Japan has been grossly misunderstood as a country with high costs. Most Singaporeans have the impression that taxes, taxi fares, food, etc are much more expensive than what we have at home. At the very top end, their kaiseiki dinner might cost than the same in Singapore but what about the quality? In terms of price-value performance, the dinner in Japan beats Singapore. In the mass market segment, the same item in a Japanese rice-bowl fast food chain, served with better quality beef, costs less in Tokyo than it costs here.
Real estate investments are not expensive compared with Singapore too. A second-hand, freehold studio unit in a prime location within Shinjuku, Tokyo, costs S$1600 per sqft and comes with a gross rental income of 4.7% per year. Studios are small, with around 230sqft of interiors and you get another 70sqft of balcony free for your exclusive use although it is classified as “common area”. But such small sizes are acceptable to the Japanese tenants who are born and bred in a city that has a population density almost twice that of Singapore’s.
In Singapore, a comparable freehold studio unit might cost S$2500 per sqft and that would include the balcony, planter boxes and aircon ledges. And the quality of the finished product lags well behind that in Shinjuku.
Acquisition costs total between 4 to 6 per cent of the purchase price of the property. The acquisition costs include a 3 per cent buyer’s commission, stamp duty (which starts from about JPY200 to a maximum of JPY480,000, i.e. S$2.30 to S$5650, depending on the price of the property*), real estate acquisition taxes for land and building, registration taxes for land and building, judicial scrivener’s fee and sometimes an upfront, once off contribution to the building management for newly built or newly renovated buildings.
So while the number of line items seem many and complex, the total costs at point of entry is not higher than Singapore’s residential investments especially if we included the Additional Buyer Stamp Duty (ABSD).
Holding costs are comparable to Singapore’s levels too. Maintenance fees payable to the building management may be around S$0.30 per sqft per month, or lower for buildings that have no facilities and no attendant building managers. Tenant management fees (for leasing, rental collection, tenant liaison, etc) range from 2.5% to 5.0% of the monthly rental, with 5.0% being the most common rate quoted by good property managers. During the vacant period between tenants, the tenant management fee is not charged. This is similar to what we charge foreign landlords to manage their tenants in Singapore, way lower than the 12-15% charged by property agents in London.
Furthermore, when the new tenant signs a contract with you the landlord, it is customary for the new tenant to pay the landlord “key money” equivalent to 1 month’s rental. I interpret this as an expression of gratitude for the landlord to accept the tenant into his apartment. The key money is considered a gift to the landlord and is non-refundable. It is paid in addition to the 2 months of security deposit that the landlord holds per each 2-years tenancy contract.
Most tenants tend to renew their contract for at least one more two-year term in order to save on the key money and the relocation costs. In a few real estate portfolios I have seen, the average stay of the tenants is more than 5 years.
There is also a very small cost for insurance, both fire (compulsory) and earthquake (not compulsory). For a studio unit, these add up to about S$100-S$200 per year.
The final part on holding costs involves taxes. Again there seem to be many line items: fixed asset taxes for land and building, city planning taxes for land and building, income taxes net of interest expenses and other allowable deductions, but the overall costs are about 10-20 per cent of the monthly rental. Added on to the 5 per cent tenant management fee, the holding costs add up to about 15-25% of the monthly rental income.
Therefore, typically if the gross rental yield (annual rental divided by purchase price) is 5.0 per cent per annum, the net rental yield may be 4.0 per cent, a drop of 20 per cent due to tenant management fees and taxes.
Divestment costs are simpler: property agent fees of 3 per cent, stamp duty on the sale of the property (from JPY200 to JPY480,000) and capital gains tax if any. The capital gains tax rate is 15% if the property has been held for 5 years or longer. 30% if it were held for less than 5 years. The tax is applied after allowable expenses have been deducted. There are no restrictions for foreigners at the point of divestment: we can sell to another foreigner or a foreign company.
To summarise, investing in Tokyo’s apartments is not any more expensive than buying into Singapore’s residences. Holding costs are also reasonable and with the higher rental yield, investors get to enjoy better cash returns on their Tokyo properties than in Singapore. Given the higher quality of construction and finishes, real estate investments in Tokyo can be a very satisfying long term commitment.
* Note: Stamp duty is staggered and the maximum stamp duty of JPY480,000 is payable for properties above a transacted value of JPY5billion, or about S$58 million.