April, 2009 Real Estate Market Research Report Vol. 53 Prepared by Real Estate Consulting Division Topics: Accelerated Deterioration of Real Estate Market - Review of Fiscal Year 2008 The real estate market in fiscal year 2008 experienced a year of turmoil. The real estate transactions which had been sluggish since the second half of 2007, worsened in the beginning of 2008 when the effects of the subprime issue became apparent. The deterioration has further accelerated since the Lehman shock. This report therefore analyzes the 2008 market conditions using a range of data including public notice of land prices and disclosed real estate transaction information. 1. Acceleration of Deterioration of Real Estate Prices and Transaction Conditions Real estate transactions had been sluggish since the second half of 2007. The trend accelerated when the influence of the sub prime issue became apparent. Since October 2008, the market began to observe the effects of the Lehman shock and has been severely deteriorating. As mentioned in the report in Vol.50, Entering a Phase of Cash Flows Deterioration, corporate earnings worsened rapidly following the Lehman shock and resulted in declining rents, which is a sign of deteriorated cash flow. In addition to the tighter financial conditions that prevent purchaser financing, the deteriorated actual economy has negative impacts on yield and triggering a drastic decline of both real estate prices and transaction volumes in the market. According to the public notice of land prices published in March 2009, average land prices in Japan as of January 2009 declined for the first time in these three years by 3.2% for residential, 4.7% for commercial and 3.5% all-purpose area respectively compared to January 2008 public notice. (Diagram 1) (Diagram 1) : Land Price Fluctuation by Area Residential Commercial All-purpose area Average (Overall Japan) 3.2% (1.3) 4.7% (3.8) 3.5% ( 1.7) Three Major Metropolitan Area 3.5% (4.3) 5.4% (10.4) 3.8% ( 5.3) 4.4% (5.5) 6.1% (12.2) 4.7% ( 6.7) Tokyo 23 wards 8.3% (10.4) 8.1% (17.3) - CBD( ) 9.5% (15.3) 8.8% (20.4) - Osaka 2.0% (2.7) 3.3% (7.2) 2.3% ( 3.4) Nagoya 2.8% (2.8) 5.9% (8.4) 3.5% ( 3.8) Local Area 2.8% ( 1.8) 4.2( 1.4) 3.2%( 1.8) ( ) CBD includes eight wards; Chiyoda-ward, Chuo-ward, Minato-ward, Shinjuku-ward, Bunkyo-ward, Taito-ward, Shibuya-ward and Toshima-ward. ( ) ( ) indicates last year s figure (Source) : Prepared by MUTB, based on the public notice of land price - 1
Among about 28,000 surveyed location, the price of land in all areas and for any use shows decline with the exception of 23 locations.. Since the public notice of land prices indicate price fluctuations occurring in a year, there is said to be a time lag in the reflection of actual status on the data. However, the sluggish market has also affected the public notice of land prices. The comparisons of the public notice of land prices and land price survey using data surveyed at the common locations revealed that the drop of land prices accelerated in second half of 2008 (July-December 2008). (Diagram 2) (Diagram 2): Land Price Fluctuation at Major Locations in Public Notice of Land Prices and Land Price Survey Locations Price on January 1st 2009 (JPY/sqm) Flunctuation rate in first half of year (2008.1.1 2008.7.1) Flunctuation rate in second half of year (2008.7.1 2009.1.1) Marunouchi 3-chome, Chiyoda-ward 24,300,000 3.6% 6.2% Ginza 8-chome, Chuo-ward 16,200,000 6.0% 8.5% Shinbashi 1-chome, Minato-ward 11,600,000 0.0% 10.8% Shinjuku 3-chome, Shinjuku-ward 11,500,000 6.8% 8.0% Koishikawa 1-chome, Bunkyo-ward 1,890,000 5.2% 5.0% Asakusabashi 1-chome, Taito-ward 2,110,000 0.9% 7.5% Shibuya 2-chome, Shibuya-ward 5,450,000 7.1% 7.6% Minami Ikebukuro 2-chome, Toshima-ward 2,450,000 3.5% 10.9% ( )Among the common locations surveyed for Tokyo CBD area land prices, the location with the highest price in each ward was selected. (Source): Prepared by MUTB, based on the public notice of land prices and land price survey For example, at surveyed locations in Marunouchi and Ginza ( ) that have been known for high land prices and at a research location in Shinjuku 3-chome that has been benefited from the start of the Tokyo Metro Fukutoshin line, land prices showed increases in the first half of 2008 (January-June 2008), but declined in the second half. Moreover, in locations that had been already been showing declines since the first half of 2008, such as Asakusabashi, Shibuya and Ikebukuro, the decline was accelerated in the second half. Significant Decline in Real Estate Transaction Amounts The deterioration in the second half can be confirmed by the consolidated research results of disclosed transaction information ( ). Transaction amounts in the second half of fiscal year 2008 reached minus-80% year-on-year growth (declining from about JPY 2.3 trillion to about JPY 480 billion). This decline also indicates the severe market conditions. (Diagram 3) - 2
