By Jeff Wynkoop
Prices for investment condos continue to rise unabated. According to a leading real estate online site, the average per room price for condos in Japan was 15.5 million JPY in the April-June period, an increase of 3.8% compared to January-March 2017. This is the highest price level in 11 years, and is indicative of the continuing high demand from private individuals and foreign investors for Japanese properties.
Compression of Cap Rates
Kenbiya, a leading real estate investment site, says that prices are up over 20% when compared to three years ago. This year, capitalization rates (annual rent divided by price) have compressed 28 basis points to 7.06%, which is the lowest yield level since they have been tracking in 2005. According to Kenbiya, the average price for an apartment is now 65.05 million JPY, an increase of 0.3% from the January-March period, and the highest level since January-March 2006.
Although prices in metropolitan areas are historically high, they continue to appreciate. According to real estate portal FirstLogic, the average per room price for a condo in Tokyo in the April-June period was 19.63 million JPY, an increase of 2.5%. In Osaka, prices were up 1.1% during the same period, and yields are still historically very low.
Demand From Chinese Investors
Demand from Chinese investors is one of the main drivers of the growing market. According to Landnet, a real estate company specialized in sales of pre-owned one room condominiums, there are more agents coming to them with Chinese customers than ever before. Real estate prices in China continue to skyrocket, so the Japanese market appears relatively attractive to the average Chinese investor.
Domestic demand for properties is also still strong. According to Nagomi Fudousan, another real estate company specialized in sales of pre-owned one room condominiums, demand is coming not only from 30-40-year-old Japanese couples preparing their life plans, but also from those over 50 wishing to invest in a condominium to lessen the future inheritance tax burden for their heirs. Orix Bank says their working customers for loans for these types of properties are usually couples with annual incomes between 6-8 million JPY.
Growing Demand in Regional Areas
Investors are looking for opportunities farther and farther outside of the traditional business centers of Tokyo and Osaka. Accordingly, investment in regional areas is also reflecting the growth in prices in the main city centers. For instance, in September last year an investor in Aichi prefecture (in the Nagoya area) bought a single pre-owned condominium that was built over 10 years ago for 180 million JPY.
High Construction Costs Providing Support
Construction costs are relatively high, and are expected to remain high for the foreseeable future. This is causing many market participants to believe it is unlikely for prices for investment condominiums to suffer a major setback in the near or mid-term according to Resona Bank. Nevertheless, there are other banks that are a bit more cautious, reasoning that since the market has been greatly supported by the very cheap borrowing environment engineered by the Bank of Japan, prices will likely be affected when the tightening cycle begins.
Source: Nikkei On-line, July 11, 2017
Top image: Wikimedia, condo buildings in Shinagawa Ward, Tokyo