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The split personality of Japan's property market

Pacific Century Place Marunouchi, located near Tokyo Station, is likely to be one of the biggest property deals this year.

TOKYO -- Japanese and foreign investors are flooding into Japan's real estate market, raising expectations of a minibubble. Home buyers, meanwhile, are disappearing, and that could end up spelling trouble.

     This summer, a property market analyst at a European brokerage's office here received a deluge of inquiries from real estate funds, both domestic and overseas. 

     They all wanted to buy a high-rise building in Tokyo's Marunouchi business district and asked how the analyst expected office rents in Tokyo to climb.

     The building is the 32-story Pacific Century Place Marunouchi, located near the sprawling Tokyo Station complex, which houses offices and commercial facilities.

     After a fierce battle for the property among European pension funds, Japanese trading houses and other institutional investors, the Government of Singapore Investment Corp., Singapore's sovereign wealth fund, has emerged as the likely purchaser.

     The purchase price is estimated to be around 170 billion yen ($1.54 billion), which would make the transaction one of the largest real estate deals in Japan this year.

     Since there are not many prime properties for sale in central Tokyo, the analyst at the European brokerage said investors saw it as a "a rare chance."

     Big real estate investors are snapping up pricey properties in Tokyo and other big Japanese cities in what is increasingly looking like a real estate boom.

     In July, a fund managed by LaSalle Investment Management bought three logistics business facilities in Kawasaki for 55 billion yen.

     In August, Mori Trust, a real estate developer based in Tokyo, bought Meguro Gajoen, a hotel and wedding hall complex in Tokyo's Meguro Ward, for about 130 billion yen.

     The growing number of property transactions is pushing up commercial land prices in large Japanese cities.

     "The Bank of Japan's aggressive monetary easing has helped the real estate market rebound," said Shigeo Hirayama, an executive officer at Urban Research Institute.

     Hirayama thinks massive extra liquidity and extremely low interest rates -- results of the BOJ's drastic monetary expansion program -- have triggered the real estate investment spurt.

     Real estate transactions by companies and real estate investment trusts totaled 2.5 trillion yen in the first six months of this year, up 6% from the year-earlier period, according to Urban Research Institute. It is the largest figure for the January-June period since the company started compiling data in 1996.

     Financial institutions are feeding strong demand for funds to buy land and buildings. These loans offer good profit margins, according to Osamu Sugata, a senior researcher at Sumitomo Mitsui Trust Research Institute.

     New loans to finance the construction or acquisition of rental properties increased 4% during the first half of this year, to 5.94 trillion yen, close to the figure for the same period of 2007, when there was much talk about a "real estate minibubble."

     The current fundraising environment, in fact, is stoking growth in real estate investment, thereby lifting land prices.

     But the housing market shows a radically different landscape.

     "Housing loans have become a tough business for us because of stiff competition to offer low-interest lending," said a top executive at a major Japanese bank. Mortgage rates have fallen to record lows.

     The Big Three banking groups lowered the rate on their 10-year fixed-rate housing loans to 1.2% in September, while Sumitomo Mitsui Trust Bank reduced the rate to 1%; all are all-time lows.

    The total of housing loans provided by the three largest banking institutions in the April-June quarter fell 23%, due to a plunge in demand following the consumption tax hike in April.

     Since then, banks have been steadily cutting their mortgage rates, and the rate war is sapping their profits.

     The trend will eventually start harming the economy, even to the point of disrupting the property market recovery.

     Alarmed by the housing market slump, the government is looking at how it might stimulate demand.

     The Ministry of Land, Infrastructure, Transport and Tourism has proposed a tax code revision to raise the maximum tax-free amount of cash that parents can gift to their home-buying children. The ministry is demanding that the maximum home-buying gift tax exemption be tripled to 30 million yen next year.

     It is, however, unclear whether this incentive would significantly boost housing demand in a nation whose shrinking population acts as a structural hindrance to demand growth.

     "The government should make greater efforts to push through reforms included in its growth strategy," said the Urban Research Institute's Hirayama.

     There has been talk of a significant corporate tax cut that some observers claim would stimulate capital investment and attract more foreign direct investment. The government would also like to see wages grow enough to goose demand for housing but seems to be hamstrung in this area.

     Whether the government can swiftly implement its growth agenda will determine, to a large extent, the duration of the minibubble in trophy properties.


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