How to Revive the Japanese Real Estate Market
Center for Global Communications
January 27, 1999
June Bowser HENTONA, GMAC Commercial Mortgage Japan
Keiko OTSUKI, Morgan Stanley Dean Witter
Yukio FURUTA, CB Richard Ellis
Takashi NORRIS, Heartland Inc.
Yoichi MASUZOE, GLOCOM
Takahiro MIYAO, GLOCOM
Daniel DOLAN, GLOCOM
The third in GLOCOM's series of English language debates discussed "How
to Revive the Japanese Real Estate Market". Four questions were discussed:
- Are Japan's real estate values too high or too low?
- How much lower will real estate prices go?
- How should Japan's real estate policies be evaluated?
- What remains to be done to revitalize the real estate market?
QUESTION ONE: Are Japan's real estate values too high or
NORRIS: It depends on the valuation method you use on the real
estate market. If you do proper evaluation you will probably find the value
of real estate in prime locations low, but the properties in the surrounding
areas still too high. Since value can be based on history you have to be
aware of this in the Japanese real estate market because you cannot use
the bubble period as an index to value any of the property now.
OTSUKI: In the Japanese economy properties are used as collateral
for the financial system. So when property prices go too low the economy
is in a complete mess.
MIYAO: On average, Japan's property prices are too low now on
three grounds. First, home prices now are just as low as those in the late
70s or early 80s. Second, it is not rare to find a property with its rate
of return around 6-7%. Third, mortgage interest rates are extremely low.
But the problem is that real estate prices are still declining, which means
more capital losses.
BOWSER: For the first time in recent history, Japanese consumers
are well positioned to purchase homes at bargain prices. Especially those
young Japanese in their 30s looking to buy their first home. As for the
so-called "bubble economy" and issues involving real estate, the economy
has come half way now and the remainder will likely be dealt with in the
next five to seven years.
MASUZOE: I basically agree with Miyao in that real estate prices
are too low now, but at the same time the problem is that investment is
one thing and buying a house is another. As an investor I do not want to
invest in real estate for the time being, but as a home buyer I would like
to buy a house now.
FURUTA: Theoretically, Japan's real estate prices seem too low,
but practically prices are determined by the market and they are the fair
values, not too high or not too low. Even though rates of return appear
too high, the risk premium is also very high because vacancy rates seem
to be rising now and in the future as well.
QUESTION TWO: How much lower will real estate prices go?
NORRIS: I believe still another 5-10% lower is possible. Prices
should go low enough so an investment in real estate becomes a viable investment
vehicle for investors looking for positive returns.
OTSUKI: In forecasting real estate prices in Japan, it is important
to distinguish among various price indexes, since official land values
are just too high compared to actual land values. Regarding actual real
estate prices, my forecast is rather pessimistic in that the Japanese government
tends to adopt policies to stimulate supply rather than demand, so we will
see more supply in the market leading to a further decline of real estate
values, at least in the near future.
BOWSER: There is a polarization of land values in the real estate
market. Prime real estate has bottomed for the most part, while those non-prime
properties, which account for more than 80% of the market, continue to
see further price declines--close to 10%, especially in Chiba, Saitama,
etc. Office buildings, on the other hand, will face another chronic oversupply
similar to the one earlier in the decade. There will be strong competition
for tenants, causing prices to further soften.
QUESTION THREE: How should Japan's real estate policies
NORRIS: We should take note of the SPC (special purpose company)
as Japan's version of the United States' REIT (real estate investment trust),
which would bring liquidity back into the market.
OTSUKI: Regarding SPC which took effect in last September, we
only have had two samples publicly announced, one by Tokyo Tatemono and
the other by Mitsui Fudosan. The big question is, Why so few?
MIYAO: One of the problems with the Japanese version of securitization
of real estate is the fact that there is no across-the-board, market-oriented
regulatory system in the Japanese security market covering securitized
real estate, like the SEC in the US. In Japan, vertical, ministerial regulations
are hurting the market.
