How to Revive the Japanese Real Estate Market

Panel Discussion
Center for Global Communications
January 27, 1999

Panelists:

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

Moderator:

Daniel DOLAN, GLOCOM

Description:

The third in GLOCOM's series of English language debates discussed "How to Revive the Japanese Real Estate Market".  Four questions were discussed:

1. Are Japan's real estate values too high or too low?
2. How much lower will real estate prices go?
3. How should Japan's real estate policies be evaluated?
4. What remains to be done to revitalize the real estate market?

QUESTION ONE:  Are Japan's real estate values too high or too low?

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 be evaluated?

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 estate market?

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 policy.

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 purpose.

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.

RealVideo of the debate

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Related Information:

Japan Needs a Total Plan for Economic Recovery Takahiro Miyao (International University of Japan), and William S. Comanor (UC-Los Angeles and Santa Barbara)