Reasons to invest in residential property in Tokyo (part 1)
This article is about investing in residential property in Tokyo with a focus on small units. That said, much of the information is applicable when considering an investment in other areas of Japanese real estate.
- High Rents / Low Interest Rates
- Strong Rule of Law
- No restrictions on foreign ownership
- Ownership rights firmly protected
- Little protection for the renter at the end of the lease period
- Key money, cleaning fees, renewal fees
- People are moving to Tokyo
- Family size decreasing
- Strong Currency
A common misconception in regards to Japan is that the yen is strong and possibly over-valued. Due to persistent deflation the yen can buy more and so long-term currency comparisons should be corrected for inflation. Have a look here for an inflation corrected chart of the yen. However, keep in mind that the US, UK and Europe are printing excessive amounts of money which increases the long-term risk of inflation that would lead to devaluation of their currencies. In Addition, Japan has a trade surplus, low individual debt levels and the government debt is entirely domestically financed.
Prices went up in 2006 and 2007. During the financial crisis in 2008 prices declined. Prices finally stabilized in the summer of 2009 and have been very slowly increasing since. Still the market is down 80-85% since 1990.
What to Buy
The advantages of older apartments offer:
- Higher rental yield
- Lower depreciation
- No earthquake risk as all the value is in the land
Keep in mind; depreciation is brutal. After 30-35 years a building is worthless. There is very little for sale between 1984 and 1995.
Rents for older apartments are also lower.
But rents drop only about 30%, while prices drop 60%. So rental yields for older places still remain higher.
The earthquake standards were upgraded in 1981, so if there is a chance that you will live there yourself avoid buildings that are much older.
Small apartments have higher yield
Look outside the Center
Rental yields are significantly higher outside the center. But avoid going outside the 23 wards of Tokyo. Not only is the population in the countryside rapidly declining, but also local real estate agents tend to have a near-monopoly in the smaller towns. As a result there is not a lot of transparency and it is hard to find out what a good price is. Also you would have to rely on that same broker to find renters. That put you at a disadvantage if that broker or his friends own property in the town as well. In Tokyo there are many brokers and the competition will ensure a decent level of service.
Apartments with an existing renter
A property with a renter is called ‘Owner Change’ in Japan.
The advantages of buying a property with a renter are that there is no need to search for a new tenant. You start collecting rent from the day you get the keys. They are cheaper too; for small studio apartments the price difference is very small, but for a 3LDK the difference can be as much as 25%.
You should also keep in mind that many buyers in Japan are looking for a residence for themselves and thus are not interested in a rented apartment. Japanese banks are also reluctant to finance investment apartments, which means there is significantly less money chasing rented apartments.
Ordinary apartments are easy to rent out and to sell
Ordinary apartments are easier to rent out or sell than unique apartments. It is a common misconception that an especially beautiful, centrally located and new apartment is easy to rent out. In general such apartments are significantly more expensive and as such there are only few people that can afford such a place. It is much better to invest in ordinary apartments, such as apartments in large buildings with many similar units. As there is a big market for such units there are always people offering and looking for such units. This means it is easy to establish the market price at which such an apartment attracts a renter or a buyer quickly. Some areas might not have many very large buildings, but always prefer to invest in what is common for the area.
In part 2 we look at some of the pitfalls you should keep in mind.