It’s July 2006 and the price of Japanese real estate is on the rise. Capital gains are here. Question is how far will these prices increase and can we maintain positive returns on our investments? Very simply, rental income divided into investment value equals basic investment yield. To expect to maintain positive returns on residential real estate investments we will soon need to see rental increases. The residential tenant’s ability to afford

 rent is dependent upon earnings or salary level. When salaries can not afford rents the capital gains cycle ends. Japan I feel has a long way to go from here in respects to available salary increases. Therefore she has a long way to go before tenants can not afford rents. As a result we may well expect that prices will continue their steady rise for some considerable time to come and we may enjoy capital gains within a positive returns environment.

Today in Tokyo prime land is already very hard to get a hold of. If you manage to grab your piece it will cost you far more than it did three years ago.  Kansai  is showing definite signs of following Tokyo into the boom yet still offering yields of between 6% and 8% on well bought new properties. But how far can prices go and still provide these real earnings on investment that we have come to expect from real estate in Japan. Or in other words, how far can we go before it becomes purely a game of depending on capital gains as was the case at the back end of Sydney Australia’s  boom which came to a  grinding unaffordable halt mid 2005.  In my simple view the answer to this question will come down to asking how far can salary levels go up?

Sure we can argue that interest rates are also a major factor in positive returns however I don’t really see interest moving from 1.5% or thereabouts on solid Japanese investment loans to a point that they will negate yields of 6%. At least not in the next few years!  If we read around these days we see predictions of Japanese interest rates rising and they must however even if the bank of Japan eventually starts moving up it’s very hard to imagine any massive movements away from the existing ground zero rate.  From a very simple contrasting view point, how can the banks of Japan having just spent a decade crawling out from under the bad debts of the 90s turn around and offer greatly increased interest on deposits  to millions of Japanese savings accounts that will need to be serviced at new increased levels? As stated when we are looking at yields of 6% I don’t put much concern on interest rates.  Therefore I argue that we need to look to salaries to consider how far rents and subsequent real estate prices may increase.

 Japan is today seeing just the slightest signs of an economic recovery  starting out and yet as at June 2006 and we still see no general increases in salaries. Arguably, the key component of all factors that determine just how far an inflationary period in real estate can run are those same salaries. If salaries are already high at the outset of a real estate boom chances are that boom will not run very far at all. If salaries are low we can expect that as rents increase pressure will be brought to bear on employers to raise salaries. After 14 years of driving salaries down and work loads and employer expectations up how will they be able to say no. Salaries must rise in Japan. Japan is the second largest economy in the world and it’s people have not had much fund at all for the 14 years of recession. It’s time to move salaries up and let the Japanese see a bit of light at the end of the tunnel.  I am sure there are those who may find any number of economic theories to argue against this rather emotional justification, that’s fine. Mine is only one man’s view point and even though  I have been living in Japan and looking out for many years and feel sure capital gains are tied to salaries and salaries have plenty of room to move, I may be proven wrong.  Let’s wait and see what happens. Or maybe let’s agree on this viewpoint and move ahead of what I feel can only be ongoing rises in salaries, real estate prices and capital gains. After all if I am shown to be right today's investment opportunties in Japan will be unavailable to those who waited to see.

Cheers,

Mark Smith.