(Diagram 3): Trend of Real Estate Transaction Amounts by Disclosed Transaction Information (JPY:100 million) 25,000 20,000 80% declined 15,000 10,000 5,000 0 FY2007 2nd Half FY2008 1st Half (Source): Prepared by MUTB, based on Disclosed Transaction Information ( ) Disclosed transaction information: Information released by listed companies that process real estate transactions for which the volume exceeds a certain standard. Please note that disclosed transaction information does not cover transactions smaller than the standards and transactions by unlisted companies. Therefore, the data does not reflect all of Japan s real estate transactions. 2. Series of Bankruptcies of Real Estate Companies The number of listed companies who filed for bankruptcy in fiscal year 2008 hit 45 and this marked the largest number since the end of World War II, which greatly exceeded the previous record of 22 in fiscal year 2002. Among these, bankruptcies of real estate-related companies reached 23, over half the total number for fiscal year 2008. (Diagram 4) (Diagram 4): Number of Bankruptcies of Listed Companies (Numbers of Companies) 50 40 Number of Banktruptcies of Real Estate realted Companies Number of Total Banktruptcies 30 20 10 0 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 (Source): Prepared by MUTB, based on disclosed information - 3
Diagram 5 illus trates that many of the real estate companies that went bankrupt were dealing primarily with funds, development of condominiums for sale and real estate liquidation. These companies had a common business model of procuring land using a large amount of debt and selling it after development in a relatively short period of time. (Diagram 5): Bankruptcies of Listed Real Estate Companies in 2008 (Top 10 Companies in Debt Amount) Disclosed Date Company Names Main Business Total Debt (JPY: 100million) March 10, 2009 Pacific Holdings, Inc. and two other companies Real Estate Investment Fund and Real Estate Investment Business 3,265 August 13, 2008 Urban Corporation Real Estate Liquidation, Condominium Sales 2,558 February 5, 2009 The Japan General Estate Co. Ltd. Condominium Sales 2,142 November 28, 2008 MORIMOTO Co. Ltd. Real Estate Development for Lease Properties, Property Sales 1,615 October 9, 2008 New City Residence Investment Corporation J-REIT 1,124 July 18, 2008 Zephyr Co., Ltd. Property Sales, Real Estate Liquidation 949 February 13, 2009 Nichimo Co., Ltd. Condominium Sales 757 January 9, 2009 CREED Corporation Real Estate Investment, Real Estate Management Business 651 June 24, 2008 SURUGA CORPORATION Real Estate Solution Providers, Condominium Sales 620 October 31, 2008 DYNACITY Corporation Real Estate Solution Providers, Condominium Sales 521 (Source): Prepared by MUTB, based on company website and disclosed information When the market was expanding, the business model with high leverage that relies on debt produced a large profit. However, in the current stagnant market with a significantly contracted number of purchasers, continuation of this type of business model that requires market growth is difficult. 3. Rapid Increase of Delinquencies of Forward Commitment Since the beginning of fiscal year 2008, a series of cancellation of real estate acquisition has been announced due to the default of purchasers. Majority of the purchasers with default problems are professional investors, such as companies in construction, real estate and JREITs, partly included ordinary business organizations. (Diagram 6) When the market was strong, competitions among professional investors to procure attractive properties and future supplies tended to be overheated. At that time, a large number of professional investors were attempting procurement by concluding with forward commitment contracts for properties of which completion of development was scheduled in two or three years, sealing the contracts before or during the construction. Of course, the assumption primarily included maintenance of price level until the completion of the development and this was a natural assumption considering the market condition at that time. However, this type of contract is now posing difficulties to companies. Burden of Cancellation on Both Purchasers and Sellers In addition to fund raising constraints, the initial contracted sales price is a heavy burden for purchasers due to the decline of prices. Since the market became stagnant before the delivery of the properties, it is believed that purchasers could not - 4
