Property in Japan is comparatively cheap. According to an October 2010 article in The Economist, Japan is 35% undervalued.
However, rents haven’t dropped as much, so rental yields in Tokyo remain high when compared to other cities in developed countries. Since the 2nd half of last year, rents started moving higher again, with the outer wards doing better than the center of the city. With the government very eager to print money, I expect this trend to accelerate with capital gains of about 5% this year and more in 2012.
When buying properties, the investor should prefer older buildings because depreciation in Japan is brutal. Usually, new properties lose 60% of their value in 30 years. It is better to buy properties that are already fully depreciated. Small apartments and units outside the center have much higher rental yields. Focus on Tokyo as the population in the rest of the country is declining. Avoid family-sized units as more and more Japanese live alone.
The best rental income is, therefore, made by investing in smaller, older properties. Properties in the north end of Tokyo in areas such as Adachi-ku and Itabashi-ku are especially lucrative. These areas are flush with small apartments, often as small as 16 square meters, that were built in the late 1980s during the bubble. Originally, these units sold for around 20 to 25 million yen and can now be had for around 5 million yen. Rental income for such a unit is on average about 50,000 yen a month, resulting in a 12% gross rental yield. This is more than double the yield on a larger, newer property in the city center.
The reason for this is because when people buy a property for themselves, they tend to do so for their family. These buyers will have good income and have access to cheap mortgages, so they tend to buy in more central locations. The smaller properties outside the center tend to be occupied by renters and are bought by investors.
That said, in Japan it is very difficult to get investment loans, even for Japanese citizens. The few available investment mortgages carry high interest rates and come with many restrictions. So while there is ample financing for units that people prefer to live in, a lot of equity is required to buy an investment property.
These two phenomena drive up prices for larger, newer and centrally located properties. On the other hand the investment market is starved for financing options and so prices for investment properties tend to be lower, despite market rents staying stable. In short, the less the typical salaryman and his wife like a property, the better investment it is.
Buying these high yield apartments can be lucrative there are still many pitfalls that can ruin your income. Building maintenance and repair can take a big bite out of your income. Elevator maintenance and replacement is expensive, so try to buy apartments in buildings without an elevator. In older buildings with elevators, confirm the last time it was replaced or that the Repair Reserve Fund has enough capital on hand if an elevator needs to be replaced.
Always look at the land value. The owner of a property has a share of the underlying land. With older buildings it is common that the building itself is worthless and that all the value is in the land. In high-rises, invest in units on lower floors as they are cheaper while having the same land rights as higher floors. Avoid flood zones or irregular shaped pieces of land as this can significantly impact the land value. Check market rents for other apartments similar to the one you’re thinking of buying. The current renter of a property might be paying a higher than market rates as the rental contract might have been signed almost two years prior. Generally, across Tokyo in all budgets, rents have come down in the last two years.
In short, investing in property in Tokyo is very attractive, but it is important to target the right properties.
Note: Erik Oskamp is the CEO of Akasaka Real Estate and a long-term Tokyo real estate agent. He will be leading an online webinar on Feb 25 at 2 p.m. in which he will share his insight and experience on the Tokyo property market.
If you are interested in finding out more, the webinar is open to all. The Webinar page is here.
Photo credit: Kris Miller / Flickr