Editor’s Note: Zoe Ward is the publisher of Japan Property Central and has extensive experience in the Tokyo real estate market, working for some of the advertising agents on Real Estate Japan. This article was originally published on Zoe’s blog last fall, but as we’re in the midst of the moving season, it’s information worth noting.

Good news for tenants and bad news for landlords in Japan: A change in the traditional transaction customs in the residential and commercial rental market in Japan is underway which is putting more power on the tenants’ side.

The various fees usually paid by a tenant such as security deposits (shikikin) and key money (reikin) are decreasing.  Japan’s declining birth rates, decreasing population, oversupply of housing and the growing awareness of consumer rights have put an end to the era where landlords once held all of the power.

30% of apartments do not require key money, 50% only require 1 month deposit

According to real estate information service and property listing database, AtHome,  28% of apartments listed for rent in Tokyo’s 23 Wards in 2010 did not require any key money. This is 17.8% higher than in 2007.

Apartments that only required 1 month deposit totaled 51.2% in 2010 – up from 29.2% in 2007. Meanwhile, apartments that required 2 month’s deposit fell from 63.2% in 2007 to 40%. Apartments that did not require any deposit increased from 3.1% to 5.1%.

The basis of these payments is opaque. Criticism is growing over the various costs that a tenant must pay when moving into an apartment. The number of lawsuits over these costs is also increasing. In July, the Supreme Court ruled that a rental contract renewal fee was valid, but many people still feel the that there is no rational explanation for the need to charge such fees.

Deposits required for commercial space falls to lowest levels

The fees when renting an office space are also falling. According to CB Richard Ellis, office spaces in Tokyo’s 23 Wards required an average of 8.6 month’s deposit as of June, 2011. During the most recent peak of September, 2008, the average deposit was 9.4 months. This year is the lowest average since they began record keeping in 1996.

In Osaka, the average in June, 2011, was 10.1 month’s deposit which is down 0.8 months from the peak in March, 2008, and is the lowest recorded average.

CBRE said that there were cases during Japan’s bubble years where a deposit of as high as 24 months was required before renting a commercial space. While 2 or 3 months deposit is the norm in many other countries, Japan’s deposit requirements still seem quite high.

Competition to attract tenants

The main reason for the reduction in deposits is to attract tenants in a highly competitive market. Rather than offering reduced rent, landlords are trying to appeal to potential tenants by reducing the initial upfront costs they would normally have to pay.

For a tenant planning to move into a 10,000 sqm office space, they are looking at initial costs of several hundred million Yen. From the point of view of the tenant, a portion of the company’s funds are essentially ‘locked-up’ and cannot be used while they occupy that space. Furthermore, if the building owner declares bankruptcy, there is a risk that the tenant will not have their deposit refunded.

The new era of the tenant

Both residential and commercial tenants are becoming more critical over the various upfront expenses associated with renting a new space, especially those costs which are hard to define as being essential.

There are various theories over the custom of security deposits and key money. The custom of paying the landlord key money is said to have started just after the 2nd World War when housing was at a shortage. Key money was also frequently required by landlords in Kobe following the 1995 Hanshin earthquake.

The various customs that developed during a time when it was a landlords’ market are in for a review now that Japan’s population is in decline and the power has shifted towards the tenants.

Source: The Nikkei Shimbun, September 1, 2011

Photo credit:  Belchers Albert via Wikimedia Commons

Chart: Courtesy of Zoe Ward

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