CONCRETE CANYONS

Maybe it’s just the heat, but the Japanese property market is beginning to feel a little bubbly. As predicted here a few months ago, the recovery is mainly being fueled by greater availability of debt, as opposed to improvement in the real estate fundamentals. Japanese real estate investment trusts (J-REITs) have continued their strong pace of acquisitions from the first quarter of 2010, but now domestic and international private funds are becoming active again. Even the office sector, where the fundamentals are weakest, has attracted new investment from foreign funds, even in some non-central locations. One active lender attributed this behavior to the rapidly approaching deadlines for some foreign funds to use or lose their capital commitments.

As discussed in this column two months ago, interest from Greater China has also continued strongly. While Chinese interest in resort hotels remains strong, two of the largest recent residential deals in central Tokyo were made by Hong Kong and Taiwanese groups, supposedly at fairly low yields.

After a long, slow dry-spell, the increase in transactions is a welcome change, and while almost any incoming foreign investment is welcome, it doesn’t hide the fact that Japan remains a ticking time-bomb. While Tokyo’s population is still inching up fractionally, the nationwide population in Japan is on the decline. According to the OECD (Organization for Economic Cooperation and Development), Japan’s population is expected to fall from 127 million now to 122 million by 2020. Even a slight fall in a country’s population has enormous impact on overall economic activity and real estate in particular, but looking ahead to 2050, the situation is even more alarming, with the population falling to 95 million.

Office rents in central Tokyo are less than half of the peak in 2008 and the vacancy rate continues to rise. No longer are empty buildings unique to regional cities; central Tokyo’s back streets are also suffering from neglect and a lack of demand. If deflation and the population decline continue at the current rate, many of these buildings may never find tenants. With 25 percent fewer people, a big chunk of Japan’s concrete jungle would be superfluous.

What has been the government’s response? Several years back, a cabinet minister was added to address the low birth rate and funding for day care centers has been increased. Thanks to the Hatoyama administration, those with children can look forward to receiving a subsidy of 13,000 yen per month for each child. These are all steps in the right direction, but none is likely to have much impact on reversing the population decline. Because of deflation and the burst of the bubble economy 20 years ago, Japan is certainly much cheaper to live in than before, but 13,000 yen per month won’t even cover the cost of juku, the ubiquitous cram schools for helping to get Japanese kids into the best high schools and universities. Japan’s bleak future is beginning to have a big impact on the investment plans of domestic companies as well. With a shrinking market and prolonged deflation, Japanese consumer products companies have stepped up their overseas investment plans. Leading companies such as Suntory, Kirin and Fast Retailing (Uniqlo) have been aggressively acquiring companies outside of Japan and expanding global sales and marketing to serve overseas demand.

With one of the lowest fertility rates in the OECD, the best solution to Japan’s future is massive incentives (otherwise known as bribes) to increase the birth rate. Imagine the impact on family planning decisions if the government were to award 5 million yen for the birth of each child and an annual subsidy of 2 million yen. Sex for fun and financial reward should be a powerful aphrodisiac.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.