When real estate prices made a vertiginous ascent in the 1980s Japan the bullish refrain was that there wasn’t enough land. However, Japanese real estate prices, and even those of crowded Tokyo, have glided downwards over the subsequent two decades, accompanied by rents - interrupted by the Karate-Kid-esque 'recovery-on; recovery-off' hope that we have also started to witness in the US. Very low economic growth and a demographic headwind, despite reasonably high employment, have led to a depressed real estate market. Is this a harbinger for the West? And what defines recovery - price, volume, net equity?
[7]
Via Goldman Sachs
The value chain for housing, as for so many industries, is broader than you might think (see the chart below), ranging from architects and mortgage providers before a house is built to utilities and insurance once it is completed. But even though the constituents of the chain all share something there are big differences in exposure. For example, some of these business benefit more from a rise in house prices (real estate agents) rather than housing volumes (cement). Similarly, some of them are exposed to basic, mass urban housing (elevators, cranes, lavatories) rather than the more expensive single family properties (landscaping). Some of them enjoy high barriers to entry (commodities), while other sectors are quite fragmented (furnishing).
[8]
And while some have to remain local by nature (developers), others find it easier to seek growth in foreign markets (chemicals). Looking at the value chain this way helps us to identify the few pockets of growth in the developing markets, and to broaden the universe we look at to include opportunities in the emerging markets, where the drivers are marginally different.