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Japanese real estate: Has it bottomed?

Many asked me if I think the real estate prices in Japan has bottomed. After 20 years of decline, I believe it has.  Why am I so confident? Well, I do not have a PhD in Economics but I understand that price is a function of demand and supply.

The Japanese are fearful of buying any real estate because anyone who bought a piece of real estate in the country within the last 20 years would more likely than not have lost money and this could be as much as 50% of the original purchase price! If the person had taken a bank loan to buy that piece of real estate, including interest on the mortgage, the losses could be even higher. 

Little wonder that 40% of the Japanese population rent the roofs over their heads.  Little wonder why Japanese residential real estate's rental rate declined little relative to the decline in real estate prices over the years.

OK, so the rental demand is strong and this means that rental rates would remain resilient but what about the prices of real estate in Japan? Well, the US$ is probably going lower in time. With QE2 (quantitative easing part 2) by Mr. Ben Bernanke, the fate of the US$ is sealed. Anyone who wants to get a better rate of return would be bonkers to put any money in US Treasuries.

So, what are investors to do? They want to invest in assets denominated in currencies which would gain against the US$. They want to invest in assets which would generate cash flow in currencies with relative strength against the US$. Many Asian countries offer opportunities to these ends.

The fact that Saizen REIT managed to sell quite a few of their properties in their YK Shintoku's portfolio is testament to the fact that buyers are back in the Japanese real estate market and they are looking for better returns on their investments. Money will go to where it is treated best.  Borrowing at very low interest rates and getting more than 10% yield in net property income from Japanese residential real estate is a mouth watering deal!

Even if the real estate market has not bottomed in Japan, I believe it nearly has. This could be the next big story.



Disclosure: Long Saizen REIT.