Will Construction Cost drop for resorts in Japan? Case from Okinawa

Question: Now the construction cost in Okinawa has still been high?

Answer: Declining, in Q3 or Q4 20-30% reduction would be evidenced.

Back ground: in Okinawa, the construction cost surge appeared before COVID

The below figures are based on my perceived prices for high end hotels. Quoted as 000 JPY/ tsubo.

In 2017, 100

In 2019 , 120- 150

So, now the question is “What would be the current price after Covid-19? “I would like to share with you my opinions over future construction price.

1 Price decrease had already started before COVID.

Before COVID, according to local real estate developers, 150 dropped to 120- 150. Mainly because of several cancellations for future projects. In 2019, most of construction companies enjoyed forward committed orders over next three years, however, those orders have been cancelled since late 2019. Presumably, limited liquidity from local banks and resort market saturation heavily impacted new development projects.

2 Competition and price drop in Feb 2020

For the underwriting of a project, I asked quotation for several local constructors over a complex building of residential and retail in central Okinawa. The estimation was around 100, which was decreased from the previous figures by say 10 percent, and I perceived that the market has got into the price declining stage.

3 In 2Q 2020

Projects which had been discussed in Q1 have suspended and few new projects have been contracted, this would cause the competition among contractors, leading the price decline.

4.After COVID analysis　

Taking above 100 as an example, there are three scenarios to consider.

Stable

Reasons: while the number of projects decreases, factors to decrease the cost will be appeared due to availability of more workers and cheap imported materials. Consequently , the price will be stable. The price remains 100.

Slight Decrease

Reasons: demand decrease, natural selections among constructers will be evidenced, but more residence or remote work facilities are demanded. Consequently, the construction price will slight decrease. Price will be 80-90.

Large Decrease

Even though there are some new construction demands, Japan’s “Welcome Japan” campaign is paused for a couple of years and few demands of resort facility, which had been driving Okinawa economy before COVID. The price will be 70, or even lower.

Prospects and conclusion

Given the tourism industry dominance and its damage in Okinawa, the scenario No2 or 3 would be highly likely. Moreover, local construction companies’ resilience under low revenue as well as the liquidity limit, there will be screening among constructors and the price would drop in Q3. For investors who are considering tapping Okinawa resort market, its worth trying to maintain local contacts, monitor supply and demand balance, and figure out the best timing to start developments.

Further queries or doubts, please email to ytomizuka@abrilsjp.com

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