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Tokyo Condominium Prices Reaching For The Sky

May 30, 2008
Land prices in Japan climbed for a second year in 2007 after a 15-year downturn, as private funds and real estate investment trusts competed to attain properties in the country's largest cities.

A 2007 survey by the Real Estate Economic Institute and a group of real estate appraisers shows that the index of the coupon yield on condos in Tokyo fell to 4.1 per cent last year - down 0.7 percentage point from 2006. The index for the five central-Tokyo wards of Chiyoda, Chuo, Minato, Shinjuku and Shibuya also fell down 0.7 point to 4.1 per cent.

The return is calculated by simply dividing rental income by the amount invested. Calculations were performed on the assumption that funds were managed by investing in developer-built condos freshly launched on the market in 2007.

The slide in the return has occurred for a third consecutive year for the overall Tokyo market. The earnings for central Tokyo has been following a downward trend since the survey started in 2000. Last year, condo prices for overall Tokyo increased to 755,000 yen (US$7,243) per sq. meter, a rise of 12.3 per cent. But rents detracted 3.4 per cent to 2,552 yen per sq. meter.

The number of condominiums ready for sale in the Tokyo metropolitan area slumped 29.7 percent in April to 2,875 units, plummeting for the eighth straight month as prices continued to surge, the Real Estate Economic Institute reported. The year-on-year figure is the worst since 1993 and reaffirms the fact that the condominium market is cooling.

The Tokyo-based private research firm revealed the shrinkage in supply is being caused by condominium prices that are rising along with the price of land, inducing people to delay decisions to buy. Among all the condos that went on sale in Tokyo and neighboring areas in the reporting month, 63.1 percent attracted buyers, falling 11.2 points for the 24th consecutive year-on-year slide, according to the institute.

A prompt recovery in the condominium market is improbable as distributors will be keen to sell units they purchased at high prices, at least for the time being. Prices rose 1.7 percent on average after improving 0.4 percent a year earlier, the Ministry of Land, Infrastructure and Transport said in Tokyo. Average commercial land progressed 3.8 percent from 2.3 percent in 2006, and residential land increased 1.3 percent from 0.1 percent.

Higher condominium prices coupled with stagnant wages are diminishing demand for residential property. Average wages downturned in 2007 and condo prices rose as developers lrestricted supply and allowed record steel and copper costs to home buyers.

Home prices are likely to plunge within several months because of an oversupply of condominiums and depleting affordability for households according to Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. It's natural to witness a drop in demand.
Consumer confidence reached a five-year low. Household assets declined for the first time in five years last quarter as shares slumped, a Bank of Japan report demonstrated last week. The Topix index of stocks has plummeted 17 percent this year after a 12 percent drop in 2007.

An alteration in building regulations may also be decreasing gains in residential land prices, according to Sato. The government's establishment of stricter building-permit rules last June resulted in a logjam in applications that 'worsened the cash position of condo developers,' making them less capable to pay higher prices for new sites, Sato said. Tokyo condo prices climbing is definitely going to have a telling impact on the property market in Japan.
About the Author
Gregory Smyth is an independent author providing assessment and comments on leading International Property Consultants in Asia and Greater China , especially CB Richard Ellis.
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