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Japan's property lending tops charts amid investment craze

But residential boom could unravel as population shrinks

A residential neighborhood in Tokyo

TOKYO -- Lending to Japan's real estate sector climbed 15.2% to a record in 2016, supported by brisk property investment amid rising land prices and the central bank's negative interest policy.

While this investment boom has yet to result in an asset bubble, the Bank of Japan and financial regulators plan to remain vigilant as booming construction could be out of step with demand, spelling default risks down the road as the rental market shrinks.

Good prospects

Financial institutions lent 12.28 trillion yen ($109 billion) for fixed investment in the real estate sector during 2016, according to data released Thursday by the Bank of Japan. This is the highest amount dating back to 1977, the first year such records are available, and marks growth more than twice as fast as 2015's 6%. New lending to all sectors rose 10.4% to 48.39 trillion yen, the highest since 1997. Property lending provided a fair amount of this growth.

At the end of December, outstanding loans to the real estate sector totaled 70.35 trillion yen, the most since March 1970 and 15% of the 477 trillion yen outstanding to all sectors.

Rising land prices are the main reason for this climb. Of 100 sites occupied by buildings such as high-rise condominiums, land prices had climbed at 82 and fallen at none as of Oct. 1, according to the Ministry of Land, Infrastructure, Transport and Tourism. Major urban redevelopment projects ahead of the 2020 Tokyo Olympics coupled with anticipated increases in tourism have fueled expectations of further increases. Investors such as foreign hedge funds are plunging massive sums into this growth market, and banks' real estate loan books are growing fatter.

Pressure on banks' finances from the BOJ's negative interest rates on certain deposits has made lending to real estate investment trusts, which are expected to gain value, more appealing. The market capitalization of Japan's REITs currently totals around 12 trillion yen, or 10% higher than when the BOJ announced the negative rate policy.

Institutions are also exploring more exotic products, including subordinated loans, which rank low in terms of repayment priority in the event of a borrower bankruptcy and so are riskier than other debt. Funding of public works construction and lodging development also rose markedly in 2016.

Individuals, too, are robust property investors. New loans of any type to individual borrowers climbed nearly 20% in 2016 to 17.71 trillion yen, due in part to growth in home loans. One 45-year-old worker at a construction company who owns six rental properties plans to buy another condo in Tokyo this year for investment purposes. Trends such as rising interest rates in the U.S. mean Japan's "ultralow interest rates are unsustainable," he said, adding that he wants "to buy now" while conditions are good.


Building or buying apartments has become a popular way to reduce one's inheritance tax exposure, particularly after revisions to the tax code in 2015 subjected many more people to such levies. Construction of rental housing is swelling in part because of such investment demand. Developers broke ground on 383,000 residential units in fiscal 2015, according to the land ministry. This is over 30% more than four years before. In April-December 2016, the total was 330,000 units -- nearly 12% more than a year earlier.

But "in a society where the population is shrinking, a drastic increase in rental construction is out of step with demand," said Tsuyoshi Ueno of the NLI Research Institute, calling lending practices "distorted."

A BOJ official said that "the real estate sector as a whole is backed by real demand." However, "if vacancies rise, particularly in regional cities, and that leads to falling property prices, that could weigh on the broader economy," the official said. Many owners -- particularly individuals -- could struggle to repay their loans if oversupply weighs on rental income. "The debt burden" associated with property investment "could outweigh the tax savings in more cases," a source at Japan's Financial Services Agency said.

Watchdogs also point out that nonbank lenders are drastically loosening borrower requirements with the goal of beating out more traditional institutions. Going forward, the FSA will also look into whether banks have adequately explained the risks of real estate investment to borrowers, such as those posed by depopulation.

Yet because many prospective landlords enter the business with a certain amount of land to their name, banks can keep their own lending risks to a minimum by using that land as collateral. "There is little concern of a negative impact on institutions' risk management," BOJ Gov. Haruhiko Kuroda told a news conference in December.

Hot markets are also fairly localized. "As far as Tokyo real estate lending goes, the situation is significantly different in the three downtown wards of Chiyoda, Chuo and Minato than in the rest of the capital," an FSA official said. This stands in contrast to the late 1980s, when land prices surged nationwide amid Japan's real estate bubble.


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