Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Japanese equity prices hit a historic record last month. The Nikkei 225 benchmark finally surpassed the 1989 peak, reached during the country’s economic bubble era.
It is not just stocks hitting fresh highs, but local property prices too. That once boring, overlooked sector — written off by foreign investors as an unattractive investment for decades after Japan’s real estate bubble burst in the early 1990s — has even started attracting foreign activist interest.
Average prices for new apartments in Japan’s capital of Tokyo hit a record high last year, with the average price of new apartments surpassing ¥100mn ($665,000) for the first time. Over the past five years, prices are up nearly two-thirds.
The office market in Tokyo has also been improving with the central five wards in the city showing lower vacancy rates and higher rent levels in the fourth quarter, according to consultancy Colliers Japan. The return of tourists to Japan has boosted business for the hotel management units of local property groups.
Surging property prices in recent years has been a common theme for many major cities around the world. The difference with the gains in Tokyo is that a longer-lasting trend is driving prices this time. The number of wealthy households in Japan has reached a record 1.5mn as the total amount of financial assets has also risen every year since 2013. That increase, coupled with demand from wealthy Chinese buyers, has boosted demand for ultra-luxury condominiums in the city. That means higher margins for developers.
For evidence see the share price surge in the sector. Shares in property groups Mitsubishi Estate and Sumitomo Realty are up 40 per cent. Those of peer Mitsui Fudosan, Japan’s biggest, are up nearly 60 per cent in the past year, reaching the highest level in more than two decades. Its market value has been partly boosted by increasing pressure from US activist fund Elliott Management to launch a ¥1tn share buyback earlier this month.
Yet even after those gains, shares in Mitsui Fudosan trade at just 16 times forward earnings, at about half its levels a decade ago. New supply of offices in Tokyo are expected to decline further this year, underpinning good fundamentals for both property prices and leasing businesses.
Expect these companies’ valuations to improve as the value of their real estate holdings rises. The growing activist interest in the sector should help close the current disconnect sooner rather than later.
Lex is the FT’s flagship daily investment column. If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline
