Tier 1- Lower Yield/Higher Stability & Growth

Tokyo/Yokohama/Kawasaki/Kyoto/Osaka/Kobe

Tokyo, and the two major cities bordering it, which are intricately tied into its economic and political dynamics (Yokohama – Japan’s 2nd largest city and the smaller city of Kawasaki, which is one of the fastest-growing cities in the country) are three crucial pieces in any investment portfolio – and although higher-yielding property deals are rare and far between, they are still obtainable on occasion – and have actually seen prices drop since February 2020, as a result of the New Coronavirus breakout, and the subsequent postponement of the Tokyo 2020 Olympics, and cessation of inbound tourism (read a more thorough analysis here).

The Bigger Picture

While, as mentioned above, high-yielding property deals are near impossible to find in Tokyo itself, and while prices have been rising rapidly in these two cities as well, investment gems can still be found in both Yokohama and Kawasaki. And with Kawasaki’s immediate proximity to central Tokyo, as well as its super-fast growth statistics, it is certain that internal migration from Tokyo into both of these cities will continue in coming years, as individuals, families and corporations – such as Nissan, which is only one of the major companies which has relocated its headquarters to Yokohama in recent years – seek to remove themselves from the over-crowded, over-trafficked Tokyo area, while still remaining in its vicinity.

Yokohama city is a high-tech industry and import/export centre, with main industries including biotech, semi-conductors and shipping. APR terminals, its largest container port, has been recognized as the world’s most productive in 2013.

Kawasaki city, aside from being one of the country’s most highly regarded residential cities, is also a major heavy industry and high technology development hub, with Nippon Oil Corp, Fujjitsju, NEC, Toshiba, Dell Japan and Sigma corporation being only some of the major companies head-quartered in the city.

Kyoto, which is Japan’s 2nd most popular tourism destinations after Tokyo and a white-collar, professional services oriented capital, and nearby Osaka, along with it’s almost equally attractive neighbour Kobe (one of Japan’s biggest commercial ports), together form Japan’s Central/Western mainland commercial hub, home to its’ second biggest international airport, and also a major tourist destination, are also internationally renown, and have also featured price drops since the beginning of the COVID-19 pandemic, although to a slightly lesser degree than Tokyo, Yokohama and Kawasaki.

Fukuoka

Nestled along Japan’s western seacoast, approximately 1,100 km west of Tokyo, Fukuoka prefecture is the main metropolitan area of Japan’s Kyushu landmass  – about half of Honshu, Japan’s mainland in size – and is also Japan’s main portal to south-east Asia, being strategically located closer to Korea and China than it is to Tokyo, and only a short flight distance to Taiwan, to the South-East. Fukuoka city, the prefectural capital, is home to approximately 1.6 million people, with population sharply rising in recent years – mainly due to progressive governance, ad-hoc migrations from the Tokyo area following the great tsunami and earthquake of 2011, and the designation of the area for renewable energy projects on an unprecedented global scale. The city’s friendly, relaxed and welcoming vibe is a major attraction to families and, in recent years, also to bootstrapped young start-up companies, both domestic and foreign. The first city in Japan to launch the ground-breaking “start-up visa” for foreign entrepreneurs, and local government’s constant efforts to turn the cities into a professional services hub, both by making business setup & running costs lower, while simultaneously pushing manufacturing/industrial companies out to other, surrounding towns such as Kurume/Kitakyushu has served to steadily boost both property prices and organic population growth on par with Tokyo.

The Bigger Picture

Fukuoka prefecture has also been the target of a large exodus of Tokyo businessmen and company employees since 2011. The vast influx of Chinese investors crossing over from the north-west and purchasing large quantities of investment properties, would seem to also indicate the promise of this area, and Monocle magazine has included Fukuoka city, the prefecture capital, in the world’s top 10 most live-able cities in 2014. Between 2012-2016, Fukuoka city property prices have been rising sharply, and have since held fast, even in light of declines in other parts of the country.

Initially our highest ranking investment destination, throughout 2013-2015, we have seen a continual rise in prices, demand and transaction volumes and speeds. Prices in our preferred investment brackets have more than doubled in the city’s top locations, with deals constantly being snatched within a matter of days, sometimes mere hours after being advertised. Yields in the city’s main districts have dropped to a maximum of 7-8% on average – but still more than adequate, considering the low vacancy rates and short vacancy periods, which make for a steady and stable income stream at all times.

Nagoya

Japan’s 4th largest city and its industrial heart, Nagoya is also one of the country’s major import and export port cities. Its’ main industries are transportation, including automotive, aviation and rail, and some of Japan’s biggest transportation manufacturing firms have their head-quarters or major divisions here – companies such as Toyota, Mitsubishi and Nippon Sharyo, which manufactures Japan’s world-famous bullet trains, the Shinkansen. JR (Japan Rail) Central, which covers most of the country’s railway tracks, is also head-quartered in Nagoya. Other major industries are ceramics and electronics manufacturing.

Nagoya’s location is also of paramount importance, being in the heart of the country, only two hours train ride from Tokyo, and even closer to Kyoto and Osaka, both internationally renown tourism and industry locations themselves and large metropolitan and historical centres on their own right. Occupancy in the city is now at an all-time high, and is pegged to increase even further with the upgrade of the bullet train line between Tokyo and Nagoya, which will be the first in Japan to run the “Maglev” magnetic floating trains – this necessitates demolishing a large number of residences and offices near and around the soon-to-be-expanded train line infrastructure, which will create an even greater demand for quality living and commercial spaces.

