Inflated Appraisals May Be Pushing Real Estate Values Higher

An interesting piece from Nikkei Business Online suggests that one reason for the sharp rise in prices for some real estate properties might be inflated assessments by appraisers. Since a private fund (which is the "seller" of properties in a REIT transaction) and the REIT (which is the " buyer") are often within the same financial group, a "public" assessment of the property is done to ensure a fair appraisal. But the assessment may be inflated, either because the private fund asks several appraisers and takes the highest price, or the appraiser is asked to come up with certain price. In either case, this may be causing real estate values to increase. While this prompts more cash flow into such funds and REITS, it could also lead to a new real estate bubble that some day may burst.

The Impact of Overseas Business on Japan's Glass Makers

Three companies -- Asahi (5201), Nippon Sheet (5202), and Central (4044) -- have long held 90% of the Japanese glass market, and it's unlikely that their competitive environment will suddenly change. Moreover, in July of last year, Nippon Sheet bought Britain's Pilkington, and thus the oligopolistic character of the industry on a global scale has been enhanced. Together, Nippon Glass, Asahi, and France's Saint-Gobain now have 65% of the world glass market for construction and automotive use, and relative to the excessively competitive markets often seen in raw materials industries, the glass sector has been stable.

However, while global restructuring of the industry has not had a big effect on the financial strength of Japanese firms up until now, their ability to exploit overseas expansion will have a big impact in the future. Notably, Central Glass has little room to boost revenue and cut costs because its business focus is the domestic construction business where times are tough. Thus, the disparity between Central and the big firms that are geographically diversified is expected to grow significantly.

So while the Pilkington acquisition won't have a drastic impact on the industry's structure or competition, it does affect the profitability of the top players. The margins of glass manufacturers are influenced by the price of crude, and companies try to push oil price hikes along to users. This is difficult in Japan, as the major customers for glass are recession-affected building/construction, and the auto industry, where material costs are strongly controlled by the auto makers and are difficult to negotiate.

However, overseas, especially Europe, it is easier to pass along hikes in material costs through the transfer surcharge system, and better market demand helps pricing too. Therefore, by adding a big U.K. company to its group, Nippon Sheet has boosted its profitability: Fourth-quarter operating margins before depreciation were 12.9% versus 8.5% a year earlier. Asahi Glass also benefited from the recovery in results of its European subsidiary, and with profits in the sheet glass business up, the contribution from overseas operations for both companies is notable. (This story is substantially based on information provided from S&P Japan; subscription required).

Hiring Up for New Grads
This is encouraging news: some 88% of new grads have already found jobs. The most telling statistic was that 98% of male graduates at vocational high schools found jobs.

Interestingly, the retirement of the baby boomers is cited as a reason for the strong hiring. As we've noted often before, the baby-boom generation is a short blip on Japan's demographic charts. But it's likely to have some significant effects on the economy for the next three years.

The high unemployment rate among Japan's young people in recent years mostly reflects the stagnant economy. But as with other affluent young people around the world, it appears that Japan's students are less interested in technical careers, and thereby have fewer skills employers really want and are ready to pay for. Those willing to train themselves for what the economy needs now seem to be finding jobs.

Tokyo's Tiny Homes
Here's an interesting BW article on so-called micro homes, which are being built on miniscule plots (as small as a large parking space) in downtown Tokyo and other central-city neighborhoods. The micro homes cater to the growing number of adults in their 30s and 40s who want to avoid long commutes and stay close to the cultural amentities in the central city. The article describes the invention of architects in creating amenable homes in almost no space.

The back-to-the-city movement seems to be a growing phenomenon worldwide. In the US, it's associated with gentrification and has political implications, since up-and-coming young professionals often displace the longtime (and often darker-skinned) inner-city residents. Examples include Brooklyn, Seattle's Central District, and the Western Addition in San Francisco.

In Japan, of course, such ethnic tensions are not a factor. Although the market for micro homes is small, it does demonstrate the desirability of Japan's downtowns for residential housing, at least for a certain segment of the population.