A half-priced apartment in an upscale Tokyo residential area reflects tough times for Japan's $46 billion apartment market, but signs of a pick up in sales, lifted by expanded mortgage-tax relief and lower pricing, suggest the worst is now over.

A cloud still hangs over the market where a bank lending squeeze, an oversupply of rooms and a sales slump triggered the collapse of dozens of developers such as Morimoto Co in the past year and knocked down share prices in the real estate sector.

Still, a turning point may be near: property agents report a pick up in interest from potential buyers and an expansion in tax relief on housing loans, part of an additional $154 billion economic stimulus, is starting to lift apartment sales.

The number of unsold apartments in the greater Tokyo area fell to 8,000 in March, after falling below the closely watched 10,000 line in February for the first time in 15 months, according to the Real Estate Economic Institute.

Property developers such as Sumitomo Realty & Development meanwhile are expected to benefit from a fall in construction material prices. Nationwide land prices fell an average 3.5 percent in the 12 months to January.

"There's a growing consensus the market is gradually stabilising following a sharp and rapid deterioration," says Chibagin Asset Management analyst Hiroshi Kakizaki.

"If so, major developers' shares are looking attractive in terms of their valuations. And that's probably why some investors are eyeing to buy them on dips."

Real estate companies listed on the Tokyo bourse's main board have an average price-to-earnings of 15.6 against 20 for the overall market average, suggesting a discount.

Apartment sales are still patchy with only about 70 percent of new rooms offered in the greater Tokyo area finding buyers in the first month after the sales launch. A wave of layoffs and corporate efforts to trim expatriates' housing budgets are sapping demand for upmarket rooms.

Any stabilisation in the market, expected from mid-year, would be a precursor to a recovery in the office market and help major property stocks such as Mitsubishi Estate, analysts say. Its shares hit a record low in March but have recovered almost 47 percent since then.

Highlighting developers' efforts to clear inventories, a new apartment in Shibuya Kamiyamacho, an exclusive Tokyo residential area where Prime Minister Taro Aso owns a mansion, has had its sales price slashed by half from its original one.

Desperate for cash, some developers are selling their apartments to "outlet" firms like Riberesute Corp which buy unsold rooms in bulk and resell them at big discounts.

BETTER TIMES AHEAD?

Katsuji Yamanaka, a sales group leader of Mitsui Fudosan Residential, a residential sales arm of Mitsui Fudosan, says he has become busier this year.

"We're seeing a recovery in the number of visitors to our model rooms since the start of this year... Thankfully, sales contracts are also rising," he said.

"The recovery is probably because apartment prices and the supply balance are returning to a normal level." Fewer than 40,000 rooms are seen coming to the market this year in Tokyo and its suburbs, less than a half of that offered in 2005, according to data from real estate research firm Tokyo Kantei.

Credit Suisse analyst Yoji Otani said in a recent report that liquidity in Japan's property market has already begun recovering and the tipping point is just around the corner.

"We recommend active investment in the real estate sector," said Otani, who has an "overweight" rating for the sector. Since hitting a bottom in 2001, the apartment market staged solid growth until 2007 as foreign investment funds and rich individuals poured into Japanese property for leveraged investments.

In the six years to 2007, the average price for an apartment in Tokyo's 23 wards, of just over 70 square metres, rose 30 percent to 61 million yen ($630,000) -- nine times the average annual income of Japanese salaried workers and double the cost of buying a house in greater London.

But the property bubble suddenly erupted following an introduction of stricter construction rules in 2007. The market was then hit by a combination of a spike in land and construction material prices and the global financial crisis, which triggered an unwinding of foreign investment.

"For apartments in the suburbs, prices have come down by 20 percent from their peak marked last year," said Nomura Securities analyst Daisuke Fukushima. "For central Tokyo, too, although there is not enough data, my feeling is that prices could come down by 20 percent as well."

Some analysts say there is no need for consumers or investors to rush and buy apartments as prices are likely to fall further. Interest rates are also likely to stay low with tax breaks on mortgages remaining in effect until 2013.

"The best time to buy is yet to come. It might be the first or second quarter next year. There is still a downside risk in the economy," said Simon Treacy, chief executive officer of MGPA, a firm partly owned by Macquarie Bank.

Developers may not have to wait that long for a boost, however as a fall in land and construction material prices helps firms such as Sumitomo Realty & Development carry out projects at lower costs.

Falling material prices should start helping major developers gain some 20 percent in profit in their apartment businesses around October or November, said Toshiaki Nakayama, a chief analyst at Tokyo Kantei.

"That, at least, would be good news for some developers who are selling off their inventories at deep discount."