Buy to Let in Japan 1

This is the first in a series of three articles about buy to let (investment real estate) in Japan. You can see part 2 here and part 3 here.

The author works in the sector, has written for “Asian Property Review” (Malaysia), “iProperty Group” publications (Singapore), “Bigger Pockets” & “Real Estate Investing Wealth Monthly” (both US based), been interviewed at length for “Real Estate Japan”, and regularly posts articles on LinkedIn and other social media. I’ve found him very approachable and helpful but haven’t done business with him -this is not an endorsement, just a chance to learn from an expert 🙂

Take it away, Ziv!

Real Estate Investment – Why Japan?
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1. Hassle Free Environment

For those of us familiar with Japan, and particularly those of us living here, the first and foremost reason is usually crystal clear – Japan’s social and business mentality is a global rarity. There aren’t many other places, anywhere in the world, which offer anything close to Japan’s “by the book”, honest and hassle-free interaction, in all aspects. And while the mountains of paperwork, procedural requirements and box checking can be frustrating at times, for those among us who want their lives (and investments alike) with as few surprises and unexpected challenges as possible, it’s a blessed experience.

And this doesn’t apply just to dealing with the professionals involved in the purchase, sale or management of property either – but also to third parties such as insurance companies, banks, building management firms, renovation/repair companies and – perhaps most importantly – the tenants. Japanese tenants normally pay on time, do not damage properties they are residing or conducting business in, and generally provide a headache-free experience for landlords – something that those of us who have owned property overseas quickly come to appreciate immensely.

Yes, there are generalisations, and exceptions to the norm exist, as anywhere – but the likelihood of those in Japan is virtually close to nil – from our own experience, approximately 1-5 of tenants in well over a hundred would be a “troublemaker” – which, in Japanese terms, generally equates to, at worst, absconding without a trace or being late with one’s rent. Even when dealing with low income earners, which tend to populate the highest yielding properties, as in any country – the horror stories common to “slum lords” in other countries are all but non-existent here. There are almost never any drug labs, other crimes committed within properties, squatting friends or family members, fires, other damages to property, etc – and even in the rare case of a chronically late paying tenant, a simple letter of eviction will do – the fear of social and legal repercussions runs deep in the Japanese psyche, and forced eviction, court attendance or other landlord nightmares are simply not required here at all.

2. Affordability

Although the last 4-5 years have been kind to Japanese property prices, particularly in the heart of the bigger metropolitan centres – this temporary rise in prices comes on the back of roughly 25 years of deflation and price decline, which has seen the country’s property price index bottom out, at the end of 2011, at less than half of its pre-1990’s peak. What this means in practice is that, for the price of the cash deposit required on mortgages in places such as Australia, Singapore or Hong-Kong, one can purchase an entire freehold property, be it a single standing older house in the suburbs or countryside, or a central city apartment.

Naturally, this sort of price provides for excellent diversity and risk-mitigation – whereas 300,000 USD would hardly get one a single property, if that, in any of the locations mentioned above, the same amount will get a property investor in Japan up to 10 one or two room apartments (or “mansion rooms”, as they’re known here). Yes, you read that right – there are apartments in Japan (tenanted and yielding quite high yields – see below) for sale at price tags as low as 2 mil JPY (just over 20,000 USD) – and not only in small villages or townships with declining populations, but in major cities as well. As a rule, hedging one’s portfolio geographically and socio-economically is always a good idea, not to mention the fact that a vacant property in a portfolio of 8 properties, naturally hurts far less than in a portfolio of 2.

3. Stable, Reliable & High Returns

While the above mentioned extended deflationary period has brought down not only property prices, but rents as well, the rental graph never rises or declines as sharply as the property prices graph, anywhere in the world – the reason being that macro changes in the economy take a very long time to trickle down to the masses on a street level. Asset prices always curve up or down with far greater volatility and in far shorter periods of time, whereas salaries and cost of living indexes take far longer to follow, and never do so quite as sharply.

Again, to translate this into practicalities, what this means is that rents are currently, even after the last 4-5 years of relative property price hikes, generating a very high yield, particularly in the lower investment brackets (smaller, older singles’ type apartments). And while the figures vary by location, it is not uncommon to find deals netting 9-12% net pre-tax yearly returns in many areas of the country. Coupled with the stability of the business environment and tenant psyches, as mentioned in section 1, above, this means that, barring some unique cases, which we will discuss in more detail further down the track, these returns are largely stable, maintainable and reliable – Japanese tenants keep the properties they populate in good condition, do not damage them intentionally, and tend to stay in one place for as long as possible – the average singles’ tenancy being approximately 4.5 years. 10, 15 and 20 year tenancies are also not uncommon, particularly among single females over 30 and single males over 40.

4. Market Size & Accessibility

​Japan is the world’s second largest property investment market, second only to the USA, and the biggest market in the Asia-Pacific region. There is a huge amount of real estate assets exchanging hands in the country on a daily basis, and attractive deals are snatched in a matter of days, and often within hours of their listing.
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This is not to say that property purchase and management is easy for non-native Japanese – far from it. Japan is a highly ethnocentric society, will very little or no grasp of English or any other foreign language, foreign mannerisms and modes of operation, and the Japanese are notoriously foreigner-shy, to the point of panic. Japanese professionals stoutly refuse to have anything to do with non-Japanese in many, if not most cases – even when these scary foreigners live here, speak, read and write Japanese. Native Japanese representation or connections are, therefore, essential, if one is to gain access to the entire market, and not only to those foreigner-friendly (and usually overpriced) pockets of it, such as central Tokyo, central Osaka, Yokosuka, Niseko or Okinawa.

The author – Ziv Nakajima-Magen is executive manager of Asia-Pacific and a partner at Nippon Tradings International (NTI), a proxy and buyers’ agency representing foreign investors in Japanese real-estate property. He can be reached at info@nippontradings.com or +81 92 600 1613