Tokyo saw modest rental growth in the run-up to 2008, followed by steady falls ever since. Capital values were much more volatile, booming further than rents and falling more.

As a result of the capital market volatility and decline in rents, there has been a significant downward yield shift in the SEU properties – from 6.8% in 2005 to 4.8% now. While this may seem bizarre in a weakening market, it realigns Tokyo with world city norms and also makes sense in the context of very low bond rates at home.

Tokyo is one of the least “global” of the cities in this study. Recently, the strength of the yen has been a major barrier to unhedged overseas buyers who have feared losing value in adverse exchange rate movements. Yen-denominated assets also look expensive compared to other cities.

The current average value for the SEU is 51% higher in sterling terms than it would have been if sterling/yen exchange rates had remained at their December 2005 levels.

Another peculiarity of the Tokyo market is the way that real estate is valued in Japan. The bulk of a property’s value is in the land it stands on and, while this may also be true in other countries, it is often not recognised in appraisal methods, which combine the buildings and land in a single entity.

In Japan, the building itself is considered separately from the land, so the building value depreciates. This depreciation occurs over a relatively short period because the tradition is to rebuild every 30 years or so.

This is a logical way to proceed in an earthquake-prone city where the only lasting variable in the real estate equation may be land. But it makes it difficult to make a comparison with Western markets. Rental growth can be more revealing of underlying demand, but even here there tends to be a deflationary effect due to a cultural preference for new properties.

This means the natural tendency of Japanese house prices, as a whole, is to decline. A Japanese index, measured by conventional means, will appear to be falling due to this depreciation. This could mislead any investor willing to take a residential development value at the end of 25-30 years, as in most commercial property.

Taken from
Insights: World Cities Review Spring 2013

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