For years people in the historically more stable economies have been saving their money to invest in real estate to secure their future. The same does not hold true today. European markets crumbled after the Brexit vote. Property prices in London, Singapore, Hong Kong, Australia and the US markets have become unaffordable for the average investor. Munich, Toronto, Vancouver, London and Amsterdam find themselves in bubble territory with the most extreme in Hong Kong where house prices have risen at an annual rate of almost 10 percent since 2012.
Suffice to say, investors, whether novice individual, wealthy, institutional, or foreign, have no choice but to venture out of their backyard into a more confident and stable market. For many that is the safe haven of Japan, the second largest real estate market in the world. The country’s low property prices and high yield are unparalleled. Add to that depreciation of the yen against the USD and other currencies and the market is quite alluring.
Understanding Japan’s Safe Haven
It is no secret that Japan has held the title of ‘the largest creditor nation’ for the last 25 years. How can it be a safe haven? Quite simply, the value of foreign assets held by Japanese investors is substantially higher than the value of Japanese assets owned by foreign investors. Based on data from the Finance Ministry, the “net foreign assets” stood at 339 trillion yen at the end of 2015 making the country not only the world’s largest creditor nation, but also the world’s most indebted nation. Therefore, safe to say, while the currency may fluctuate, the market is not likely to crumble.
Young Investors Discover Japan Real Estate
Bubbles and volatility have created an era in which home ownership is out of reach for many people. Today’s young investors have to wait to be able to afford a deposit on a home and then figure out how to manage to pay a mortgage for the next 25 years. The same deposit can be invested into Japan’s vibrant rental market for immediate rental income as cash flow, providing young investors with the ability to build an investment portfolio as a means to secure their future. Earning from rental income instead of the more speculative capital growth provides young or new investors with immediate cash flow.
What’s on the Market?
Investors will find properties from small apartments from USD $25,000, to apartment buildings and commercial properties, to suit their criteria based on price, location, size, year of build, etc. Rental yields vary from 6% to 12% net pre-tax on average. For a quick approximate calculation, at 10% yield net pre-tax, for example, at a buy price of $25,000, would generate approximately $250/month in rental income.
Tokyo properties are becoming increasingly popular with the onset of the 2020 Olympics and Paralympics, and Rugby World Cup 2019. Central Tokyo properties are usually 4% to 5% net pre-tax and the outer suburbs at 6.5% at most. Properties at 6% yield net pre-tax would be considered high for the central Tokyo market and sold within days of hitting the market and not expected to cease at this rate any time soon.
Language and Cultural Barriers
Perhaps the first caveat that might come to mind for a new investor is Japan’s language and cultural barriers. Seasoned investors use a reputable proxy, one that speaks both Japanese and English, to act as their arm in Japan to purchase, manage and eventually resell the property. In this way foreign investors never have to leave their desk. Furthermore, because of the nature of the culture, tenants are trouble-free for the most part. Intentional damages and slow to no rental payments are rare.
The challenge is neither affordability, nor international barriers, but instead the fast pace of the Japanese property market. An alluring market, it moves much like the pace of a stock market for real estate – as soon as attractive properties are listed, they are sold within days, sometimes hours. Demand may be high, but supply is constantly refreshed keeping investors always on alert for the next high yield opportunity.
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