Yen for Japan
It’s no secret that the Japanese property market has taken a series of major hits, says Andre Cooray. But it’s time to realise that the only way is up
It’s hard to ignore Japan, the land of the rising sun, sushi, manga, geisha girls, and oh yeah – the world’s second-biggest economy. Therefore, it comes as no surprise that after paying its ‘bubble bursting’ dues and then some, Japan’s property market has undergone a price correction significant enough to prompt renewed interest from foreign investors.
It seems the honeymoon is briefly over for investors smitten by emerging markets; this year, they want returns from core assets and are actively seeking out developed markets such as Japan. What’s more, easier credit and low prices have further enticed potential overseas buyers, particularly to Tokyo.
Japan tops the list of best countries for property investment in 2009, along with Australia and China, in an annual survey of the intentions of some of the world’s biggest investment groups including LaSalle Investment Management and Morgan Stanley. The survey was conducted by the Asian Real Estate Association, in conjunction with the European Association of Investors and the U.S.-based Pension Real Estate Association.
The latest statistics from Japan’s Ministry of Land reveal that 19 districts in the three largest metropolitan regions showed a slowdown in decreasing land rates for the first quarter of 2009, compared to the previous quarter. This is the first indication of some kind of market recovery, and overseas investors, particularly the mainland Chinese, are therefore showing a keen interest.
Kazuo Tanabe, president of Chuo Mitsui Trust Holdings, Japan’s sixth-largest bank, which specialises in real estate and asset management, recently confirmed that foreign buyers are showing a lot of interest in acquiring property in Japan; and that property transactions are up as much as 30 percent on last year. He notes that home sales have been increasing most dramatically in Osaka, Nagoya and Fukuoka.
Kunihiko Koike, CEO of Fast Star Management Ltd, a Japanese-based property company, recommends investors buy in prime Tokyo wards, such as Minato, Shibuya and Chiyoda. Real estate in these areas goes for about HK$247,000 per 35 square foot. In Koike’s opinion, the most popular residential properties among locals in Tokyo range from HK$2.9 million to HK$4.1 million. Such homes are affordable for the average Japanese corporate employee, and therefore have solid re-sale potential.
“There are ample opportunities for investors to purchase residential property in Japan this year. It’s possible to get good residential property at lower prices especially from sellers who urgently need cash,” says Koike. However, he advises investors against buying property in the smaller cities where rental yields are unstable. In addition, landlords may have difficulty finding tenants in remote areas.
The average rental yield in Tokyo for a whole building ranges between 5 percent and 7 percent; one-bedroom apartments can generate returns of between 6 percent and 8 percent, and returns of about 5 percent can be expected on three-bedroom houses with a living room, dining room and kitchen, aka 3LDK homes. However, yields in Japan’s capital (which was ranked the world’s most expensive city for expatriates to live in this year, by consultancy firm Mercer) can reach 10 percent.
Koike reveals that investors from China are particularly interested in Okinawa Island, which is located in the most south-western part of Japan. “They love this beautiful beach resort because it is only a two-hour flight from Shanghai,” he says. The average price of a 3LDK home here is roughly HK$1.6 million. The local Okinawa government plans to increase air services to the island, thus encouraging more overseas tourists to visit, and opening up the holiday-rental market.
Steven Windholz, real-estate consultant for AIE Group Japan, agrees that now is a good time to buy property in Japan especially in the foreclosed market, which still boasts impressive rental yields. In his opinion, rental returns in regional cities appear to be higher and unleveraged. However, properties that may qualify for equity release are mainly located in the largest cities.
“The Japanese real estate market does not seem to be filled with the same degree of uncertainty as other major markets these days. Prices fell for 16 years in a row and only started to show gains in the last two to three years before the American housing bubble popped. These gains were then pretty much erased, putting Japan at what is perceived as back at the bottom of the cycle with very little margin to fall further,” explains Windholz. “Thus it’s a pretty safe bet.”
Windholz says there are great bargains to be had in the Japanese foreclosed market. You can now purchase a 1,291-square-foot house in the countryside or in small cities such as Oita, Gifu, Nagano and Kushiro for just HK$200,000. You will pay the same amount for a 269-square-foot studio apartment in a medium-sized city such as Sagamihara, Okayama, Niigata or Kagoshima. Such homes can be rented out for HK$2,500 to HK$4,000 per month, with more than healthy gross yields of 15 percent to 24 percent.
Prices for a small house either in a medium-sized city or on the fringes of Japan’s largest cites, such as Tokyo, Osaka and Yokohama, start from HK$500,000. “[Such a purchase] can be very lucrative,” says Windholz, “a client today, for example, picked one up yielding 46 percent.”
Buyers with a budget of around HK$1.3 million are in a particularly strong position, as they may be able to acquire one of the few properties (often condos with three or more bedrooms in central Tokyo) where developers can assist with cash-out financing of over 100 percent of the purchase price.
This is known as the elusive, infinite return on investment (ROI). Such properties are wildly discounted from the market price and can generally produce more income than the repayments. “If one uses only the money from the lender and still receives a monthly income, this produces a return of infinite,” Windholz explains.
“The secret of foreclosures here is not really being kept very well anymore. With a growing number of investors participating in the auctions, winning tender amounts will continue to rise. Some studies show that the general price trends are first visible in foreclosure data. Prices and activity have been on the increase since March, which may be setting the stage for rising prices in the overall market in general,” says Windholz.
According to Windholz, Americans and Australians in particular are actively seeking entry into Japan’s real estate market, which is the second largest in the world. He says that it is quite straightforward for foreigners to invest, though assistance from a local company is generally required for non-residents to participate in auctions and manage any assets acquired.
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