Japan's Real Estate Market Reignites... How to Seize the Opportunity [Kim Yongnam's Real Estate Asset Management]

The Japanese real estate market is currently reminiscent of the shadow of the past bubble economy. In the first half of this year, foreign investors' purchases of Japanese real estate reached a record high of 1.14 trillion yen (approximately 10.83 trillion won) on a semi-annual basis since 2005. This amounts to 22.8 billion dollars (approximately 32 trillion won), which is one-third of the total investment in the Asia-Pacific region. Among this, Tokyo recorded 13.2 billion dollars (approximately 18 trillion won), emerging as the top investment hub in Asia.

Several factors are contributing to the heated investment sentiment. The biggest factor is Japan's accommodative monetary policy. Although the Bank of Japan has ended its ultra-low interest rate policy, the short-term interest rate remains at around 0.5% per annum, which is significantly lower than the 4.25-4.5% in the United States or 4% in the United Kingdom.

The yield gap is also attractive. As of the first quarter of this year, the difference between the investment return on real estate in central Tokyo and the long-term interest rate reached 1.9%, surpassing New York (1.7%) and London (1.2%). In addition, the consumer price inflation rate, which has been in the 3% range for eight consecutive months, is raising expectations for rent increases.

The trend of returning to the office after COVID-19, which has increased demand for large office buildings in the city center, is also a positive factor. Global investment firms like Blackstone are making large-scale investments, seeing this market potential.

The residential sector is also experiencing a boom. The proportion of existing apartments in Tokyo's 23 wards exceeding 100 million yen (approximately 950 million won) has surged from 1% to 16% over the past decade. In particular, in Minato and Chiyoda wards, more than half of the pre-owned homes for sale exceed 100 million yen. As the surge in new apartment prices spreads to the second-hand market, one in seven existing apartments for sale in the first half of this year exceeded 100 million yen.

However, behind the boom, there are growing concerns. As speculative transactions increase, making it difficult for actual-demand buyers to purchase homes, Chiyoda Ward has requested that a five-year resale ban be included in public redevelopment apartments. Although it is not legally binding, the real estate industry is concerned that such a measure could adversely affect the sale of new apartments.

The current situation is reminiscent of the bubble economy of the late 1980s. At that time, the Japanese government lowered interest rates from 5% to 2.5% per annum and eased lending regulations to counter the strong yen. The 'myth of land invincibility' was rampant, and speculative sentiment reached its peak, with Tokyo land prices skyrocketing more than threefold. However, a sharp interest rate hike from 2.5% to 6% per annum, coupled with aggregate real estate regulations, caused the bubble to burst, and a 20-year long-term recession began.

Of course, the current market is not exactly the same as it was then. While past speculation was on a national scale, the current trend is concentrated in specific areas such as Tokyo. However, there are similar concerns to the past, such as increased dependence on foreign capital and rising labor costs as wages have risen by 5.3% this year alone.

According to the Asahi Shimbun, from 1991 to 2020, nominal wages in Japan rose by just over 10%. Unlike this long-term stagnation, the recent rapid wage increase is acting as a new variable in the market cost structure and investment profitability.

The Japanese real estate market is currently revitalized by the influx of global capital and expectations of economic recovery. However, it is a time to remain vigilant, reflecting on the lessons of the 1980s bubble burst.

So, what path should investors choose in this uncertain time? The answer lies in a strategy that turns crisis into opportunity. In a period of inflation, income-generating properties such as studio apartments or multi-family homes that can pass on rent increases will be the most realistic and powerful solution to generate profits beyond the wave of inflation.

<Korea Economic The Moneyist> Kim Yongnam, CEO and President of GlobalPMC Co., Ltd.