Posts Tagged ‘Japan’
Real estate and the “long game”
The two big economic stories right now — and probably for the rest of the year — will be the impact of the Euro problems and the impact of the impending “fiscal cliff” in the U.S. We don’t want to minimize the significance of either of these impending problems on the financial world in general and real estate in specific. Indeed, either of these problems has the potential to bring down the global house of cards.
Nonetheless, it’s important to keep our eyes on the longer trends within which these crises exist. The exit strategy for either of these crises depends heavily — maybe even totally — on the trajectory of these longer-term trends.
A very brief article in the current issue of The Economist caught our eye this week. The article was about the disparity between the median population age of various countries and the average age of that country’s cabinet ministers. The goal was to show that in the “rich” world (e.g. — Germany), the cabinets more closely resembled the general population, while in the “emerging” world (e.g. — India, China) there was a large disparity, with attendant potential instability. In that context, however, the article wasn’t very compelling — the U.S. has a huge disparity, while Russia has a high degree of alignment. Go figure. What caught our eye, though, was the variation in population age among various countries, and the implications for long-term growth. Quite a few years ago, I was at an academic conference which discussed the increasing age of the population in Europe, and in that context how Europe had the potential to be the next Japan. An aging population has very significant implications for real estate — particularly in the commercial sector. As a decreasing portion of the population is working to support a larger and larger retired segment, there is both a generic malaise inherent in the economy (unless high increases in productivity are induced) and a decreasing need for commercial real estate space (particularly in offices, warehouses, and manufacturing).
In that context, the emerging nations of the world have an edge — note the low median ages in India, China, Brazil, and Canada. Ironically, the U.S. is also in that mix, and to a lesser extent Australia and Russia. At the other end of the spectrum, Japan and Germany have nearly the same median age problems. The latter is most problematic, since the German economy has been entrusted with bringing the Euro zone out of its doldrums. Clearly, a rapidly aging German population has less need for commercial real estate, but also less ability to drag the ox cart of Europe along the road to recovery. Britain, solidly part of Europe but outside the Euro, has a somewhat younger population — indeed slightly closer to the U.S. than Germany and about equal to economically stalwart Canada. The short-term horizon will continue to fuel real estate challenges and opportunities, but the “long game” context needs to be taken into account as opportunity-seekers consider down-the-road exit strategies for today’s purchases.
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Japan — take 2
A correspondent on one of the news shows seemed almost apologetic this week in discussing investment opportunities following the crisis in Japan. I concur with the sentiment — the focus today must be on humanitarian and environmental concerns.
Nonetheless, Japan will fix the immediate problems, and then must move rapidly toward the economic issues. People need to be fed, housed, clothed, provided jobs, and treated medically. To accomplish this, they need energy (over 10% of their nuclear generating capacity has been wiped out) and capital.
It’s too early to get good facts on the housing disruption, but it is safe to say that the housing shortage will be north of a million units. The final tally will depend on whether or not large swaths of “buffer” zone will be created around the melted-down nuclear plants (probably so, but we don’t know for sure or how big yet). In a typical year, Japan builds less than 1 million housing units (788,000 in 2009), down from about 1.3-ish million a decade ago. Thus, the housing shortage will likely exceed a year’s typical output for their housing industry.
Further, even though Japan is a heavily forested country, they are the least-self-sufficient in terms of lumber of any developed nation in the world. By the last statistics I’ve seen (and these are estimates — Japan itself isn’t very forthcoming with this stuff) they import about 44% of their lumber needs. Canada has historically been their biggest supplier, followed by Russia, Indonesia, Malaysia, and the U.S.
From a global-trade perspective, this is problematic in the extreme. Ironically, the U.S.-Japan lumber trade has declined dramatically in recent years, due to foresting limitations here. China has become a big importer of lumber in recent years, principally from the same markets as Japan. Both China and Japan have faced the same commodity-price increases of late, mainly driven up by increasing demand in emerging markets.
Lumber is not the sort of thing that can be spun-up quickly. Here at Greenfield, world lumber supplies are not our expertise, and we would note that demand in the U.S. is down (due to the housing crisis) by an annual amount roughly equal to the potential housing disruption in Japan. Thus, there may be some offsetting world-supply equilibrium, albeit with prices (and transport costs) going through the roof.
