The Japanese property bull has barely begun

Rising house prices have been as big a feature in Britain over the past ten years as falling ones in Japan at least, until now. While UK prices have risen by as much as 154% between 1997 and 2005, they've dropped by 28% in Japan during the same period and by a massive 50%-80% across the country since the bubble burst back in 1991.

Japanese property: how fast are prices rising?

But Japan's property market is finally showing some signs of life: according to recent figures from Japan's Ministry of Land, Infrastructure and Transport, land prices rose for the first time in 16 years in the year to July. Commercial land prices are up 3.6% in Tokyo, Osaka and Nagoya. And demand from tenants has been more than strong enough for landlords to start raising rents. The vacancy rate for Tokyo office space fell to 2.98% in August, the lowest rate since December 1991. "For tenants signing new leases, rents are up 20% this year," says James Fink of Colliers Halifax on Bloomberg. Residential prices are also rising: they're up 0.4% in the past year.

The fortunes of land prices are reflected in the recent performance of property developers. While the Nikkei index has fallen 0.5% in 2006, the Topix Real Estate Index has gained 6.5% in the same period. Mitsubishi Estate is up 9%, Mitsui Fudosan up 13% and Sumitomo Realty up 39%. And the new confidence in the sector shows no sign of abating. Last month, newly listed Nomura Real Estate Holdings saw its share price rise 18% on its first day of trading in Tokyo. Here in London, Japan Residential Investment has just floated on Aim with a view to investing more than £300m in residential and commercial Japanese property.

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Japanese property: should investors look East?

So with housing markets in the West looking hugely overvalued and US house prices in outright freefall, is it time for property investors to look East? Patrick Armstrong, a fund manager at Insight Investment, thinks so. He tells Reuters that the "property cycle is in the final stages of a bull market in most places, but it's in its early stages in Japan". The trouble is, he's not the only one who's noticed the turnaround in Japan, and that's something that is already being reflected in share prices: investors have been piling into Japanese Reits and the 37 stocks in the TSE Reit Index now trade on an average p/e of more than 30 times (the average of all the stocks in the Nikkei 225 is 25 times). That's enough to have started muttering about a bubble: with prices up and yields down, investors should "be careful'', warns Atsuto Sawakami of Sawakami Asset Management.

But can the rise in Reit prices really be called a bubble? We aren't convinced. Let's not forget that property prices have been falling for 16 years in Japan, that even now they have recovered by only a couple of percent, and that mortgage rates are exceptionally low (2%-3%, depending on your credit rating). It is entirely possible that we are, as Steve Sjuggerud on DailyWealth puts it, "set for a ridiculous bull market in Japanese real estate". Reits may look pricey, but given the growth potential in the market, they might be the "best investment opportunity for the next 15 years".

Japanese Reits such as Japan Retail Fund and Japan Real Estate Investment Corporation can be bought through Barclays Stockbrokers. Those looking for an alternative play on rising house prices might like to focus on the companies who sell the things people like to buy when they move house. Ryohin Keikaku Co sells reasonably priced household goods and furniture and Yamada Denki sells consumer electronics.