There are many reasons to invest in real estate in Tokyo: low interest rates and high return on investment combined with a strong legal foundation for landlords are drawing in foreign investors. However, the Japan's real estate market is fundamentally different from those in the United States and Europe and it pays to get informed about the risks you might be faced with when purchasing a property in the Japanese capital.

Natural disasters

Earthquakes are a very real threat in Japan, as was last proven by the destructive force of the 2011 Tohoku Earthuake. They are often followed by tsunamis. Check with your real estate agent if the property is located in a tsunami evacuation zone (e.g. bayfront areas like Odaiba or Toyosu). 

Handy resources

• You can check areas at highest risk of impact during earthquakes (in Japanese)
• This maps illustrates areas at risk of soil erosion from liquefaction, soil weakening caused by quakes (in Japanese)
• Each ward has been asked by the Japanese government to produce a tsunami hazard map – here is the English version for Minato ward

Buy a property that is built to the most recent earthquake standards. In the 1981, reinforced concrete (RC) became the standard, later followed by super-reinforced concrete (SRC). Don’t buy a property that is not at least built with RC.

Fires are another risk, especially in the dry Tokyo winters, for wooden apartment buildings. Fire insurance is mandatory for property owners in Japan. 

Finally, Tokyo is located in the Kanto plain. Several streams dissect it and before the Japanese capital was built up here during the Edo era to today’s size, it was dominated by floodplains (e.g. areas by Tonegawa and Sumidagawa River). Floods are possible, which can cause the soft soil to erode away and seriously damage buildings. Here is a list of flood hazard maps for all 23 Tokyo wards (Japanese only).

Disaster insurance exists but think twice if it is worth it; policies may only cover a fraction of the property value, or may not deem the damage suitable to qualify for a pay-out. In the event of a catastrophic earthquake, there's a bankruptcy risk as insurance companies may not be able to honour all the claims. Best not to buy properties in the high-risk areas.

Society and demographics

Japan is the unfortunate poster child of an ageing society with a shrinking population. However, this doesn’t need to worry you if you are investing in Tokyo. The megapolis shows a continuous upward population trend in all 23 wards as the Japanese move from the countryside to the capital. But be aware of demographic shifts: by now, most households in Tokyo are single person, and families are on the decline. Investing in a small apartment suitable for one or two inhabitants will likely be a safe choice than a larger unit or family home.

With Japan’s ageing population and an increasing number of elderly people living alone, a tenant’s death in your property can be another problem. Cases of dead tenants that haven’t been found for weeks are a sad, regular occurrence and hopefully you'll never have to deal with the aftermath.

A much bigger issue, however, are suicides — as these can block your property from receiving a new tenant. Despite its image, Japan only ranks 26th among countries with the most suicides according to the World Health Organization. Most Japanese would avoid an apartment where a suicide has occurred. Article 47 of the Real Estate Transaction Law obliges realtors to disclose any information about a property to a potential buyer or tenant that could affect their decision and deaths or suicides fall in this category. The units are not unsellable, however. Many agents suggest that you substantially lower the rent for two years and the unit will rent out quickly. After another tenant has lived, and stayed alive, in a unit with a prior incident, it is usually not mentioned to future tenants anymore unless they ask specifically.

Lastly, it might be exciting on cinema screens, but in real life, yakuza, the Japanese mafia, can be a real threat to your investment. If you buy 1) a property that is currently inhabited by a gang member (or in a building/area frequented by them) or 2) a property from a yakuza-owned real estate agent, you are putting yourself at the risk of not receiving your rent or sitting on an investment you are unable to resell — or violence and extortion at the worst. Only buy properties through trustworthy agents—here's a guide to finding one in Tokyo. 