None of this portends good things for prices of new homes in the U.S. One of the saving graces of the construction industry has been that costs of construction have fallen sufficiently so that builders can construct homes at prices which match the overall price decline. If lumber prices soar, as is quite possible, then it may very well be that homebuilders won’t be able to deliver homes at market prices. Since home builders are very much economic “price takers” right now, this could really be a short-term death knell for that industry and many of its smaller — and even larger — players.
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…of Japan, earthquakes, and real estate
It’s hard to overstate our sympathies for our friends in Japan who find their country in tatters, with hundreds — if not thousands — of their fellow citizens dead, thousands (tens of thousands? hundreds of thousands?) more homeless, and the economy at a standstill. Fortunately enough, the Japanese are a terrifically resilient and stoic people, with a hard-working culture and more experience dealing with earthquakes than any other developed nation. I have no doubt they started the clean-up and rebuilding process the moment the aftershocks ended.
At Greenfield, we’ve enjoyed a terrific relationship with the Japan Real Estate Institute over the years. It almost seems embarrassing to talk about business while people are still dying, but a quick “google” search on news about the earthquake shows that the top page of stories deals with how this will affect global business, ranging from impacts on energy prices to the availability of Apple’s Ipad-2. Our focus, of course, is real estate, and that may prove to be one of the more interesting problems in this aftermath.
After WW-II, the Japanese people adopted a new constitution which was largely written by U.S. General Douglas MacArthur, the commander of the occupying forces. MacArthur really thought of himself as a Viceroy, and fashioned himself as an expert in governance. (In actuality, his administration of post-war Japan was probably the highpoint of his stellar career.) Despite being relatively conservative in most things, he was a very traditional liberal (albeit in a Victorian sense) in governance. As a result, the Japanese constitution provided for women’s suffrage. It also provided extraordinary rights to small, private property owners, as a mechanism to break-up the hold feudal land holdings. Indeed, eminent domain “taking”, as we think of it in the U.S., is very hard to accomplish in Japan. Small property owners — even the owners of the smallest pea-patch — have exceptionally strong property protections under law.
As great as this sounds, it makes it very difficult to clean up after a disaster. In 1995, Kobe was struck with what is known in Japan as the Great Hanshin earthquake, with a magnitude of 7.2. About the same time (1989), California was hit with the Loma Prieta earthquake, which measured 7.1. Both earthquakes hit in highly populated areas, although the Kobe quake killed over 6,000 while the Loma quake only killed 63. The Kobe quake destroyed about 200,000 buildings, while Loma damaged about 18,000 (12,000 homes and 6,000 businesses).
Of more direct comparison was the destruction in California of Oakland’s Cypress Street Viaduct and a portion of the San Francisco-Oakland Bay Bridge. In Japan, about 1km of the Hanshin Expressway collapsed.
In California, the highway collapses were repaired quickly. Indeed, one of the repair contractors won a huge bonus award for completing a large chunk of the work in record time, and the Bay Bridge was reopened in 32 days. The Cypress Street Viaduct required longer to replace, but traffic was rerouted quickly.
In Kobe, on the other hand, rubble from the expressway was still piled up five years later. Why? At the heart of the problem was access to private property under, near, and surrounding the expressway. Many of these small parcels had hundreds of individuals listed on deeds, and each of those individuals had to be contacted and permissions gained before reconstruction could begin.
Eminent domain can be a contentious issue here in the U.S. — taking agencies typically try to acquire property on a shoe-string, and my own analyses of “takings” appraisals show that they’re not done very well. That having been said, at least we HAVE mechanisms for handling these problems in the U.S., and should be thankful for that.
Again, our best wishes to our friends and colleagues in Japan. They’re going to need a lot of support as they emerge from these trying times. I also don’t want to forget our friends in New Zealand who had, on a relative level, an equally devastating earthquake in Christ Church. I have great friends from that country, and have enjoyed doing business down there. Best wishes to all of them.
From a small northwestern observatory... 