Is a real estate property a good investment in Japan?
Japan: prices of existing condos go up, prices of new condo’s go down
It’s a confusing case. While the demand for old homes in Japan continues to be strong, the market for new homes is increasingly depressed.
In the Tokyo Metropolitan Area, the average price of new condominiums increased by 4.73 percent in 2019 (3.91 percent inflation-adjusted), up from 0.9 per cent in the previous year. Established condo prices increased by 2.04 percent (1.65 percent inflation-adjusted) over the last year.
Nevertheless, the average price of new condos in Tokyo fell by 2.67 percent in 2019 (-3.43 percent inflation-adjusted), following a fall of 0.23 percent in the previous year. The big surprise was that, during the last year, new condo prices dropped by 8.11 percent (-8.46 percent inflation-adjusted).
Demand is on the rise, partly fuelled by international investors. In Tokyo, new condominium sales decreased by 2.4 percent y-o -y in 2019, while current detached house sales rose by 4.5 percent.
In Osaka, sales of new condo and detached houses rose by 1.4% and 1.7% respectively.
Nevertheless, residential building activity remains low. In 2019, the approved housing starts decreased by 4 percent to 905,123 units, the third consecutive year of the y-o-y decline.
According to Mori Nishimura of Housing Japan, Japan is a safe haven for rich citizens in Asia and nowhere else can you purchase land as a tourist. Most foreign buyers in the world come from Singapore, Malaysia, Thailand, Hong Kong, and Mainland China. There is also increasing interest from the USA, Australia, Western Europe, Taiwan and Indonesia.
Some foreign buyers are searching for rental income and diversifying their assets beyond their home countries, while others are only searching for a holiday home in Japan, according to Robert Crane of Solid Real Estate.
According to Global Property Guide study, gross rental yields – the rental revenue received on the selling price of a residential home – varies from 3.4 percent to 5.4 percent in Tokyo’s central districts.
The yield on the very smallest apartments is 5.42%, a fair return.
There are no formal limitations on foreigners to own properties in Japan.
Japan faces big economic and social problems ahead. Apart from its decades-long issues of slow economic development and declining population, the world is grappling with the effects of the COVID-19 pandemic.
Prime Minister Shinzo Abe is implementing economic stimulus steps. Such policies would be beneficial for the Japanese housing market (which generates relatively decent rental income for investors), but pose some threats to the broader economy as Japan’s national debt increases.
The Japanese economy shrank by an annualized rate of 7.1 per cent in the last quarter of 2019, worse than the initial estimate of 6.3 percent and the highest fall in more than five years, with the introduction of new sales tax rising from 8 percent to 10 percent on consumer spending. The outbreak of COVID-19 may drive the world’s third largest economy into a technical recession in Q1 2020. Decreased tourism is a major problem for Japan, which last year received 8.1 million Chinese tourists.
In March 2020, the Japanese government introduced a fresh relief plan to help businesses affected by a recent coronavirus epidemic. This comprises JPY 500 billion (USD 4.72 billion) in zero-interest loans for small and medium-sized businesses and JPY 4.100 (USD 38.7) per day grants for self-employed workers forced to give up jobs and take care of their children in the midst of school closures. A month earlier, the government had announced a JPY 500 billion (USD 4.72 billion) program of low-interest loans to small and medium-sized tourism and other virus-hit businesses.
In addition to these new measures, the state has enacted a $120 billion stimulus program last December 2019 to stimulate the struggling economy and offset the effects of the sales tax increase levied in October 2019.
Moderate rental yields on Japanese residential property
Gross rental yields in Tokyo’s central districts ranges from 3.4% to 5.4% on the purchase price of the rental property, before taxes, vacancies and other expenses. They’re a bit better in smaller buildings. Not perfect, but not uncommon for a city like Tokyo. The yield in the very smallest apartments is 5.4%, a fair return. But smaller apartments tend to need more upkeep, so higher yields are justified.
Prices per square meter range from around $8,700 to $13,800, which is not so expensive compared to other global cities. In Yen terms, residential rates tend to increase. This is expected to happen as long as stimulus is in place. More money in the system means lower interest rates means higher asset prices, especially those prices of assets that produce good incomes, such as Tokyo property.
It’s going to be interesting. If Abenomics really leads to a revival of Japan’s economy, rising incomes will continue to support rising rents. But as time goes by, the success of Abenomics appears more and more in doubt.
Round trip transaction costs in Japan are low.
Moderate roundtrip buying costs in Japan
The average roundtrip transaction cost is 13.16 percent to 13.45 percent, with an agent charge of 3.15 percent and an extra sum of JPY63,000 (US$ 578).
Landlord and Tenant
Japanese landlords get main money
The balance of power moved from tenants to landlords, rendering Japan strongly pro-landlord.
Rents: The contract is openly negotiable. Apart from a security deposit of two or three months, the landlords earn main money worth one or two months’ rent.
Tenant Eviction: If the occupant terminates the contract prematurely, the landlord can get one month’s rent.
Japan ‘s declining economy
The Japanese economy shrank by an annualized rate of 7.1 per cent in the last quarter of 2019, higher than the original forecast of 6.3 per cent and the biggest fall in more than five years.
Now the outbreak of COVID-19 is likely to worsen the situation and may drive the world’s third largest economy into a technical recession in Q1 2020. Decreased tourism is a big concern for Japan, which last year welcomed 8.1 million Chinese tourists.
On should keep in mind that Japan’s economic success is often over-criticized, seeing the fact is that Japan ‘s growth has been better or the same when compared to Europe’s older economies over the last decade , especially in terms of GDP per capita.
When it comes to currency strength, the yen has stabilized over the last three years and stood at $110,044 = US$ 1 over February 2020.
Nevertheless, in the last two years, the Japanese yen has risen by about 11 per cent compared to the euro, to EUR 120,043 = EUR 1 in February 2020.
Unsurprisingly, exports fell by 2.6 percent in January 2020 from a year ago, in the face of declining global demand and the continuing US-China trade conflict, according to the Ministry of Finance. In fact, it was the fourteenth consecutive month of y-o -y decline.
After years of massive monetary easing, Japan’s core inflation, excluding volatile food prices, stood at 0.8% in January 2020 – far below the official BOJ target of 2%.
The government’s ultra-accommodative monetary policy ‘s failure to fuel inflation has contributed to dissident voices calling for change, while others called for additional stimulus to reach its inflation target.
BOJ Governor Haruhiko Kuroda recently stated that he would consider further easing if the outbreak of COVID-19 seriously damages the economy and inflation of the region.
In September 2017, the government unveiled a new stimulus package of JPY2 trillion ( US$ 17.8 billion) – the fourth in a row. The government has vowed to abandon its massive stimulus only after inflation reaches 2%.
Then, in December 2019, Abe accepted another US$120 billion stimulus package to support the struggling economy and offset the effects of the increase in sales tax.
In March 2020, the Japanese government introduced a fresh JPY 1 trillion (USD 9.6 billion) relief plan aimed at helping industries affected by a recent coronavirus epidemic.
The new measure comes about a month after the government introduced the first JPY 500 billion (USD 4.72 billion) program to provide low-interest loans to small and medium-sized tourism companies and other industries impacted by the coronavirus outbreak.
Japan has the highest debt load in the world. The country’s total debt amounted to about JPY 1,325.6 trillion (USD 12.49 trillion) in 2019, which is equal to about 237.7% of GDP, according to the IMF. However, views vary as to how much of the issue that is.