, this is all changing:

Condo sales ordinarily begin with model units before actual units are available, but recent poor sales have led some midsize developers to dismantle their model rooms and postpone sales until the developments are complete…When carrying out sales before the units are finished, developers usually distribute flyers in about 10 seperate “rounds,” with each distribution effort costing about 3 million yen. Deciding that it is useless to try talking uninterested consumers into buying when there is nothing tangible to see, developers are switching to post-completion sales, where customers can see the actual unit and decide whether to buy on the spot.

30 million yen for flyers isn’t very much, but model rooms can be expensive. Where I live, both Mitsubishi and Mitsui have recently shut their doors on building that formerly housed model rooms. One of them now hosts a hula dance studio. We will be reporting on its bankruptcy in a few months, but that’s beside the point. The news for condo builders gets worse with the Nikkei telling us, “There are even cases in which developers are cutting prices to the point of losing money just to shed inventory.”

Ouch. So why is this all happening? Apparently, condos used to cost ten million yen less than a house. That gap is closing fast, and the Nikkei says it is now as little at 910,000 yen in some places. I saw a renovated 2 story home with 140m² of space at about $600,000 in Setagaya advertised tonight about a 5 minute walk from where $600,000 condos are being built.

Which one would you rather live in? I mean, if you happen to have a drum kit.

Tokyo’s property market slowing down?

We suspected that most recent Tankan data, combined with a decreased rate of rent rising in Tokyo (though it’s still rising), might be signs of a slowdown in the city’s property market. The Nikkei has confirmed something along those lines. A survey released Friday by the Ministry of Land, Infrastructure and Transport tells us that in September:

Land investments in Tokyo’s 23 wards slowed compared with six months earlier, dropping for the first time in five years…The land transaction diffusion index — the percentage of firms that said land deals were bustling minus those citing sluggishness — deteriorated in Tokyo’s 23 wards for the first time in five years.

Any thoughts on when we’ll start seeing true signs that the cycle is over?

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