Japan, long mired in recession since the early 1990’s, appears to be making a comeback. Property prices in the bigger cities – and a great many of the smaller ones – have been rising steadily since PM Shinzo Abe came to power in 2012, consumer confidence and spending is also on the rise, and for the first time in a long time, it seems as if the world’s 3rd largest economy is on the mend.
Considering the fact that Japan is also Asia-Pacific’s biggest real-estate property investment market, and second only to the USA globally, now would seem to be an opportune time to plant a financial foothold in the land of the rising sun. What, then, are the advantages and disadvantages, from a foreign investor’s point of view, of playing in this vast real-estate arena?
The Pros –
While prices, as mentioned, have gained significantly – some of the lower end, high-yielding studio/single bedroom apartments in the heart of the big cities have more than doubled in the last four years – they are still ridiculously cheap when compared with other popular investment destinations favoured by Asian investors, such as Australia or the United Kingdom. The types of properties generating the highest yields would typically cost between 20,000-90,000 SGD per unit, depending on size and location – a fraction of the price of even the most modest small town property in any comparable first world country.
Monthly cash-flow for any of the above-mentioned properties is spectacularly high – particularly if one steers clear of the internationally renown destinations in the country, such as Tokyo, Osaka and Niseko (in the Northern ski and winter holiday mecca of Hokkaido). Net pre-tax yields (including all known purchase and running costs, but excluding unknowns such as maintenance, vacancies and annual taxes) normally run between 7-13% per annum – figures which are very difficult to achieve in any comparable location these days.
Anyone who has ever come in contact with the Japanese will most likely agree that they are among the world’s most docile, compliant and trouble-free citizens – and the same holds true for almost all property transactions conducted in Japan. Everyone involved, from realtors and property managers, through building management companies, insurance companies, government agents and professional maintenance/renovation firms, are straight as an arrow, honest, transparent, and leave a paper trail several miles long. There are no “under the table” deals, undocumented payments, double-talk, dodgy sales people and/or corrupt officials to deal with. And, most importantly, the same applies to the vast majority of tenants, who always pay on time, tend to stay in one place of residence and employment for as long as they can – with 10, 15 and even 20 year tenancies not un-common – and would never wilfully damage or abuse the properties they rent. And while exceptions to this rule exist, of course, as they do anywhere in the world, they are extremely rare in Japan. Try comparing this business environment to Indonesia, Malaysia, Thailand, the USA, or a score of other countries where foreign investors are seen as wealthy cash-cows and fair game, and where tenants in low-end, high-yield properties can be a nightmare – and you’ll begin to see the attraction.
The Cons –
1. Property Prices
While the last four years have been kind to Japanese property values, as mentioned above, it is important to note that this trend follows more than two decades of flat or declining prices, that have seen properties lose approximately 60% of their bubble-peak prices in the interim. And while investment banks, sovereign funds and a great many institutional investors and high net-worth families have taken this latest trend as an indicator for things to come, ignoring monthly cash-flow projections in favour of growth potential could be a risky, speculative move. Japan still has some severe issues to tackle, not the least of those being its ageing/declining population and high government debt to GDP ratio – both of which are currently the highest in the world. Until these issues are addressed, any long-term economic improvement should be taken with a grain of salt – property price hikes included.
The Japanese are notoriously foreigner-shy – to the point where the vast majority of them will gladly bow out of any potential involvement with foreigners due to an inability to communicate, inability to understand the vastly different mentality (see “Manageability”, above), and an almost pathological fear of anything different, unknown or out of their comfort zone – which is a rather narrow and confined space. In practice, while foreign buyers in any other market will normally be met with a huge selection of property professionals who speak their language, and are keen and eager to do business with them (and would then have to carefully pick the reliable ones), in Japan the opposite holds true – the vast majority of property professionals may be reliable and honest to a fault – but foreign investors would find it near impossible to find anyone who would agree to work with them. What this means in practice is that in almost all cases, and certainly if one wishes to gain access to the less internationally familiar locations in the country, as mentioned above – one would require local representation (more on that under “Bureaucracy”, below).
3. Archaic, Low-tech Bureaucracy
As mentioned above, and perhaps in contradiction to their love of gadgets/electronics and automation, the Japanese love paper dearly – partly because they are sticklers for a highly regulated, fully transparent business environment, as mentioned – but also because of a deeply rooted love of tradition, and an even more deeply rooted fear of change or innovation. Coupled with the culture and language challenges discussed previously, this means that all documentation, barring some very unique cases – and there will always be a great deal of documentation – will always be in Japanese. Meetings will also be conducted only in Japanese. Banks will not provide any practical solutions for foreigners (including, but not limited to opening bank accounts), government agencies will not communicate via email, and will in most cases not even post any notices abroad – many of the bills will have to be paid in person, at a local Japanese post office, convenience store or bank branch – and rent will only be deposited into a local Japanese bank account (a classic case of ‘catch 22’, considering banks will not enable foreigners to open any manageable bank account). To drive this point home, here’s a practical example – the preferred method of business communication in Japan, as unbelievable as this may sound, remains, to this very day – the fax machine.
While all of the above may sound daunting, once these obstacles are surmounted, the rewards can be extremely lucrative, the selection immense, and most importantly – hassle and head-ache free – which is why a great many Asia-Pacific based investors are already highly active in this exciting market, with many more joining them on a daily basis. But more on that in our next instalment in this series.