White Paper on Land and Real Property 2007
Chapter 1 Recent Land Market Developments and Structural Land Market Changes
　

              Since the myth that "land prices would rise forever" turned out to be groundless, Japan's land markets appear to have been structurally transforming into a market where market mechanisms appropriately work to price land assets according to their utility values. With the development of real estate-based financial products, it has become important to establish a stable flow of funds in the financial and real estate markets.
              In the context of such structural changes to the land market, land demand has been increasing in regions that offer convenience and profitability. The expanding real estate securitization markets have helped invigorate investment focused on profitability in the real estate sector. Under such circumstances, land price hikes have shown remarkable growth in the three largest metropolitan regions and in major cities in other regions.

Section 1 Changing Trends in Land Prices and The Background Thereto
1. Land Price Trends 
              According to the land prices published in 2007, average residential and commercial land prices in Japan rose slightly during the year starting in January 2006. This was the first rise in 16 years, since 1991. In the three largest metropolitan regions, residential land prices increased for the first time in 16 years. Commercial land prices in these regions increased for the second consecutive year. In other regions, both residential and commercial land prices continued to decline. However, the margins of decline narrowed.
Chart:  Year-on-Year Land Price Changes
　 Residential land Commercial land
2006 2007 2006 2007
Whole of Japan -2.7% 0.1% -2.7% 2.3%
Three largest metropolitan regions -1.2% 2.8% 1.0% 8.9%
Tokyo region -0.9% 3.6% 1.0% 9.4%
Osaka region -1.6% 1.8% 0.8% 8.3%
Nagoya region -1.3% 1.7% 0.9% 7.8%
Other regions -4.2% -2.7% -5.5% -2.8%
 
Chart: Accumulated (residential) Land Price Changes in Tokyo's Central Wards and Central
           Osaka City
Source: "Published Land Prices," Ministry of Land, Infrastructure and Transport
Chart:   Prefecture-by-Prefecture (Residential) Land Price Changes Over Three Years
Source: "Published Land Prices," Ministry of Land, Infrastructure and Transport
2. Rising Land Demand in Regions Offering Higher Convenience and Profitability
               Over the past few years before which the Japanese economy remained mired in a long slump following the burst of the Bubble Economy, economic recovery has continued through such adjustments as enterprise restructuring and the disposal of non-performing loans, invigorating land markets mainly in metropolitan regions. In particular, land demand has been robust in regions offering higher convenience and profitability. At points close to major railway stations in the center of Tokyo, large office buildings are in great demand. Condominiums have been popular in regions that are convenient for traffic. These phenomena apparently indicate that land demand now tends to depend on regional conditions as enterprises and citizens have been emphasizing the utility values of land since the collapse of the myth of ever-rising land prices.

① Growing real estate demands by business enterprises on the back of economic recovery
(Land investment by business enterprises) 

                Business enterprises have successfully improved their circumstances through rigorous restructuring and have familiarized themselves with land investment. Moreover, they have generated an expansion of capital investment in land.
Chart: Diffusion Index on Assessments of Land Transactions after One Year
Source: "Land Investment Trend Survey," Ministry of Land, Infrastructure and Transport
Note: Diffusion index: A gap between percentages for respondents anticipating active and inactive land transactions after one year. The unit is a percentage point.
Chart: Changes in Capital Investment in Land
Source: "Short-term Economic Survey of Enterprises," Bank of Japan
Note: Large size represents 1 billion yen or more in capital, medium size 100 million yen to 1 billion yen, and small size 20 million yen to 100 million yen.
 
(Office buildings)

              As enterprises have been expanding their business operations and workforces, demand has been growing for office buildings, primarily in the center of Tokyo. Vacancy rates for rental office buildings have declined while rents have risen in some buildings.
              During the Bubble era, small to medium-sized office buildings were constructed mainly at locations close to the major office districts in Tokyo. Recently, however, large buildings are been actively produced in highly convenient locations close to major railway stations.

Chart: Changes in Office Building Rents and Vacancy Rates
Source: "Office Market Report," CB Richard Ellis
Note1: Vacancy rate represents the share of vacant spaces among the total rental building spaces within a surveyed target area in December of each year.
Note2: Rent represents the average rent offered between January and December each year.
Note3: The five major wards are Chiyoda, Chuo, Minato, Shinjuku and Shibuya
② Brisk housing market reflecting popular urban dwellings

　　　　　In the housing market, which accounts for a large portion of individuals' land demand, housing starts for the whole of Japan increased in 2006 for the fourth consecutive year.

Chart: Changes Housing Starts by Region (Index)
Source: "Housing Starts Statistics," Ministry of Land, Infrastructure and Transport
Note1: Housing starts are indicated by an index based on 100 for 1998.
Note2: Details of the regions follow:
Tokyo region: Saitama, Chiba, Tokyo and Kanagawa Prefectures
Chubu region: Gifu, Shizuoka, Aichi and Mie Prefectures
Kinki region: Shiga, Kyoto, Osaka, Hyogo, Nara and Wakayama Prefectures
Other regions: Other prefectures

              Reflecting a recent trend in which people are giving priority to living and traffic convenience in their choice of dwelling, the condominium supply has remained firm, primarily in the center of Tokyo.

