In 2013 and 2014, Hong Kong hosted dozens, if not hundreds, of overseas property sales launches, but for the first time in recent memory, a handful of them were for new condominium properties in Japan. Prime Minister Shinzo Abe has been on a foreign investment tear — investment into Japan — and that is finally starting to trickle down to individual real estate investors. Materials were available in English, Chinese or both, and major property agencies were on board. As more and more investors jump on the Japan bandwagon, the net is going to be cast wider. Like into the second-hand property sector.
An Enigma Inside a Mystery
Like many aspects of Japanese life, Japan’s property market is something of a head-scratcher for buyers looking to dabble in the Land of the Rising Sun. Its fundamentals aren’t the trouble: the economic outlook is solid, demographics impacting Tokyo are positive, it’s legally transparent, one of only three clearly titling freehold markets in Asia and similarly one of three safe havens. But unlike oddities like Hong Kong, the UK and North America’s fondness for measuring flats in square feet, a minor quibble, Japan uses the tsubo (just over 35 square feet). Occasionally rentals are advertised by number of tatami, which indeed indicates room size but which varies from region to region. And that’s just the start.
One thing is obvious, however: risk-tolerant investors may want to investigate the country’s second-hand property market. Like all mature property markets, Japan’s, specifically Tokyo’s, second-hand sector has its share of advantages, chief among them higher yields and lower prices than new builds, which are on the rise. “Now, the price of first-hand property in Japan is increasing,” explains Yasuoka Akihiro, manager at Japanese brokerage Daikyo Hongkong Limited. “It’s because material costs are increasing a lot and because of the lack of manpower due to the increase in domestic construction works.” Lest we forget, Tokyo is on a building boom ahead of major international sporting events in 2019 and 2020, as well as infrastructure projects spanning Japan.
“Although the price of second-hand property is linked with the rising price of first-hand properties, the general price of second-hand property is relatively cheap … and will be easier to buy,” says Yasuoka. In addition, movement in residential rental rates isn’t matching price increases, “So there is increased attention to second-hand property due to the fact that yields on first-hand properties are decreasing,” she/he finishes.
Admittedly, those advantages are fluid and can evaporate in the blink of an eye. “Second-hand [stock] is, of course, cheaper in price and higher yields can be expected than in new apartments,” agrees Joe Law, JL Advisers’ managing director. But second-hand investments, “Very much depend on the age of the building … Those built in the 1990s or 2000s should be safe, with good shape and structure, but the old ‘grandpa grandma’ will be tough,” he warns. Lower occupancy rates, higher maintenance costs, more management and maintenance concerns and stress in general put a big question mark above second-hand stock. “Regarding financing,” Law continues, “The older the building the less of a chance to get a loan. And the capital gains may not be satisfactory for investors in old or older grandpa grandma [properties].”
For those who are considering the second-hand market, the statistics are on their side. According to the latest data from brokerage Sumitomo, “With prices for pre-owned apartments remaining stable, they can be expected to consistently retain their value as assets … Prices per square metre for pre-owned apartments in the Tokyo metropolitan area have remained stable for the last ten years, with prices in 2014 up by approximately 37 percent compared to 2004.” This despite the GFC and the Lehman Brothers crash in 2008 and the catastrophic earthquake in 2011. And with construction costs on the rise, prevailing wisdom suggests those represent up to 70 percent of the price on a first-hand property and could go up further still.
The key is what to buy and where. “For the second-hand property in Japan, Tokyo is the main active market. The prices in some large cities are also increasing and the market for investors continues to expand,” explains Yasuoka. If yield is the primary concern, Yasuoka suggests investigating other large cities, like Osaka, Yokohama, Nagoya, Kobe, Fukuoka and Sapporo — with one major caveat. “However, also considering domestic population inflows and inbound overseas capital and so on, Tokyo is definitely regarded as a stable investment market.” Law agrees on the appeal of Tokyo, pointing out the locations stretching from Chiyoda-ku to Minato-ku spanning the crucial JR Yamanote train line are at the top of investor wish lists. They’re core CBD and tourist areas, and come with lower risk and higher occupancy and potential for capital gains. “A super high-end apartment, say in Minami Azabu or somewhere near the embassy street in Tokyo, may cost you JPY200 to 300 million (HK$13 to $20 million) for a 2,000 square foot flat. You may get the same one at less than JPY100 million (HK$6 million) in some other location in Tokyo.”
Law is quick to argue that luxury address or not, yield differences between first- and second-hand properties may not be all that vast. “Most of the high-end flats are relatively big units versus the mass-market one- or two- room apartments,” he says, adding a new flat may gross up to 4.5 percent yields, while a well-located second-hand unit can gross from 4 to 8 percent. The biggest discrepancy comes in property quality: super-luxury buildings with high standards versus mass-market structures that can vary.
As is the case in Hong Kong, Tokyoites have themselves to thank for rising prices in both sectors. Design, location and class (mass-market or luxury) can influence price and yields, but Abenomics has newly affluent residents active in the market. “Not only are monthly transaction numbers over 1,000 units in Tokyo’s 23 wards, but the transaction numbers in surrounding prefectures has also greatly increased,” finishes Yasuoka. Naturally with Tokyo leading the charge.