fulfill contractual obligations and consequently the number of cancellations dramatically increased. Among these purchasers, there are cases like New City Residence Investment Corporation that penalty payment triggered its bankruptcy. On the other hand, for sellers, though they may receive penalties, there are many cases in which the amount of property price decline exceeds the amount of penalty. Therefore, the sellers are unable to receive the asset value that could have been realized if the contract was executed as planned. Therefore, there are many cases where long-term forward commitment contracts are inducing significant burdens to both purchasers and sellers in the down-turn phase of the market. (Diagram 6): Major Cancellation Disclosed in Fiscal Year 2008 Disclosed Date Seller's Purchaser Price Cancellation Penalty Types Location (Cancellation Release) Industry Industry (JPY: 100 million) (JPY: 100 million) October 2008 Residential SPC REIT Toshima-ward, Tokyo 277 55 December 2008 Warehouse / Office Textile Construction Koto-ward, Tokyo 215 39 November 2008 Residential / Retail SPC REIT Yokohama-city, Kanagawa 117 23 February 2009 Multi complex Retail Construction REIT Osaka city, Osaka 95 19 (Source): Prepared by MUTB, based on disclosed information 4. New Transaction Trend Sectors that Showed Increase Despite the sluggish market, some sectors showed increase in real estate transaction amounts. In a recent trend, transactions are increasing among the public sector, such as national and local government agencies and parts of ordinary companies, along with individual investors. Real estate acquisition by public sector had been hovering somewhere around several billion yen each term. However, there was strong movement, such as procurement of land for roads, in the second half of fiscal year 2008. (Diagram 7) In the current market where the number of purchasers is extremely low, there are the cases that sellers wishing to sell their real estate properties cannot sell at their asking price or even with the level of Rosenka (Values of land adjoining a major road to calculate inheritance tax). Under these circumstances, there seemed to be many cases in which procurement of land for roads was carried out smoothly. Moreover, recently there are cases that non-professional investors, such as companies with abundant cash and individual investors, serve as purchasers of properties owned by professional investors. Normally, the disclosed information ( ) does not supply the investment trends of non-professional investors, including individual investors. However, individual investors are sometimes listed as purchasers in press releases for sales of real estate properties by REITs. Besides many have also commented on the increasing number of affluent individuals showing interest in high-yield properties. - 5
Properties managed by JREITs often facilitate maintenance services of a higher than standard quality. Therefore, properties for which yield improved due to a significant price drop have the potential to be purchased even in the stagnant market. This is of course a small-scale trend in the market as a whole. Since the majority of real estate transactions have been handled by professional investors, there is no way that these types of transactions will take the place of those by professional investors. However, for the extremely sluggish market, increased transaction volume by public sectors and individual investors is welcome news. ( ) Please refer to the note on page 3 (Diagram 7): Real Estate Acquisition Trend by Public Sector, based on Disclosed Transaction Information (JPY: 100 million) 180 160 140 120 100 80 60 40 20 0 FY2005 FY 2005 FY2006 FY 2006 FY2007 FY2007 FY 2008 FY2008 (Source): Prepared by MUTB, based on Disclosed Transaction Information Important Disclosure This document is produced by Mitsubishi UFJ Trust and Banking Corporation ( MUTB ). While every effort has been made to ensure the accuracy of the information herein, MUTB accepts no responsibility for the accuracy of information, nor the reasonableness of the conclusions based upon such information, which has been obtained from third parties. Past performance (including back test) is not necessarily a guide for future performance. Principal and income amount of the investment might fluctuate due to market and exchange rate movements. As a result, the investor may not receive the full amount originally invested. - 6