Debate continues on whether property values in Japan can continue to rise, with some managers believ...
Debate continues on whether property values in Japan can continue to rise, with some managers believing fundamentals remain strong, while others are steering clear.
Natasha Chetwynd, head of Japanese equities at Resolution Asset Management, says prices in central Tokyo have risen dramatically in the last few years, as much as 80% in some areas. She says while the real estate sector is being impacted by global issues, yield spreads remain good and investment funds are likely to continue to buy into the sector. "We've been keen on property for a long time and although there is debate on whether prices can continue to rise, we still think the underlying fundamentals for the market remain strong," says Chetwynd.
Joji Maki, head of Baring's Japanese equity team, supports this view and says he believes property companies are likely to deliver better than expected earnings growth for longer than the market has predicted.
However, Chris Taylor, head of research and manager of the Neptune Japan Opportunities fund, is underweight real estate. Taylor says it is the extension of height restriction laws in prime areas in Tokyo that triggered the rise in property prices. He explains: "It meant that you could jack up the number of storeys by 30% so there was an immediate uplift in terms of the value of rental volumes, never mind the price. However, if you look at the demographics of the Japanese workforce, the total number of yen earned is actually going to go down. There are more people retiring than there are joining the workforce and, if that wasn't bad enough, the people who are retiring are being paid twice as much as the people who are starting work for the first time, that is, the amount of yen earned to pay for the property in these prime areas isn't about to increase."
As a result, Taylor is also steering clear of banks. He argues the only real growth of loan volume has been mortgages and mortgage requests dried up seven months ago.
Taylor concedes the outlook for the commercial property sector is less gloomy but his investment interests lie elsewhere, namely in carbon fibre and paint companies. Although the prices for raw materials for such companies can go up, Taylor argues that because these companies are such dominant players in their industries, they are able to pass this price on to their clients.
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