Chart: Condominium Supply in Tokyo Metropolitan Region
Source: "Japan's Condominium Market Trend," Real Estate Economic Institute
③ Changes in People's and Enterprises' Perceptions of Land

                As the economic slump and decline in land prices continued long after the burst of the Bubble Economy, perceptions of land on the part of individuals and business enterprises changed dramatically. The myth of ever-rising land prices has died and the people and enterprises are now emphasizing the utility value of land.

Chart: Is Land A More Valuable Asset than Deposits or Shares?
Source: "Survey on People's Perceptions of Land Problems," Ministry of Land, Infrastructure and Transport
Note: Major urban regions cover Tokyo's 23 special wards and the cities of Sapporo, Sendai, Saitama, Chiba, Yokohama, Kawasaki, Nagoya, Kyoto, Osaka, Kobe, Hiroshima, Kitakyushu, and Fukuoka. The "Other regions" category covers all municipalities other than the ones cited above.
Chart: Purposes of Land Purchases or Planned Land Purchase for the Next Year 
(Multiple choices are allowed)
Source: "Survey on Corporate Behaviors Regarding Land Ownership and Uses," Ministry of Land, Infrastructure and Transport
3. Expanding Market for Real Estate Investment Focusing on Profitability

              The recent expansion of markets for real estate investment utilizing the new "real estate securitization1" schemes has been cited as one of the factors behind the active land market. In the center of Tokyo in particular, demand for more profitable land has emerged as a product of expansion of the real estate investment market.
              Expanding real estate securitization is significant for land markets because it creates new buyers, alters Japan's real estate ownership structure, forms excellent urban stock through the dispersion of investment risks and improves market transparency by promoting information disclosure.
① Expansion of real estate investment markets

(Real estate securitization deals)
               According to a "Real Estate Securitization Survey" conducted by the Ministry of Land, Infrastructure and Transport, real estate assets subjected to securitization in FY 2006, or the value of the trust beneficiary rights thereof for the year, totaled some 7.8 trillion yen, up about 13% from the previous year.

Chart: Changes in Real Estate Securitization Deals
Source: "Real Estate Securitization Survey," Ministry of Land, Infrastructure and Transport
Note1: In order to grasp the total extent of real estate liquidation, this survey covers not only the narrowly defined securitization deals accompanied by securities issues but also borrowings-based deals that represent securitization deals in a more broadly defined sense.
Note2: "Non-J-REIT deals subjected to refinancing or resale" represent assets reported for refinancing or resale among the total assets for securitization of trust beneficiary rights left out of J-REIT deals. Therefore, actual values could be larger that those listed. This category was not surveyed for FY 2002 or for the previous years.
Note3: One J-REIT deal represents one investment corporation.
Note4: Components may not add up to match the total because of the rounding of numbers.
Note5: Data for FY 2006 is preliminary. Data for FY 2005 is based on real securities issued by the TMK (Tokutei Mokuteki Kaisha) special purpose companies.

1 Under a real estate securitization scheme, a TMK (Tokutei Mokuteki Kaisha) special purpose company is founded for the sole purpose of issuing securities for purchase by investors, investing proceeds from securities sales in real estate assets and allocating returns (including rental income) on investment to investors. Attention is paid to profitablity of investment target assets.
              Of real estate asset values that were subjected to securitization in FY 2006, 30.8% were used for office buildings, 22.8% for housing and 15.9% for commercial facilities. Land use under securitization schemes is diversified.
Chart: Breakdown of Uses of Real Estate Assets Subjected to Securitization
Source: "Real Estate Securitization Survey," Ministry of Land, Infrastructure and Transport
Note1: "Other uses" include the following:
- Uses (like parking lots and training facilities) other than offices, housing, commercial facilities, plants, warehouses and hotels.
- Real estate assets used for multiple purposes
- A combination of assets for different uses
Note2: Data for FY 2001 and beyond does not cover securitization of real estate assets under the SPC (Special-Purpose Company) Law because breakdowns thereof are unavailable.
Note3: Breakdown data for FY 2006 is preliminary.

(J-REIT trends)
               Deals in which J-REITs2 or SPCs purchase real estate assets have expanded their share of real estate transactions involving public traded companies. On a trading value basis, J-REITs and SPCs accounted for some 70% of real estate purchases in FY 2006.

