Shares of Japanese real estate stocks have reached levels not seen since the country’s asset bubble era, stoking concerns that the property sector is becoming overheated amid an unprecedented inflow of capital.
Shares of Mitsui Fudosan, Japan’s leading property company, surged 7 per cent on Tuesday to close at Y3,440, surpassing a lifetime high reached in December 1989. Shares of peers Mitsubishi Estate and Sumitomo Realty & Development reached lifetime highs early last month.
“Abnormally low interest rates are being used as justification for exceptionally high valuations,” said Peter Tasker, analyst at Dresdner Kleinwort. “The result has been a parabolic ascent, similar to that [of] Nasdaq between 1996 and 2000.”
Not only have individual and foreign investors been active buyers in recent months but many pension funds have increased their allocations to property, creating a wave of money targeting the sector. The Tokyo Stock Exchange Real Estate Sector index returned 13.4 per cent in 2006, dwarfing the 1.9 per cent returned by the broader Topix index.
Last month, the prices of Japanese real estate investment trusts hit record highs, underlining investor confidence that rental prices will keep trending upward.
“Foreign investors have played a role in this upsurge but we believe the main reason is an inflow of funds from individual investors through investment trusts,” said Yoji Otani, real estate analyst at Credit Suisse.
Nikko Asset Management has lifted its stake in Japan Real Estate Investment and 17 other Reits to about 7 per cent each.
Reit returns mostly range from the mid-2 per cent level to about 4 per cent, compared with about 1.6 per cent for newly issued 10-year Japanese government bonds.
Foreign investors have also ratcheted up their share in the country’s leading property companies on optimism that office rents will rise further as Japan’s economic growth continues. Foreign shareholders hold 46 per cent in Mitsui Fudosan and 39 per cent each in Mitsubishi Estate and Sumitomo Realty & Development.
The exorbitant prices of recent property transactions in Tokyo have signalled an end to the persistent asset deflation that dragged the nation’s economy into recession in the early 1990s. But the valuations have also raised fears that the market is overheating.
Concerned that a “mini-bubble” could be forming, Japan’s Financial Services Agency is planning a regulatory tightening on lending to real estate funds. The FSA in December said it had amended internal guidelines used in its monitoring of financial institutions to put a higher priority on risk assessment by banks and brokerages on managing loans to Reits and other types of property funds.