At the PERE Forum: Asia in Hong Kong in February, it was clear that Japanese real estate was turning the corner after a couple of years in the doldrums.
Fred Uruma, Touchstone Capital Securities’ chief executive officer, told PERE on the conference sidelines that he would not be surprised if visible domestic real estate investment grew from about $7 billion in 2010 to as much as $20 billion this year. Part of that was due to the fact that the Bank of Japan had pledged $600 million in state aid to stimulate the flagging J-REIT sector, which had prompted lenders – old and some new – to ramp up their financing programmes. “The stimulus is working,” he insisted at the time.
One month and a 9.0 magnitude earthquake later and you can kiss such optimism goodbye. Or should you? Let’s examine what happened and what was said on the first full working day after the earthquake struck, when extreme sentiment should presumably be at its rawest. 
Accepting that no comments can adequately address the human devastation caused by the earthquake and the resulting tsunami, the initial prognosis for Japan’s economy and its real estate market was brighter.
Accepting that no comments can adequately address the human devastation caused by the earthquake and the resulting tsunami, the initial prognosis for Japan’s economy and its real estate market was brighter. Sure, the Nikkei 225 tumbled 6.2 percent and the J-REIT index fell even further, by 6.99 percent. Still, that didn’t stop analysts from predicting brighter times ahead.
According to a research brief by JPMorgan, comparisons with the earthquake in Kobe in January 1995 give clues as to why real estate investment in Japan might not unduly suffer in the medium to long term. The investment bank noted that the direct damage value of the Kobe earthquake was approximately $121 billion, $71 billion of which was reflected in damage to buildings, but that resulted in reconstruction and other public works ultimately valued at more than the damage cost and, as a result, GDP growth of three percent per subsequent quarter ensued. “With hindsight, the Kobe earthquake does not seem to have weighed sustainably on the economy,” the bank stated.
After considering numerous variables, JPMorgan concluded its brief by saying: “In all, we provisionally have revised down Q1 and Q2 GDP from 2.2 percent to 1.7 percent and from 2.2 percent to 0.5 percent, respectively, but we have revised up Q3 and Q4 GDP from 2.5 percent to 4 percent and from 2 percent to 2.5 percent, respectively.”
The rating agencies also reacted with some positivity. Standard & Poor’s said: “[We believe] the earthquake will have a negative, though limited, impact on the financial bases of rated major banks and most regional banks. The impact upon their credit ratings also is likely to be limited as their main operational areas were less directly affected by the quake.”
JC Rathbone Associates, the financial risk management consultancy, noted that “key technology companies are not based in the worst-affected areas either. Neither are the major players of numerous other key sectors.” For the private equity real estate sector, that point is most poignant. Indeed, evaluation of investment sentiment cannot exclude evaluation of occupier sentiment, and it appears at first glance that major occupiers will not be going anywhere. I’ll be first to admit there will be some difficulty. But what you have seen over the past 72 hours is the reason why Japan works, not anything to deter you from investing here
Christian Mancini, Savills Japan
Real estate firms exposed to the prefectures of Miyagi, Iwate, Fukushima, Ibaraki and Chiba – those nearest to the earthquake’s northeast coastal epicentre – include AMB Property, ProLogis, Starwood Hotels & Resorts and Simon Property Group. Still, their holdings in the region are minimal. AMB, for example, said in a statement that, of its 10.6 million-square-foot Japanese logistics portfolio, 88.8 percent had experienced just “minor damages, primarily cosmetic.” Just 0.6 percent – basically an asset in the nearby city of Sendai – was expected to have suffered material damage.
From PERE’s conversations with real estate businesses in Japan, it appears the one city currently attracting any institutional capital of note, Tokyo, was barely touched. As Secured Capital Japan’s (SCJ) chief investment officer J-P Toppino put it: “It was a huge earthquake. All the buildings were shaking from the ground, but it’s very difficult to even find broken glass.” When asked about repercussions for real estate, he added: “I really don’t think we’re suddenly going to see vacancies up three percent because of this.”
Perhaps a decent barometer of earthquake-defying sentiment can be found in the words of Christian Mancini, chief executive officer of property services firm Savills Japan. He has halved his forecast for the value of real estate the firm transacts in 2011 from $1 billion to $500 million, acknowledging some investment committees could now “take a different view.” However, he said: “In spite of the earthquake, our transaction volumes from this year compared with last year will be in dramatic excess still.”
Nodding to Japan’s stringent seismic building codes to which developers must comply when constructing properties, Mancini added: “I’ll be first to admit there will be some difficulty. But what you have seen over the past 72 hours is the reason why Japan works, not anything to deter you from investing here.”
Looking forward, there is no avoiding the difficulties, both civic and economic, that Japan faces as a result of last month’s disaster. However, it is important to realise that Tokyo and most of the country stands shaken, not broken.
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