February 3, 2018 11:37 AM

Tokyo condo prices tower near record heights in 2017

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From Nikkei News

Condominium prices in the greater Tokyo area are reaching levels not seen since Japan's bubble economy 27 years ago as major developers aggressively price new properties in popular areas amid a limited supply.

The average price of a newly built condo in the capital region -- Tokyo and the surrounding prefectures of Kanagawa, Saitama and Chiba -- rose 7.6% in 2017 to 59.08 million yen ($533,000), the Real Estate Economic Institute said Monday. That was higher than the average in 1989 and 1991 and the second-highest level ever, trailing only the 1990 record by 2.15 million yen.

But unlike the bubble era, when the value of all property skyrocketed, sharp price increases have been limited to new units in the heart of Tokyo or redevelopment projects near major train stations.

Only the biggest survive

Prices are rising as Japan's large developers expand their dominance. Japan had 390 developers in 2002 but has just 122 now as small and midsize

operators folded in the wake of the 2008 financial crisis.

The seven biggest players, meanwhile, widened their market share from the 20% range before the financial crisis to 46%. Price competition has become less common as a result, creating ideal market conditions for these companies.

Only large developers can afford to build in Tokyo's 23 wards, where demand is firm, given the intense fight for land with hotels and other competitors. "Condo development has become a business with high barriers to entry," said Takao Yamada, a group officer at Mitsui Fudosan Residential.

The number of new condos priced at 100 million yen or more rose 52.4% to 1,928 in 2017, the highest level since 1990, as major developers actively build luxury properties in central Tokyo. Tokyu Land has put four such properties on the market in the current fiscal year in popular neighborhoods including Roppongi and Nagata-cho.

"We want to continue to provide one or two properties annually going forward from next fiscal year," said Yuji Okuma, Tokyu Land's president and CEO, referring to developments with condos of 100 million yen or more.

But there is a limited pool of buyers for high-end apartments in central Tokyo, mainly wealthier dual-income households, with purchases by young families particularly weak. The rate at which contracts for new condos were signed in the first month averaged below 70% in 2017 -- an indication of sluggishness -- for the second straight year after falling 0.7 percentage point to 68.1%.

"Supply keeps falling as new construction becomes concentrated in redevelopments near stations and large projects," noted the head of a major developer. Just 35,898 new condos came onto the market in 2017, less than 40% of the peak supply in 2000.

Demand is expected to spike before the consumption tax increases in autumn 2019, and "companies will see this as a chance to reduce their stock by lowering sales prices on suburban properties," said Tatsuhiko Hisamitsu, president of real estate research firm Total Brain.

But developers are staying bullish. "This is not a time to lower prices considering labor expenses for contractors and materials costs," explained Masaharu Miyajima, senior managing executive officer at Mitsubishi Jisho Residence.

"There will be little impact, similar to the last tax hike," said Masato Kobayashi, deputy president of Sumitomo Realty & Development.

Yet some big developers are becoming concerned about overly aggressive pricing that could leave more units unsold and put downward pressure on earnings. Expecting profit to fall for the year ending in March, Nomura Real Estate Holdings has lowered its target gross margin on condoes to 19% from 20% for the year ending in March, with an eye toward keeping prices in check.

"Real estate companies are increasingly requesting lower prices," said Noriaki Tsuji, president of contractor Haseko.

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