Japan's property market is currently undergoing extensive restructuring in a push for modernization that followed the stock exchange and real estate crashes of the early 1990s.
As a dramatic deterioration in real estate prices that lasted for 14 years has now stopped, land prices in the country's six largest cities have started to rise once again.
Against the backdrop of recovery in the world's second largest economy, Japan's real estate market is becoming more attractive to foreign investors as a result.
"The market is becoming increasingly more important to those international investors who have historically not invested in Japan," said Leonard Meyer zu Brickwedde, president and chief executive officer of Hypo Real Estate Capital Japan Corporation.
A subsidiary of Hypo Real Estate Bank International, the firm has been present in the Japanese market for about one year.
According to the company, it has already built a financing portfolio worth about ?100 billion (US$930 million dollars) within the first ten months of operation.
Until the end of next year, this amount is expected to increase to ?300 billion, according to the company.
The sheer size of the portfolio indicates the importance of the Japanese market, Meyer zu Brickwedde said in Tokyo.
Greater Tokyo generates as much GDP as the whole of Germany, he said. Each square kilometer of Tokyo generates US$53 million dollars of annual GDP, 10 times what Germany generates per square kilometer.
The three main business districts of Minato, Chiyoda and Chuo alone accommodate 40 million m2 of office floor space, which is more than in New York and about twice as much as London, he said.
Annual rents collected in these three Tokyo districts amounted to US$47 billion dollars, which was more than in Manhattan and London combined, he said.
Until the Asian financial crisis in 1997-1998, a true real estate market was practically non-existent in Japan. Land was principally privately owned by companies and served the firms as refinancing collateral.
When dealing with loan applications, banking institutes traditionally only checked balance sheet figures, which were practically synonymous with the respective companies' real estate properties.
"This was one of the reasons why private companies never sold their real estate properties. There was no turnover," Meyer zu Brickwedde said.
There was no transparency and no price development in the modern sense of the word, which resulted in the so-called "bubble" that finally imploded in 1991.
Changes only occurred after the financial crisis as foreign investors began purchasing Japanese real estate for the first time.
In September 2001, Japan introduced so-called REITs (real estate investment trusts), from which a new market emerged.
REITs are defined as stock exchange-listed companies whose liquidity is solely based on real estate in which they have invested and used to refinance loans.
The market capitalization of the current 17 listed Japanese REITs is already more than US$20 billion, and the figure is rising. In the meantime, Japan's real estate market has become as transparent as those in western countries, Meyer zu Brickwedde said.
In the next three years Japanese companies may part with office space worth between US$550 billion and US$650 billion in connection with further essential restructuring measures, Meyer zu Brickwedde estimated.
Market analysts like Hajime Takato of Mizuho Securities recommends that foreign investors get involved in Japanese REITs as Japanese government bonds yielded the lowest dividends worldwide, he said.
Fund portfolio managers are encouraged to increase their yields by including funds which are secured by real estate, Takato was recently quoted as saying by Bloomberg.
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