The Bigger Picture

With PM Shinzo Abe’s economic rejuvenation policies and forcibly devalued Japanese Yen exchange rates, exports have picked up significantly, as Japan once again re-positions itself as a major manufacturing and industrial player on a global scale. From an investment point of view, this major port city and industrial power-house, therefore becomes an essential building block in any diverse portfolio.

In the aftermath of the 2011 earthquake and tsunami disaster, as companies sought to have manufacturing, operational and data-bank backups to their Tokyo operations, the importance of Nagoya has increased ten-fold. As a result, property prices have begun to climb, although not as quickly and sharply as in Tokyo, Osaka or Fukuoka, a trend which is most likely to continue at least until the 2020 Olympic games, as global interest in Japan increases on an annual basis.

Geographically, as well, Nagoya’s location in the very heart of Japan, marks it as one of the country’s major transportation hubs – with two airports and the world’s largest train station by floor area, it is a crucial artery in the country’s transportation system, and is conveniently located on most of its major logistics channels – yet another reason for its standing as a major corporate centre of the highest importance. Since late 2015, the city has been going through a major re-development phase, which has provided for rising property prices, as well as rising rents – both of which will most likely continue in the foreseeable future.

Tier 2 – Higher Yield/Lower Stability & Growth

Japan’s Northern-most point, the Hokkaido landmass, is renown for its internationally acclaimed winter resort villages, ski courses and breath-taking natural beauty. Sapporo city, Hokkaido’s capital, home to 1.9 million people, is Japan’s 5th largest city – featuring stable but stagnant population figures and long, cold winters. Sapporo city is also highly white-collar industry oriented, being one of Japan’s academic capitals, with education and information technologies being two of the city’s main industrial sectors, alongside tourism and retail. Conversely, it is one of Japan’s most popular tourism spots, with annual visitor numbers often exceeding the tens of millions(!)

The Bigger Picture

In the two years that passed after the great tsunami and earthquake of 2011, Hokkaido tourism, which is largely dependent on international visitors, has suffered significantly – as winter holiday makers and ski enthusiasts were mostly avoiding the area, due to fears of further quakes and nuclear spillages from the subsequent Fukushima incident – even though the distance between the two areas is over 800 kms.

As international tourist numbers dropped, jobs were lost in Sapporo city, and the depressed local economy has led to property price drops as well. Since mid 2012, however, and with the situation in Fukushima declared as stable, fears have subsided – and tourism commenced again with much vigour. Property prices have slowly begun to respond with a slow and stable price hike, transaction speeds have similarly picked up significantly, with good deals once more being snatched within a matter of days. 

Additionally, the geographically wide-spread nature of the city means larger properties, and while elsewhere in Japan a high yield property would normally be 1-2 bedrooms at most, Sapporo often offers larger units at the same yield levels – 3-4 bedrooms properties at low prices and high return capacities regularly being advertised for sale. These larger properties mean tenants are often families, as opposed to the typical single tenant which normally occupies high-yielding properties in most other parts of the country- which naturally makes for longer tenancies, fewer vacancies and lower vacancy related expenses.

The reason Sapporo has been relegated to Tier 2 in our analysis is due to the long winter months in Hokkaido – with snow possible, and often a reality, any time between October and April, vacancies can be far longer in comparison with other, warmer areas – as tenants tend to postpone the search for new properties between those months, which means a vacancy occurring any time after September can often take up to 5-6 months to fill. Additionally, a colder climate means more maintenance and electric equipment, which leads to higher over-all maintenance costs.

All of the above means that, Sapporo’s higher rental yields can often be short-term and theoretic in nature – as over an extended period of time and over a larger properties database sample, the longer vacancies, higher maintenance and repair costs, and slightly declining tenant-base tend to translate into lower yields in practice, which in turn mean rental yields can be on par with Tier 1 locations – but without the added values of an ever-abundant tenant-base and capital growth potential of the latter.

On the upside, Sapporo city’s tenant population, like Kyoto’s, is more mature and traditional in nature – and the ample space in and around the city means larger, family-sized properties can also yield relatively high rental returns – both factors which translate directly into longer tenancies overall, as traditional, larger family units tend to stay in one place far longer than youngsters and single tenants.

Kumamoto & Other Prefectural Capitals

Prefectural capitals are medium-sized cities in otherwise rural areas, which are functioning as metropolitan and commercial centres for their respective areas, and are normaly characterised by stable or increasing population numbers, relatively diverse economies, and significant regional importance for their respective surrounding areas. One such example in Kyushu is Kumamoto, one of the nation’s “Green Energy Meccas” – home to a multi-billion dollar world-class solar farm, and with a population of approximately 750,000 which has been steadily rising over the last few years, advanced local governance and financial support for the elderly, disabled and welfare recipients – we’ve yet to see any extended vacancies in Kumamoto city, similar to Fukuoka, above. However, although prices have been rising in Kumamoto as well, they are doing so far less sharply than in Fukuoka city, which makes yields of 8-9% far more achievable, and deals costing as little as 2-3 mil JPY (18-25,000 USD) still very much a reality.

Satellite Cities around Tokyo / Osaka

Smaller cities around the Tokyo and Osaka metropolitan areas, within 30-60 minutes train ride from the cities themselves, are an ever-popular investment destination – particularly due to their status as “bedroom communities” to the major cities themselves – meaning, places where a large number of company employees rent a unit to use during the week nights, before returning home to their families in more distant cities for one or more weekends every month – and where families whose main providers work within the city limits often prefer to live, due to the larger home layouts and lower prices available in those locations. With lower prices, higher yields, and high levels of occupancy, these cities may not gain in value over time, or at least not significantly so – but are very viable, reliable cash-flow generators.

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