QUESTION FOUR: What should be done to revitalize the real
Takehiko AOYAGI, GLOCOM: Since we do not have a free market
with direct financing, nothing works in Japan. So, in the real estate market
I am afraid that securitization won't work. In this connection I would
like to see regulations on farm land lifted altogether in urban areas in
order to solve our housing problem by market forces.
MASUZOE: I would disagree with the proposal of lifting regulations
on farm land. We need some government policies, including agricultural
FURUTA: A more serious problem is that the inheritance tax is
too heavy. The important thing is to help, not hinder, individuals accumulate
assets. So, real estate taxes in general should be reconsidered for that
NORRIS: I believe securitization is the key and that is what
Japan has to do. Securitization will allow for promoting investments and
bringing liquidity back into an illiquid real estate market.
MIYAO: I would like to point out the "new" housing policy, which
seems to be creating a kind of mini-boom in the housing market now. But
the effect won't last too long unless we adopt a home mortgage interest
income tax deduction system like the one in the US, rather than the current
housing loan credit system.
MASUZOE: I agree that Japan needs the home mortgage interest
income tax deduction system that our group has been proposing. Going back
to the issue of deregulation, I think at least within the Yamanote-line
the FAR (floor area ratio) should be relaxed.
BOWSER: If one climbs to the top of Tokyo Tower, it is easy to
see that this city has many low-rise buildings, despite being one of the
most concentrated metropolitan areas in the world. In this sense, Mori
Building's Roppongi 6-chome Project is an ideal example for the 21st century:
build a few high-rise complexes for a combination of commercial and residential
use, and open up the space to greenery and the environment. This is one
way to bring more residents back into the central three wards.
OTSUKI: Regarding the relaxation of the FAR, we need some method
to fully utilize the existing FAR, rather than further relaxing the FAR
regulation, since the existing limit is not achieved in most places. One
of the questions is how to move or remove the existing tenants for redevelopment
to fully utilize the current FAR.
MIYAO: One of the possible solutions is to adopt the American
style of TDR (transfer of development rights or air rights). For example,
those pieces of land with low-rise use like parking spaces may sell their
air rights to nearby locations for high-rise redevelopment. Such market-oriented
ideas are needed, rather than bureaucratic regulations.
FURUTA: To encourage re-development within the Yamanote-line
we should give real incentives to developers so that successful re-developers
can get huge monetary rewards.
MASUZOE: The basic problem in Japan is that the government
is not giving free choice to individuals. Regulations and taxation are
limiting our free choice. We may have a lot of houses to buy, but not many
houses for rent. So we need a package of consistent policies to meet a
variety of housing needs.
MIYAO: Speaking of a package, what is missing in the whole
package of housing policy is a set of measures to increase productivity,
efficiency and satisfaction in each location. Silicon Valley is a very
expensive place, but people can afford it because their productivity is
high enough to pay high prices or high rents. So what is needed in the
package is something like accelerated depreciation of PCs to encourage
the use of the Internet, etc.
Adam PEAKE, GLOCOM: In looking for an house to buy, personally
I found that nothing is done to encourage the secondary housing market
in Japan. Loan payments may be relatively low now, but we won't be able
to afford to resell our house for many years [new houses typically loose
20% of their market value on the date they are first occupied.] There is
a market for new housing, but no market for reselling. That is something
missing in Japan.
DOLAN: As a summary, I will point out a couple of trends
in our discussion. One is to make the real estate market more efficient
in general. Another is that we need more market-driven activity in real
estate. A third point is that real estate taxes should be re-considered
in order to revitalize the overall market, including the stock of housing
and not just the flow of new construction. We have here a printout of the
proposals generated today, which I hereby present to Mr. Masuzoe. When
you become Governor of Tokyo, Mr. Masuzoe, please remember today's discussion.
Note: To view the above video, you need to have RealPlayer installed in your computer.
Japan Needs a Total Plan for Economic Recovery Takahiro Miyao (International University of Japan), and William S. Comanor (UC-Los Angeles and Santa