After 15 years of rising prices, the bull market in UK commercial property is over. Prices fell last month for the first time since 1992, the Royal Institution of Chartered Surveyors (Rics) reports. And things are set to get worse, as interest rates remain higher than yields and credit conditions deteriorate further. RICS reckons prices will fall by 5% in both 2007 and 2008, while Capital Economics expects a 12% fall in prices between 2008 and 2010. Unit trusts invested in the market are already feeling the impact: the New Star Property Trust is down 2%, while Resolution Asset Management’s eight property funds have fallen between 2.5% and 3% over the past year.
But just as the UK market has peaked, one international property market looks like its bull run may be just beginning. Japanese commercial land prices are on the up, according to the Japanese Land Ministry. In the year to 30 June, they rose 1% across the country. “That sounds skimpy”, says The Economist, “but it was still the first increase in 16 years.” Big investors, such as Goldman Sachs and Morgan Stanley, are snapping up commercial land and companies with large property portfolios in Japan’s three biggest cities, adding to already substantial portfolios. Prices are up 24% in central Tokyo, and 14% and 18% in Osaka and Nagoya.
“If you are looking at a sector, then it should be the Tokyo office market,” says Toshihiko Okino, UBS Securities’ senior analyst for Real Estate Investment Trusts (Reits) in Barron’s. The office vacancy rate in the city’s five central wards was a tight 2.8% in July, while asking rents rose 12.4% in July year-on-year. Yet property prices are no more expensive than in the 1970s. Investors could look at the New Star International Property Fund, which is 32% invested in Japan and is up 12.6% for the year. Better still, for anyone willing to invest directly in Japan (larger brokers, such as Barclays, should be able to do this for you), the US sub-prime crisis has seen J-Reits fall from recent highs, presenting a real opportunity. The J-Reit index is at 2,037, says Barron’s, from a June high of 2,612. One we like is the Japan Retail Fund (8953), which invests in shopping centres and department stores in the big three cities, where values have risen most. It’s up 446% since 2003, but even at 28.5 times earnings it remains cheap compared to many of its peers.