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Stocks

Real estate stocks could cool on BOJ news, building scandal

TOKYO -- Investors sold off real estate stocks here Friday as the Bank of Japan refrained from additional monetary easing and hints surface that the hot condo market could be losing its shine.

     The Nikkei Stock Average rose just 20 points to 19,879, stopping short of the keenly watched 20,000-point bar. Real estate stocks were particularly listless, and fickle short-term investors have dominated trading on those shares recently.

     "We have repeatedly seen buying ahead of BOJ monetary policy meetings and selling directly afterward," Daisuke Fukushima of Nomura Securities said, describing price movements since September. That pattern held true this time as well: Real estate stocks fell across the board Friday after the central bank held off on further easing at a meeting the day before. Sumitomo Realty & Development shed nearly 2%.

Building excitement

Monetary easing has proven a boon to Japan's real estate industry so far. Outstanding loans by the country's banks to that sector stood at a record 64.9 trillion yen ($523 billion) at the end of September, BOJ figures show. Easing has let real estate developers raise funds more cheaply, cutting the burden posed by interest payments. Loose money also has given a lift to property investment by the wealthy.

     Luxury condominiums in central Tokyo have seen the largest influx of cash. Units at a Tokyu Land development in Chiyoda Ward are priced at a steep 300 million yen on average. Interest has been strong nonetheless, and 70-80% of those units appear to have sold.

     Prices on existing condos in the greater Tokyo area have soared 40% since 2006, even as land prices have slipped 10%, Deutsche Securities data shows. Only prices on central Tokyo condos -- high-rises in particular -- have been growing, according to Yoji Otani, an analyst there. "A bubble has been quietly forming in that particular market," he said.

Outside shocks

But a bolt from the blue looks to bring prices back down to earth. A major contractor was revealed recently to have presented bogus data on the driving of foundation piles for an apartment complex in Yokohama. The building, owned by a Mitsui Fudosan affiliate, drew attention when it began to lean. How far ripples from the scandal could spread is an open question. But observers have noted similarities between this situation and the lead-up to a steep condo market slump around 2007.

     At the height of another mini-bubble, in November 2005, a number of buildings designed by architect Hidetsugu Aneha were revealed to contain inadequate earthquake-safety measures, with related data having been forged during the design process. The scandal fueled a nationwide uproar, resulting in tougher design regulations enacted in June 2007. New building development slowed, sending the market into decline. The following subprime mortgage crisis, collapse of Lehman Brothers and other events abroad were enough to send some real estate companies under.

     Long-term data on real estate components of the Nikkei average shows those shares entered a decline when the new regulations came on the books. If the pile-driving scandal yields similar efforts, the condo market could falter as before, hurting share prices for real estate companies. Some signs are emerging: The number of newly built units put on sale in the Tokyo area during October slipped 7% from the year-earlier period, the Real Estate Economic Institute said Tuesday. The contract ratio for the region also dipped below the boom-bust mark of 70%.

     Real estate shares no longer appear underpriced, said a foreign securities company here that is recommending investors sell. Condo buildings are the leading earnings source for major developers aside from office buildings. How the condo boom pans out will determine whether those stocks are truly nearing their sell-by dates.

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