This is the second in our three-part series on buy to let in Japan. You can read part 1 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 – The Challenges
1. The Gaijin Factor
As mentioned in the previous article in this series, and as those of us living here know all too well, the Japanese market is unique compared with other business environments around the world, particularly when it comes to dealing with foreigners.
While other countries normally speak some English at least to some extent, and always have a host of service providers all too eager to work with overseas investors, one must conduct careful due diligence on any potential business partner, in order to identify the reliable ones to work with and to avoid potential delivery problems or even outright fraud in advance. In Japan, however, the exact opposite holds true – almost no one speaks English to any extent, and while service providers are normally as “by the book” as possible (reliability is still a matter of research and some luck), it is extremely hard to find anyone who will agree to work with “scary foreigners”.
This is, in fact, the major hurdle which most non-native Japanese face when initially considering to enter Japan’s exciting property investment arena. Finding brokers, realtors, property managers, insurance companies or renovation/repair professionals who are comfortable working with non-Japanese, even those who speak, read or write the language fluently, is extremely difficult. Internationally renown hotspots like central Tokyo, Osaka, Niseko or Okinawa are the exception to the norm, but being limited to only those locations, all of which generally offer quite low rental yields, and only to those professionals who will agree to work with foreigners, severely limits one’s selection of investment properties
The first challenge, therefore, is in securing a native Japanese partner – either a family member, close friends with a lot of time on their hands, an employee or a business partner such as a buyers’ or proxy agency – who is able to attend meetings, make and receive telephone calls, fill in forms and paperwork whenever required, etc. This becomes doubly important if and when one travels abroad extensively, as many ex-pats do, since someone must be available to take local calls, receive local postage items and be able to physically pay bills at a post office, bank or local convenience store on a regular basis – the Japanese cannot and will not communicate with clients overseas in the vast majority of cases, and will simply enter “frozen” mode if they receive no imminent reply to their notifications and queries, with disastrous results.
2. Growth/Cashflow Balance
One of the better known investment idioms is that “the profit on a deal is made at the time of purchase” – this is doubly true in property investment, as generally speaking, identifying a good deal and negotiating a good price (when possible) pre-purchase will normally make or break an investment. And it is far easier to provide for a comfortable yield reduction margin when green-lighting a deal, or to reject it for uncomfortably narrow profit margins or high levels of risk, than it is to improve it during the investment’s life cycle. A property price reduction or creative negotiation on fees has a far greater effect on lifetime yields than any other method practicable further down the track, such as renovations, furnishing, tenant-base expansion, or any other method.
In Japan specifically, one must consider the right balance to a property investment portfolio ahead of the purchase, and with a long term view. Capital growth profiteering is problematic in the land of the rising sun, since legislation is geared against flips, short-sales and other short term profit schemes (capital gains tax is 40% in the first five years of ownership, reduced to 20% thereafter). Additionally, looking back at the “lost” two decades since the early 1990’s, one can see that generally speaking, the value of properties tends to go down over time, as opposed to other countries, where the growth/slow cycles are much shorter. And while the last 4-5 years have seen property prices rising in all major cities, concluding with any certainty that this trend will continue far beyond the 2020 Olympics is difficult. Japan is facing several serious demographic and economic challenges, the main two being its’ rapidly shrinking population and rapidly rising public debt to GDP ratio – both of which are currently the worst in the developed world.
The solution lies in a well-balanced and hedged portfolio, focussing mainly on rental yields as primary criteria, with any potential growth to be considered as a bonus if and when it occurs. Fortunately, Japan provides plenty of that, from large tier 2 cities such as Yokohama, Kawasaki, Fukuoka, Sapporo or Nagoya - and well into attractive tier 3 cities such as Kumamoto, Kobe, Hiroshima, or any of the major prefectural capitals around the country (see partial geographic asset diversification strategy and list of cities by population trends here - http://nippontradings.com/financial-data/)
3. Population Trends
Further expanding on the issue touched upon in 2, above, cities must also be chosen carefully, considering Japan’s rapidly declining population. The same list of cities by population trends can be used not only to choose the bigger cities to invest in, but also the ones actually gaining in population to any significant degree. As the smaller villages and townships die out and people migrate into the bigger metropolitan centres, and as government ordinances constantly change, conglomerating clusters of smaller settlements into larger municipal ordinances, opportunities are vastly changing, certain attractive investment locales being practically wiped off the map, while other “come into the light” as newly designated cities.
Here, too, the solution lies in balance, hedging and diversification, with the ideal portfolio structure emphasizing steady, reliable returns in well-established larger cities, and 25-40%of the portfolio at most delving into more adventurous, smaller townships with attractive profiles (bedroom communities to Tokyo, robust economy powerhouses with more than a single industry worth mentioning, internal tourist meccas, and so forth). It is certainly not advisable to stick to only one’s “back yard” when selecting investment destinations, since the market is very large and very dynamic, and such a strategy doesn’t bode well for a nation as weather-disaster prone as Japan. Furthermore, Japanese tenancy laws forbid anyone from entering a tenanted property except the property managers themselves, along with any renovation or repair professionals – and only when specifically requested to do so by the tenant. This means that there is absolutely no advantage in investing “close to home”, since one would have to rely on those property managers in any case, and there would be no advantage in micro-managing or attending in person to any property at any point in time.
Keep all of the above in mind when setting your purchase criteria, and you’ll be well on your way to acquiring and managing an attractive Japanese investment portfolio. Happy investing! J
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 firstname.lastname@example.org or +81 92 600 1613