Is now the right time to dive into the Japanese market?

Is now the right time to dive into the Japanese market?

By OrangeTee Research & Consultancy

Right place, right time?

Singapore’s outward real estate investment

With real estate prices at record high and stringent cooling measures in place (refer to exhibit 1), Singapore real estate investors have started looking overseas to grow their wealth. The growing demand for overseas investments is evidenced by the increasing number of international property roadshows held in Singapore, as well as more interests from banks to finance overseas properties. According to the Monetary Authority of Singapore (MAS), the value of overseas properties dealt with by Singapore real estate agencies has reached $2 billion in 2013, up from $1.4 billion in 2012. This is a 43% year-on-year increase. Popular locales include countries like Malaysia, London, Australia and the USA. Most recently, countries like Philippines, Thailand, New Zealand and Japan have been gaining popularity.

Exhibit 1: Singapore Property Price Index

Outward real estate investment in Singapore can generally be grouped into two buckets — emerging and developed markets. Real estate investment in emerging markets generally offers potential high capital growth on a relatively low investment quantum. However, the risks involved are also greater. Developed markets offer low-risk investment options but the quantum is generally much higher which raises the entry barrier for some. Investors can expect a steady income through rentals together with prospects for capital appreciation, though potential capital growth is usually slower compared to emerging markets.

Allure of investing in Japan

Japan has a total population of about 127 million and is the third largest economy in the world in terms of nominal GDP. Previously, the Japanese property market was considered inaccessible to many foreign buyers partly due to the high cost of Japanese property and strong yen. Deflation which has plagued Japan for the last two decades made things worse, as the prospect of capital growth was almost non-existent. However, things are set to change. Currently, with Abenomics pushing the yen lower and driving growth, Japan has come onto the radar of many investors. Like the rest of the developed economies, Japan offers relatively stable rental incomes, good supporting infrastructure and transparent regulations. Furthermore, with Abenomics as the catalyst, Japanese real estate market is poised to become an excellent market with upside potential for capital appreciation.

So far, Japan is proving to be an exciting place to invest. It was one of the best performing stock markets in 2013, gaining 33% in one year (refer to exhibit 2). The hosting of the Olympic Games 2020 has also excited real estate investors around the world.

Exhibit 2: Nikkei 225 Index

Rising land prices

Since the start of Abenomics, land prices in Japan have started to trend upwards. Based on data from the Ministry of Land, Infrastructure, Transport and Tourism of Japan (MLIT), in 4Q13, 81% of intensively used land in Japan rose in prices, a sharp contrast to 2009 when over 98% of intensively used land in Japan was falling in prices (refer to exhibit 3). Intensively used land is defined as land in built-up districts and is a lead indicator of the property market trend in Japan. Based on the data, for the whole of 2013, the proportion of intensively used land that has seen rising in prices has increased sharply.

Exhibit 3: Prices of intensively used land in major cities (Japan)

Condominium prices outperform

The rise in land prices may ultimately fuel property price growth in Japan. However, it seems that not all segments of the private residential market performed similarly. Based on property price index data (refer to exhibit 4), condominium prices have performed spectacularly, soaring 11% in 2013. However, the landed and detached housing segment has lagged behind, falling 5% in the whole of 2013. This has put a drag on overall residential prices. Overall residential prices are down 2% y-o-y at the end of 2013. We expect to see more upside in the residential market, as rising land prices augur well for both the condominium and landed segments.

Exhibit 4: Residential Property Price indices (Tokyo)

Japan residential market characteristics

Tokyo’s residential market enjoys high occupancy rates similar to Singapore. As at end of 2013, occupancy rates were at 95.5% (refer to exhibit 5). Even during the Global Financial crisis, occupancy rates were resilient, only falling to a low of 92.3% in August 2009. Though, both Japan and Singapore residential markets enjoy high occupancy rates, there is a notable difference in home ownership rates. Home-ownership rate in Tokyo is about 44.6%, compared to 90% in Singapore. This could mean that there is a higher propensity to rent than to buy properties in Japan.

Exhibit 5: Residential occupancy rates (Tokyo)

In Tokyo, residential transaction sales volumes averaged around 7,244 units quarterly over the last 2 years. Volumes have remained relatively stable except in 4Q13 where quarterly volumes suddenly plunged 41% q-o-q, probably due to insufficient real time transaction data. According to MLIT Japan (refer to exhibit 6), houses in Tokyo which are about 50 to 100sqm take up the greatest proportion (46%) of transactions each quarter in 2012 and 2013. “Shoebox” units as defined in Singapore as units under 50sqm, took up only about 22% of the total transaction volumes in Tokyo.

Exhibit 6: Residential volume breakdown by size (Tokyo)

We also analysed the distance (based on walking time and is measured as 1 minute being about 80 metres. The Japanese do walk very fast) to the nearest metro/subway station. Based on the data (refer to exhibit 7), for transactions in 2012 and 2013, about 63% of all the transactions in Tokyo in the past two years were less than 10 minutes away from a metro/subway station. This could imply that accessibility is a very important factor for the residential market in Tokyo. Tokyo has a very extensive and well developed metro/subway system and is the most convenient way to travel in Tokyo.

Exhibit 7: Residential volume breakdown by walking time to nearest metro station (Tokyo)

Why Singaporeans should consider Japan

Due to Abenomics, the strong yen has depreciated significantly against the Singapore dollar. Currently, the yen has depreciated by about 21% against the Singapore dollar compared to five years ago. As residential prices in Japan have yet to surge, this is an opportune time to purchase a quality asset at a discount due to weaknesses in the Japanese yen. Furthermore, the current Japanese government seems very determined to implement measures and changes to bring Japan out of its current slump.

Other than the positive effects of Abenomics, the high occupancy rates for residential properties are also attractive to investors who have a longer-term investment horizon. The resilience of the occupancy rates even during challenging times will be able to provide some peace of mind should major crisis hit unexpectedly. Despite the shrinking national population in Japan, capital city Tokyo continues to enjoy positive population growth. It is estimated that the population in Tokyo will increase from 13.16 million in 2010 to about 13.35 million in 2020. Furthermore, compared to 20 years ago, migration from Tokyo to other prefectures within the Greater Tokyo Area has dropped drastically from an outflux of 93,000 to only 3,000 in 2010, implying that more people prefer to remain in Tokyo as it is a centre of government, education, media and transportation.

The prospects for Japanese real estate are attractive. Japan’s economic growth in 1Q2014 has surged 5.9% on an annualised basis from the previous three months (refer to exhibit 8), and the growth surge appears to mark a victory for Abenomics. Should Abenomics continue to succeed, and stable inflation start to set hold in Japan, upward revision in prices and rents are likely to follow suit given the increasing land prices. Investors who are looking for quality real assets with stable rents and good capital appreciation prospects may want to consider adding Japan real estate to their portfolios as the timing is just about right.

Exhibit 8: Japan annualised real GDP growth (Seasonally adjusted)

Photo credit: Flickr/Bryan Suen