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Property bubble may burst: Daiwa House

A concerned CEO of Japan homebuilder aims to cut costs and expand in China

(TOKYO) Daiwa House Industry Co, Japan’s second biggest homebuilder by market value, wants to cut local costs and expand in China as the developer is concerned a property ‘bubble’ may burst, slashing land prices.

‘The property market has become dangerous,’ Takeo Higuchi, chairman of the Osaka-based homebuilder, said in an interview. ‘I wouldn’t be surprised if the real estate bubble goes bust.’

Land prices are key for Japanese homebuilders like Daiwa House because declines in population are shrinking the residential construction market. Housing starts in the first half of this year averaged about 23,000 a month fewer than they did 20 years ago.

Daiwa House wants to build condominiums in China and Vietnam and is increasing sales of cheaper steel-frame homes in Japan. The company is also investing in energy and research into rechargeable batteries.

The Ministry of Health, Labour and Welfare in December predicted Japan’s population would drop to 95.2 million by 2050 from 127.8 million in 2005 because people are marrying later in life and having fewer children. That compares with a January 2002 forecast for a 21 per cent decline in the population to 100.6 million by 2050.

The homebuilder’s overseas expansion plan is a positive move, considering the shrinking market at home, said Yoji Otani, an analyst at Credit Suisse Group. Even so, it may be difficult for Daiwa House to meet the needs of consumers in foreign markets, he said.

‘Homes are a highly local product,’ Mr Otani said. ‘It may be risky for a foreign builder to expand broadly into another country’s market.’

Annualised housing starts fell 23 per cent in July from a year earlier to 947,088, after surging 6 per cent to 1.35 million in June after changes to construction laws prompted companies to apply for building permits the previous month. Under the new rules, approvals can take as many as 70 days, compared with 21 days before the change.

Daiwa House, whose shares have dropped 27 per cent this year, plans to spin off a real estate investment trust (Reit) within a year as Japan’s real estate market rebounds from a 15-year slump.

The Reit will contain 100 billion yen (S$1.32 billion) worth of properties, including warehouses, rental apartments and commercial buildings, Mr Higuchi said. The properties will be mainly located in Tokyo, Osaka and Nagoya.

Japan’s land price growth quickened last year to 8.6 per cent from 0.9 per cent in 2005. The gain was the fastest since the National Tax Agency started to compile national land figures. The rapid gain in land prices has become worrisome for Daiwa House, Mr Higuchi said.

Osaka’s Midousuji, one of the city’s main streets for office centres, experienced the most rapid growth, with prices soaring 40 per cent to 6.96 million yen per square metre, the tax agency said on Aug 1.

Daiwa House forecasts profit will surge 25 per cent to 58 billion yen for the year ending March 2008, as sales are expected to advance about 5 per cent to 1.7 trillion yen.

The company is cutting costs by increasing sales if its ‘xevo’ line of two-story, steel-framed houses.

The company plans to sell 1,200-1,300 xevo houses a month this year, exceeding an earlier goal for 1,000 a month.

From next year, Daiwa House expects all of the new homes it sells to be based on xevo frames, up from about 85 per cent now, Mr Higuchi said.

Daiwa House will next month start selling 830 apartments in the seaport of Dalian, north-east China. The developer also plans to build 10 condominiums with 1,200 units in Suzhou, near Shanghai, seeking to meet its two trillion yen sales goal by 2010.

In Vietnam, Daiwa House plans to build 200 units of rental apartments near Japanese schools in Hanoi by 2010.

‘In the long run, it is impossible to achieve such growth if we only focus on the Japanese market,’ Mr Higuchi said.

The company is also looking to expand into energy. Daiwa House bought 52 per cent of Eneserve Corp, which makes electricity generators, for 2.51 billion yen in April.

In addition, it has invested an undisclosed sum in research on lithium-ion batteries, a type of rechargeable battery commonly used in consumer electronics, for residential usage to combat carbon emissions contributing global warming.

The homebuilder plans factories in the Tokyo and Osaka regions and may start producing rechargeable batteries for properties by 2009.

Daiwa House also plans to start producing power- assisted walking devices for the disabled from next year, Mr Higuchi said.

 

Source: Bloomberg (Business Times 6 Sept 07)

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