A year is not considered a long time in real estate markets. Especially for a well-established and matured economy like Japan’s where during the Lost Two Decades, real estate prices remained flat after Japan’s bubble collapsed. Since deflation ruled Japan’s economy since the mid-90s till after the Lehman crisis, Japanese real estate are rarely ever considered for capital gains.
In the last 12 months, the tides turned. Twenty years of stagnation in the real estate market was stirred up after Prime Minister Shinzo Abe won the election in December 2012. He kept to his campaign promises of high government spending and money printing to reflate the economy from its slumber.
Japan Residential Property Price Index. The value of condominiums have trended up, gradually appreciating about 10% from January 2010 to October 2013. Published 29 January 2014.
Source: Ministry of Land, Infrastructure, Transport and Tourism, Japan
Several things took place in quick succession within months of Abenomics being introduced, majority of which made Japanese real estate very attractive:
1. Cheaper entry price: Unprecedented money printing weakened the Japanese Yen relative to most of the major currencies in the world. In Jan2013, 1 Singapore Dollar can buy 72 Yen. In Feb2014, it buys you 80 Yen, a drop of over 10%. For example, a luxury apartment in Central Tokyo which was priced at JPY 200 million in Jan2013 (equivalent to about S$2.78 million), can be had for about S$2.63 million today despite its price appreciation to JPY 210 million in Feb2014. This a reason why foreign investors are more positive about Japan’s real estate market than Japanese investors themselves. Foreign investors also expect to profit from the eventual strengthening on the Yen when they divest in 5 to 10 years’ time.
2. Higher costs for new properties: A weak Yen will increase the costs of imported goods, increasing construction costs. Most property developers are forced to price in a 20% premium for their new project launches to account for higher imported costs. New launch property prices are leading the real estate index on an uptrend.
3. Hedge against inflation: Higher imported costs will lead to inflation and Mr Abe’s objective is to achieve a small and sustainable rate of inflation by keeping the Yen weak. The past half year of official data has shown inflation at a positive 1.0-1.5%. Since we generally expect that rentals and capital values should rise in tandem with inflation, investing in real estate will provide our portfolio with a natural hedge against inflation.
Most investors getting into Japanese properties today are expecting to reap rewards from rental income (current rental yields of about 4-6% in Tokyo are expected to rise with inflation as tenants renew), price appreciation and hopefully foreign exchange gains.
The scenario above can describe any other country which has a weak currency and a positive inflation. But Japan has something else in the form of a strong jolt of power, much like the Singapore economy was spurred up in 2006 with the announcement of two multi-billion integrated resorts.
Since taking office, Mr Abe invested time efforts and trillions of Yen in many emerging markets, particularly around South East Asia. In countries such as Indonesia and Myanmar, Japanese conglomerates are expected to benefit from the large infrastructure projects which will be built from funds provided by the government’s Yen printing press. Japanese firms will earn US dollar income and report their corporate results in a weakening Yen, therefore pushing up corporate returns and share prices.
By September 2013, we see the early fruits of investments obtained by the Abe government in the form of votes for Tokyo to host the 2020 Olympic Games. This single massive project provides to green light for the government to print even more Yen as infrastructure and facilities for the Olympics at Tokyo Bay would need to be built. In turn, this would spur jobs and employment, bring about increased tourism revenue, add foreign income from tourists and push up consumption.
For such a large and beautiful country with 127 million population, tourist arrivals stand at a paltry 10 million, lower than the 14 million people who visited Singapore last year. Lots of upside for tourism expected from now till the 2020 Olympics, especially if visa requirements for foreigners are further relaxed.
Given the many positive factors, most investors are focused on Tokyo’s hotel assets and residential assets. Those who search for yields of over 6% and larger headroom for capital appreciation (or yield compression) may consider other major cities such as Nagoya, or the Kyoto-Osaka-Kobe region or the many and varied locations in Hokkaido.
Several points of note for first time investors:
a. Almost all land titles in Japan are freehold in nature.
b. Generally no restrictions to foreigners buying land and properties, except that since the Lehman crisis, mortgages from Japanese banks are restrictive. Those who might secure mortgages in Japan will enjoy relatively low loan rates at below 1.0% p.a.. There are also Singapore banks that lend for prime Tokyo residential properties but the interest rates are relatively high at above 3% p.a. and TDSR rules apply. Versus a yield of 3-5% p.a. for prime properties, these packages are not attractive.
c. For investments of say, above S$2-3million, it might be cost effective to set up a Japanese company to purchase the property.
d. Japanese taxes and stamp duties might seem complicated but they are not as complex as Singapore’s recent introductions of multiple types of duties and tiered taxes. A typical apartment of about S$1million might require the buyer to pay a once-off tax and stamp duty for: “Registration License Tax” and “Real Estate Acquisition Tax” on both the value of the land and the value of the apartment/house and a “Consumption Tax” on the value of the apartment/house. These taxes add up to about 5% of the purchase price.
[Note: Consumption Tax is at 5% and will be raised to 8% from 01April2014, and to 10% from 01April2015.]
e. Owners also make annual payments for “Fixed Asset Tax” and “City Planning Tax”: a total of about 0.3% of the property’s value.
f. Capital gains tax varies depending on the length of time the property has been held, whether it has been used as a place of residence or not and what are the taxable profits. The basic calculation is 39% if the property is sold within 5 years and 20% if it is sold after 5 years. As there will be deductions and other mitigating cost factors, I usually let my clients speak with a Japan-registered tax accountant for filing taxes.
Unless purchasing direct from developers, buyers are required to pay a commission of up to 3% of the transacted price to the real estate broker representing them.
Mixed strata apartments with retail shops on the lower floors in the upmarket Shibuya district
Investors highlight their concerns about natural disasters and the seemingly high costs of business in Japan. But such is the nature of investing: risks versus rewards. I would advise that it is more important for investors to do their homework thoroughly, get themselves familiar with the rules, the good locations, the reliable brokers, accountants and property managers.
In my view, and aided by the hindsight of the London and Sydney Olympics, Tokyo’s real estate is worth a close look. But we need to move fast, as droves of investors have already started their search across Japan.