2012-09-04 08:45:47 - Recently published research from Business Monitor International, "Japan Commercial Banking Report Q3 2012", is now available at Fast Market Research
BMI View: Real estate related loans on Japanese banks balance sheets have seen relatively slow growth compared to the growth in portfolio assets, a trend that we expect to reverse over the medium term. With the IPD rental index returning to positive growth territory for the first time in 29 months, real estate could present itself as a more attractive investment compared to government bonds. Growth in loans related to real estate could help banks to increase their capital as profitability improves and in turn, provide a buffer to withstand losses that may arise from their government bonds holdings. The percentage of loans to bank assets in Japan has fallen to an all-time low of 50% as of January and
this trend is bound to reverse, in our view. The loan growth rate only turned positive in Q311, after recording negative growth for seven quarters. In the past four years, most of the asset growth of banks can be attributed to the increase in securities, mainly in the form of central and local government bonds, which now stand at 21% of total bank assets (or 67% of investment securities held). Positive Returns From Japanese Real Estate On The Horizon Of the total loans extended by banks, close to 40% are real estate related. As a significant portion of loans, weak growth from loans has severely impacted the overall asset composition of banks. The chart above shows that while growth in loans to real estate companies has been on the decline from mid-2007, it has now returned to a steady upward trend. Over the past five years, a large part of the reason for weak Japan Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 32 loan growth has been due to the relatively poor returns from Japanese real estate. Compared to Japanese Government Bonds (JGBs), which have provided excellent returns in the last five years, Japanese real estate hardly seemed like a good alternative. Price losses from real estate during these years have largely outweighed investors' stable but declining income from rent. However, an improvement in returns from this asset class is growing more probable as price declines have started to stabilise and signs of price and rental growth have been more frequent in the last two years. The total area of construction started in January grew by 1.7% year-on-year (y-o-y). Recent land sales surveys have also shown some degree of stabilisation of land prices in the larger cities, although overall price growth remains subdued. Small Improvements In Non-Dwelling Real Estate Could Persist Non-dwelling private building construction starts have seen some growth since their low in 2009, with the manufacturing and healthcare sectors registering the strongest growth in FY2010-11 (April to March). With the reconstruction of capacity lost in the tsunami likely to continue into 2012, manufacturing related real estate construction is also likely to continue to be a source of growth over the short-term. A bigger and longer-lasting boost could come from growth in real estate related to healthcare as supply continues to play catch up with demand in the face of Japan's aging population. Rental Markets Perking Up In Certain Regions While these are positive trends in the non-dwelling sector that could encourage investors to return, the residential real estate market still retains a far larger role, making up about two-thirds of total private real estate investment. Although construction of residential real estate has seen growth in line with nondwelling real estate, prices have not shown as much improvement. In Tokyo, which accounts for approximately 35% of building activity in Japan, the annual growth in house prices has dipped back into negative territory. In spite of this, IPD's apartment rental rate index has improved and return to positive growth in 2012 after sustaining 29 months of negative growth. At the same time, the average rental yields for major cities have started to rise from the low recorded in mid-2011. Increased Private Investment Into Real Estate Could Aid Deteriorating Fiscal Balances With the improvement in the real estate market, we expect more investors to return to the market and the uptake of loans from banks to halt the decline of the loans-to-asset ratio. The return of private investors would be needed to reduce the role of the government in the allocation of resources. This could in turn allow the government to reduce its expenditure and the speed at which the level of debt is growing. More importantly, the growth in loans could improve profitability ratios as net interest margins improve. This could provide the much needed capital for banks to buffer any losses they could suffer as a fall in the value of government bonds. At the current level of JGB held, a 10% decrease in the value of JGB could wipe out the capital held by banks, ushering in a crisis which would leave few solutions other than to monetize the large pile of debt away. Although the improvements in the real estate market are in the early stages, the outlook for this asset class is turning and could present an alternative investment opportunity to banks and investors.
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