Interest in Tokyo real estate has skyrocketed since the early 2010s. While domestic and international buyers rush to the market to secure a property, it is important to review a number of criteria besides an ROI calculated on paper before signing any deals.

Several key factors need to be carefully checked to ensure your investment is viable in the long term. Here's what they are.

Location

Location is one of the most important factors when selecting a property. Land prices in the five central wards of Tokyo – Chuo, Minato, Shibuya, Shinjuku and Chiyoda – are the highest and also have the highest chance of appreciating.

But in the outer wards, lower land prices make real estate more affordable, and, as the difference in rents is smaller than that in land price, these properties often offer a higher ROI.

Buyers should also pay close attention to the walking distance to the nearest station. Public transportation is the main mode of transport in Tokyo, and renters narrow down searches for potential new homes by selecting a maximum walking distance.

“Within 10 minutes' walk to nearest train or subway station is best for future potential tenancy purposes,” advises Ziv Nakajima-Magen as a rule of thumb.

It is also important to carefully check the location of the unit on the property. Does the apartment face a quiet backyard or noisy street, and does it get sunlight?

Most likely, your tenants will be Japanese. “Bear in mind that single females tend to avoid ground floor (1F in Japan) units due to privacy concerns, and that in buildings that have no elevators – which is possible if there are less than six floors altogether – most tenants would naturally avoid the upper floors, so anything above the third floor may be harder to re-populate once vacant,” says Nakajima-Magen.

You'll also need to check the area for other pitfalls like soil contamination, low areas susceptible to flooding, whether it is a tsunami evacuation zone, cemeteries in the neighbourhood and yakuza activity.

For older buildings, soil contamination sometimes does not need to be checked or stated on the Statement of Important Matters, but can be extremely costly to clear up if the building is to be demolished and rebuilt. An experienced realtor can inform you of the risk in the area and will check documentation available at the ward office. In general, property on higher locations like hills is considered safer in Tokyo and therefore valued higher.

Finally, yakuza activity sounds like something out of a Takeshi Kitano movie, but can be a real issue in Tokyo. Again, a good realtor will be able to advise you on the general reputation of the neighbourhood and will also visit the area to check for this, as well as other issues like neighbouring cemeteries, noisy train lines or other unwanted facilities.

Freehold vs. leasehold

Properties in Japan are usually freehold – the land, or a portion of the land in the case of apartments, belongs to the property owner. But a small number of leasehold properties also exist, where only the building is owned and the land is leased from the landowner.

While these are cheaper initially, they can be hard to resell and depreciate fast without the added land value. Therefore, a freehold property is generally recommended.

Brand-new vs. old

With the 2020 Olympics on the horizon, new developments have been mushrooming over central Tokyo, and whole areas are being redeveloped. While central Tokyo is seeing mainly luxury apartments constructed, the outer wards are also offering a large number of mid-range apartment complexes in development.

Japanese people love anything new and this isn’t any different for real estate. Most young couples will buy a brand-new apartment for living in. However, for investment purposes, an older property usually offers better returns.

Depreciation of buildings in Tokyo is severe. But again, the difference in rent between a very new and an older place is not so big, skewed in favour of an older, already depreciated apartment with a much lower purchasing price in terms of ROI.

Unit size

Another rule of thumb for real estate investment is that the apartment you would want to live in is usually not the best investment. Why? Smaller units rent out faster and offer better returns.

As of 2018, single households are the largest demographic group in Tokyo, meaning that demand for studio and one-bedroom units is the highest, and that they also have the lowest vacancy risk. At the same time, they offer the best ratio between purchasing price and rent, and so, better ROI.

Renovation history and the reserve fund

In case you are buying a unit in a building, or an entire building, check the building's renovation history, advises Nakajima-Magen. “Large ticket items such as exterior renovation and roof renovations come up every 10-15 years, as do elevator renovations in buildings with elevators – if this time period is drawing to a close, owners can expect a large expense which will mean either one-off payment, or, in case of a co-owned building, a hike in monthly building fees.”

Therefore, checking the reserve fund pool status is also crucial, and it should be compared with the building's renovation history, continues Nakajima-Magen. “If there may be large-scale renovations coming up, but the reserve fund pool has large amounts of cash in it compared with the size of the building and units, these can be performed without charging owners extra.”

Finally, it is wise to also take a look at the internal renovation history on the unit itself as an important aspect of your due diligence process. However, Nakajima-Magen adds: “If a tenant has been in place for a decade or two, and it's an excellent tenant profile, then it might be worth the risk of potentially completely renovating the property when they move out. That would be a hefty expense though, so something that must be considered in regards to available capital for future renovations.”

Tenants

Most investment properties are sold occupied, meaning it is important to talk about the tenancy history with the current owner. “Is the tenant a chronic late-payer, have they filed many complaints and/or requests for maintenance beyond what is considered normal or average, and have there been any disputes with building management authorities or other neighbours,” are questions that Nakajima-Magen suggests.

Future owners should also know that the rent a tenant is currently paying might not be the same as the average achievable rent for the unit. “This is because rents are rarely negotiated mid-tenancy in Japan,” explains Nakajima-Magen.

For example, a tenant might have moved into the property when the economy was doing better, and if they move out, the average achievable rent can be far lower than what a tenant is currently paying. “It is important to run numbers with average rent figures, and not only with the current rent amount received, to confirm the deal would still be attentive if and when the current tenant moves out,” concludes Nakajima-Magen.

By Mareike Dornhege

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