2 A J-REIT is an investment corporation formed under the Law Concerning Investment Trusts and Investment Corporations. At the end of 2007, 41 J-REITs were listed.
Chart: Breakdown of Publicly Traded Companies' Real Estate Transactions by Buyer (Purchases by Value)
Source: Urban Research Institute

               Real estate assets for J-REITs are used mainly for offices. However, those for housing have been increasing, indicating a diversification in use. J-REIT target assets have been increasing steadily not only in central Tokyo but also in other regions.
Chart: Changes in J-REIT-Owned Assets (Cumulative Acquisition Prices)
Source: Urban Research Institute

               Recently, acquisitions of profitable assets for securitization have reportedly grown more difficult in the center of Tokyo and in some other areas.
Chart: Changes in Numbers of Trust Launches and Beneficiary Transactions
Source: "Survey on Liquidation of Land Assets and Flow of Funds in Land Markets," Ministry of Land, Infrastructure and Transport
Note: Even if a land site is divided into multiple portions for registration or utilization, it is treated as a single site for transaction purposes.
② Viewpoints of real estate investors
              According to a questionnaire survey of real estate investors conducted by the Ministry of Land, Infrastructure and Transport, many investors’ views of the current state of real estate investment markets revealed dissatisfaction with the development of rules and systems, the state of transparency and reliability and the amount of long-term, stable investors. Many investors also believe that the government should take measures such as promoting compliance with laws and regulations, encouraging information disclosure and developing a real estate investment information infrastructure conducive to further long-term expansion of real estate investment markets.
Chart: Perceptions and Assessments of Real Estate Investment Market
Source: "Questionnaire Survey of Real Estate Investors," Ministry of Land, Infrastructure and Transport
Chart: Policy Challenges and Need for Measures for Future Real Estate Investment Market
Source: "Questionnaire Survey of Real Estate Investors," Ministry of Land, Infrastructure and Transport
4. New Developments in Non-Metropolitan Land Markets

               According to the land prices published in 2007, non-metropolitan regions as a whole saw land prices continuing to decline. However, margins of decline narrowed for both residential and commercial sites for the third consecutive year. A closer analysis of these non-metropolitan regions leads to a finding that trends are not uniform but various.
              Sapporo, Fukuoka and other major cities outside the three largest metropolitan regions have seen fast land price hikes confined to certain commercial and business centers and people have been moving to convenient dwellings in urban centers. A land price uptrend is growing clearer in these cities.
               Some other non-metropolitan cities have also seen land price hikes, reflecting improvements in convenience and profitability through local community invigoration efforts, including the development of urban areas and expansion of transportation infrastructure and tourism.



[Case] "Saka-no-Ue-no-Kumo" Town-Building (Matsuyama, Ehime Prefecture)
              Matsuyama City has improved the Matsuyama Castle ropeway stations, complete with roads to the ropeway and store walls, and has implemented an urban renovation campaign centered around the novel by the name "Saka-no-Ue-no-Kumo," promoting the town’s prosperity. As a result, some points in the city have posted fast increases in land prices.

5. New Developments Accompanying the Utilization of Real Estate Assets as Financial Products
              Real estate securitization has allowed the comparison of real estate assets with other financial products under the common standard of investment return. Utilization of real estate assets as financial products has advanced globally, activating an international flow of funds. National real estate markets are now expected to intensify their race for funds. While it is important to develop a market wherein Japanese and overseas long-term investment funds flow in a continuous and stable fashion, investment of pension funds in real estate assets is still limited in Japan at present.
Chart: J-REIT Investment Lots and Shares for Foreign Corporations and Individuals
Source: Ikoma Data Service System based on published J-REIT data

(Foreign Investors' Perceptions of Japan's Real Estate Markets)
              According to a questionnaire survey of overseas real estate investors by the Ministry of Land, Infrastructure and Transport, many foreign investors hold a favorable view of Japan's economy and real estate market size. Meanwhile, the survey indicates serious information problems regarding the Japanese real estate markets.
Chart: Factors in Japan's Attractiveness as an Investment Target
 
Source: "Survey on Internationalization of Land Markets," Ministry of Land, Infrastructure and Transport
Chart: Problems in the Japanese Real Estate Market
 
Source: "Survey on Internationalization of Land Markets," Ministry of Land, Infrastructure and Transport

(Need for long-term stable funds)
              In order to ensure the sound maintenance and development of stable long-term investment funds such as pension funds in Japan, it appears to be beneficial to invest said funds in real estate markets.
              At present, Japanese corporate pension funds are invested mainly in stocks and bonds, including government securities. Real estate assets account for a limited share in corporate pension fund investment portfolios. However, these funds have indicated a positive willingness to increase investment in real estate in the future. It is important to develop a highly transparent, attractive market into which domestic and foreign long-term stable funds can flow in a continuous and stable fashion.
Chart: Importance of Real Estate Assets for Pension Fund Investment
Source: "Questionnaire Survey of Real Estate Investors," Ministry of Land, Infrastructure and Transport
Chart: Obstacles or Impediments for Corporate Pension Funds' Real Estate Investment
Source: "Questionnaire Survey of Real Estate Investors," Ministry of Land, Infrastructure and Transport
　

　

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