The last 18-months have been really interesting in terms of real estate investment in Nagoya. We have seen activity that has never been seen before in Japan's 4th largest city. It went mad, it died off, and now it is back on again.
In the last 12-18 months, Nagoya has been influxed with visitors from Real Estate Investment Trusts (REITs); mainly Japanese ones that are known as J-REITs. From early until late 2006, these trust "funds" have come into Nagoya and bought up a good percentage of the large developments in the city like nothing else ever seen before.
So, why Nagoya?
Well, due to increasing land and construction prices, the return on investment (ROI) that is available to investors in Tokyo has dwindled below 5%. So, as this as happened, investors have begun to look else where; Nagoya, Osaka and Fukuoka being the main targets. Having been seen to be more "genki" than Osaka and Fukuoka economically, Nagoya was the initial target of REIT eyes looking outside the capital, and with ROIs of 6-8%, in came the vultures to buy everything up. And they did. Most of the large development projects or "A-Grade" projects that have been completed in Nagoya in the last 18-months, have had REIT involvement. Their investment makes up only about 5% of the total building investments in Nagoya, but from virtually no presence in Nagoya, REITs are now involved in more than 30 large-scale developments in the city (data from JonesLangLasalle).
So what has this done for Nagoya?
Well, basically two things.
Firstly, you may have heard that the area in front of Nagoya Station has had the highest valuating land prices in Japan for 2 years in row. REIT investment activity has been the main driver. Nagoya has a shortage of "A-Grade" office buildings, so the REITs coming to the city have driven up the demand for sites that are feasible for "A-Grade" projects. As a result, land prices have valuated sharply in prime "A-Grade" locations, which has in turn driven up the general land prices in the down town Nagoya area. This has also triggered valuations in other areas of Nagoya City, and this "effect" has also slowly dispersed out to areas such as Kariya and Anjo Cities, who are also recording record land values.
Secondly, higher land prices and increasingly expensive construction costs have driven up project fees to a level where Nagoya is now not a bargain compared to Tokyo or other locations. ROIs are falling, and word in the market now is you are doing well to calculate 5% returns.
As a result, the REITs began moving out of Nagoya in late 2006 to find greener fields elsewhere.
So, where are the REITs now?
Funnily enough, they are back. As mentioned in my introduction, it went mad, it died off and now it is starting again.
But, didn't you say ROIs were falling? What are they doing back?
As mentioned above, the REITs were only every interested in "A-Grade" opportunities. These were the large-scale properties for which a signifcant amount of land in a down town location was required. Such opportunities were limited, and the laws of supply and demand soon turned the ROIs sour. However, while general land prices were rising, smaller blocks of land were not affected as much by supply and demand forces, as they were not feasible for what the REITs wanted to invest in.
So, what are they doing now? Well, the "A-Grade" opportunities have pretty much been eaten up, so now they are back buying up "medium-scale" opportunities in 3s and 4s. In other words, they can't get projects large enough, so they are buying into 3 or 4 projects at a time, and treating them as one large project. Yes, this is how the activity is taking off again!
If only the Nagoya market can sustain the need for all these new developments. I am skeptical that it can........Once again, the winners will be those who have thought about their investments (developments) and those that have a marketing plan in place. From where I sit, Nagoya is not growing quick enough to sustain the supply that this activity is bringing. Time will tell!
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