Will Olympics boost Japan's property market?

Abenomics sets stage for recovery and demand for real estate could rise too

SINCE Tokyo was selected to host the 2020 Olympics, Japan has been riding a wave of elation. The Nikkei rose 2.5 per cent following the announcement, with construction stocks being the notable beneficiaries.

The Olympics boost came just in time. One year after Prime Minister Shinzo Abe's Abenomics was introduced, Japan's economy is seeing a revitalisation after more than two decades of stagnation.

In Q2 2013, Japan recorded positive GDP growth for the third consecutive quarter. The Property Business Confidence Index by the Land Institute of Japan also recorded positive numbers for all three segments (developer, brokerage and building management) for the first time since January 2007.

This is a good sign as it indicates that sentiment has returned to the pre-global financial crisis level. But the question remains whether the property market will generate enough interest from investors and whether the recovery in the sector is sustainable.

Based on the past, the direct implications of hosting major sports events such as the Olympics depend on the size and relative maturity of the property market. The impact also tends to be greater in smaller and less mature markets.

However, these are not apple-to-apple comparisons as each city differs in size, geography, economic condition and so on. For instance, when Beijing hosted the 2008 Olympics, China was in the midst of an economic boom, which benefited the property market.

In contrast, property prices in London dropped prior to the 2012 Olympics. Although this can be mainly attributed to the global financial crisis and the eurozone debt crisis, London's property prices did not recover to the 2005 post- Olympics announcement level until a year after the Games.

So how will Japan fare leading up to the 2020 Olympics?

There are a few positive demand drivers. Firstly, interest rate in Japan is among the world's lowest. Inexpensive senior debt can be obtained from Japanese megabanks at 50-70 per cent loan-to-value. With the Bank of Japan continuing to pump money into the economy, the low interest rate environment is expected to stay which could spur demand for property.

Secondly, Japan's inexpensive and readily available debt financing produces one of the highest yield gaps in the world. Although a low yield indicates a higher real estate price, the yield spread that investors enjoy over interest rates offers the allure to invest in Japan properties. Over the past decade, Tokyo has consistently offered attractive yield spreads among major global cities (see Exhibit 1).

Being the second-largest property investment market after the US, the size of Japan's institutional grade real estate market is estimated to be worth around US$2.7 trillion as at 2012.

This constitutes 10 per cent of the world's total real estate investment universe, making Japan too big a market to ignore. But foreign investors should note that the investment size for individual assets may not be as large as that in their home countries. This is because many Japanese properties are of smaller sizes compared to many other countries.

In 2012, Japan was ranked third, after the US and China, for having the highest number of Fortune Global 500 companies in the country. Tokyo alone has 48 such companies, the highest among all major cities globally.

Given its mature economy and advanced infrastructure, Japan will continue to be a preferred destination for international companies to set up their operations. This may fuel demand in the property market, especially the commercial sector.

Based on this, the allure of Japan's real estate sector was in place before the Olympics came into the picture. The Games only serves as a catalyst to further boost market sentiment. It is certainly not a key factor that will lift property prices for a sustainable period, nor is it an essential element in enticing property investors to jump on the bandwagon. At most, the Olympics creates a "steroidal boost" to property prices, especially in the Tokyo Bay area, which is the venue for the Olympics.

In short, even without the boost from the Olympics, Japan is undergoing a major turnaround. The beacon of light in the form of Abenomics has helped to inject market confidence, kickstart growth and hopefully will end decades of economic stagnation.

If the momentum continues, there may be potential for capital upside in the near future. Historically, land prices have lagged the stock market. For instance, the stock market peaked in 1989 while land prices only peaked two years later in 1991. (See Exhibit 2)

Land prices are now 66 per cent and 22 per cent below the peak in 1989 and the pre-global financial crisis level, respectively.

Should the economy continue to improve, demand for real estate could rise in tandem. Demand from foreign investors may also run high, as Mr Abe's policies are favourable to foreign investment. As there is a high possibility for real estate prices to improve, potential investors should time their investment strategy accordingly so as to catch Japan's property upcycle.

Source: 19th November 2013 Business Times/ Orange Tee

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Will Olympics boost Japan's property market?

Abenomics sets stage for recovery and demand for real estate could rise too

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