Japan land prices rise for first time in 16 yrs

TOKYO: Land prices in Japan rose for the first time in 16 years as overseas and domestic investors competed to acquire properties in the country’s three biggest cities. Gains in Tokyo, Osaka and Nagoya compensated for a drop in regional areas.

Average commercial land prices in the three cities rose 8.9% and residential 2.8% in the year ending December 31, the ministry of land, infrastructure and transport said in report released on Thursday. “Japan is becoming a country of cities, and those companies leveraged to urban real estate will do best,” said Eric Starr, a Japanese stock portfolio manager at Connecticut-based Forest Investment Management, which manages about $820 million in assets.

“I see real estate as a multi-year trade in Japan.” Land values are still recovering from the collapse of an asset bubble at the start of the 1990s and the ensuing decade of declines. Overseas investors continue to pour money into Japanese real estate, attracted by low interest rates, economic growth and new securitisation deals. The investment rush has sparked fears that a new land bubble may emerge in certain areas.

BOJ said in its Financial System Report that it was “necessary to watch future developments in the realty markets and their effect on the financial system”. Japanese interest rates are still the lowest among developed economies after the bank raised rates to 0.5% last month.

“The possibility of the Bank of Japan raising interest rates faster than the market expects has emerged with this data,” said Yoji Otani, an analyst at Credit Suisse Securities Japan in Tokyo.

“The current phenomenon in land prices is becoming a problem. The BOJ has good evidence of that now.” Japan’s increasing land prices are a reflection of the economy and don’t indicate an asset bubble, vice finance minister Hideto Fujii said.

The ministry’s land report, based on appraisals of 30,000 locations across the country, is used as a benchmark for determining land values in the private and public sector. Demand for office space in city centres and for condominiums in expensive districts pushed up prices, according to the ministry report.

Japan’s economy continued its longest extended period of post-war growth, expanding by an annualised 5.5% in the three months ended December 31. The steepest gains were seen in areas near Omotesando Hills, a retail and residential development in central Tokyo, which opened on February 11, 2006.

Both commercial and residential land prices rose by as much as 46% near the project. High-end retailers such as Louis Vuitton, Christian Dior, Armani and Polo Ralph Lauren have opened stores in the area in recent years.

High demand for office space in developments near Osaka and Nagoya railway stations resulted in advances of over 40% in those cities, according to the ministry. Urban prices may have already reached a short-term limit, according to Credit Suisse’s Yoji Otani. “Real estate prices listed on the internet and in newspaper ad flyers have shown signs of peaking,” Mr Otani wrote in a note to investors last week.