First-time investors into Japan’s real estate market will tend to focus on the capital city of Tokyo. And within Tokyo, most investors are familiar with the six prime wards of Chiyoda, Chuo, Meguro, Minato, Shibuya and Shinjuku. However, in the past 12 months, prices have already risen in these prime wards and investors are increasingly looking beyond these areas to the other 17 wards of Tokyo, particularly where there may be infrastructure investments related to the Olympic Games around Tokyo Bay, the redeveloping Shinagawa ward, or the new Japan Rail line linking Haneda Airport to the centre of the city.

Investors who prefer the tourism growth story might focus on hotels and serviced apartment assets in the key gateway cities of Tokyo and Osaka. But those preferring to place their bets on the integrated resorts should pay attention to the likely winning locations: Okinawa, Hokkaido, Osaka and Tokyo.

Among the high net worth Japanese families, highly ranked investment locations would include the cities of Karuizawa and Kyoto. Foreign investors are less familiar with these cities, but I believe that within the next two years, these cities will see a significant increase in foreign investors.

The costs of acquiring, holding and then divesting your real estate investments are not as high as most people would think. Holding costs, including interest expenses, income taxes and property management fees are similar to those in Singapore. Acquisition costs range from 4.0 to 5.5 per cent depending on the value of the property purchased. An apartment of say S$1 million would cost about 4.5 per cent to acquire and this includes the acquisition taxes, registration taxes, stamp duty and buyer’s agent fee of 3.0 per cent. Divestment costs are about 3.5 per cent as it includes a 3.0 per cent seller’s agent fee but excludes a capital gains tax of 15% if the property were held for more than 5 years. In general, the costs of investing into Japanese properties are lower than Singapore’s if we included the Additional Buyer Stamp Duty and Seller Stamp Duty.

As the saying goes: “when in Rome, do as the Romans do”. Investors wishing to source for good investment deals should take note that Japanese buyers almost always pay a buyer’s agent fee of up to 3 per cent of the transaction price. The buyer’s agent is therefore motivated to negotiate the best deal for the buyer.

Expected Returns

While prices of condominiums in Tokyo and its suburbs have climbed about 15 per cent since January 2013, the overall residential index for Tokyo’s residences remained flat between 95-100 points. Higher construction costs have limited the price at which developers are willing to bid for land.

Investors in the residential segment can expect yields of between 3 to 7 per cent per annum, depending on the location and the age of the properties. Getting tenants within most of Tokyo’s neighbourhoods is relatively easy as there is a culture for rentals. Owner-occupied homes only account for about two-thirds of the market.

Tenants may renew their tenancy agreements over a long period. And with the annual inflation target of the Abe government set at 2.0 per cent, increments in rental may be slow. Investors will be wise not to purchase at the top of the market, (new luxury residences with rental yields expected at about 3.0 per cent) but instead go for properties which have existing tenants offering at least 4.0 per cent annual returns. This will allow room for capital appreciation when the market starts to accept sub-4 per cent returns once the combination of the casinos and the Tokyo 2020 Olympic Games make their impact felt in the market.

A point of note: when buying into a condominium with rental guarantees where the monthly rental is fixed, do check that the guarantee can be voided when you decided to resell the property in future. This is because the investor you are selling to may not like to accept the guaranteed rental value as it might not be attractive vis-a-vis your higher selling price.