Dishonest actors

The Japanese enjoy the image of being extremely trustworthy in business. However, recent cases of real estate investment scams have surfaced in Tokyo. Unethical realtors usually target high-income individuals at seminars where they are offered whole building investments that are extremely high yielding, usually in suburban or regional areas. Fraudulent activities include fake sale and rental contracts with inflated prices and faking occupancy of vacant rooms. Beware of real estate seminars with pushy sales tactics and always compare if the current stated rent for a property is close to the market rent in the area before buying.

Contract issues

It is generally advised against buying foreclosed homes in Japan. A foreclosure process in Japan is rare, and usually indicates complete societal failure of the individual and therefore often connected to issues like addictions or the yakuza being involved. It is best to avoid getting into such a case as most foreigners lack the cultural understanding to navigate it.

Leasehold properties exist on the Tokyo market, but are much rarer than freehold properties. The renewal of the leasehold can be unclear and usually comes with a hefty price tag and restrictions apply to reconstruction or other changes to the building. A freehold property that includes the land and building is usually a better choice.

Make sure that the reserve fund — a pool of money held by the owners’ union for necessary repairs and renovations — holds enough money. Otherwise big ticket items like installing a new elevator could come at a hefty expense, neutralising any ROI for several months.

Make sure to read the explanation of important matters carefully. By law, this document (in Japanese) must be disclosed to the buyer with every real estate transaction in Japan.

Construction issues

Japan allowed the limited use of asbestos until 2006. Besides it being extremely damaging to health, you will be responsible for its proper removal in case you keep the building or until it gets demolished, which can be extremely costly. The explanation of important matters must include a clause on if asbestos has been used during construction,. It often simply states ‘unknown’, so be aware of the potential.

Also, potential soil contamination must be listed on the explanation of important matters, but again, are often only remarked as ‘unknown’. A good real estate agent can check the local government records to see if businesses associated with contamination were formerly registered on the plot of land you are considering, e.g. factories, a gas plant or a dry cleaning business.

Despite its clean reputation, architectural forgery scandals exist in Japan, most famous the ‘Aneha scandal’ when Aneha Architectural Design Office in Chiba faked documents to prove the earthquake-resistance of their buildings.

Last, termites can be a problem for wooden structures like apartments and detached houses, up to the collapse of the whole building.

Land issues

Be aware that certain neighbourhoods are undesirable for Japanese renters. These include: 

• the vicinity to cemeteries (most temples have an adjacent cemetery), slaughterhouses or other institutions associated with death,
• red-light districts (like Kabukicho), 
• areas frequented by yakuza, and
• former burakumin ghettos.

Burakumin (a term encompassing two groups known as eta or hinin), meaning ‘hamlet people’, dates back to the Tokugawa era. It referred to the outcast workers in occupations that were considered impure or tainted by death, such as executioners, butchers and undertakers, as well as prostitutes or even actors. Today, the former burakumin ghetto areas still carry stigma and are best avoided. In Tokyo, some areas are found in Ueno and Asakusa, but the image is less tainted and the location is more fuzzy than areas in for example Kyushu or Osaka where their descendants mix with the poor, physically or mentally unwell, or elderly without family. Please keep in mind that the term burakumin, eta, and hinin are extremely offensive and the most politically correct term is dowa, so you could refer to the ‘dowa issue’ if you want to make enquiries on this sensitive topic.

Properties near such areas are naturally cheaper to purchase than those of equal standard in more reputable locations, but vacancies will pose a serious issue. 

Finally, municipalities can decide to rezone land, changing between industrial, commercial and residential. This could mean that in the case of rebuilding on the plot of land, less floor space will be available. In similar fashion, if a decision is made to widen the road in front of the property, land of the plot might be used, making the building larger than allowed for the plot depending on the zoning. This can result in issues with documentation that the building is in fact still legal, and if rebuilding is planned, in a smaller building than the original one. 

Government, taxes and exchange rates

Foreign exchange rates always pose a risk for international investors that are not based in Japan. The Japanese yen has a volatile history. And while interest rates are currently at an historic low, this can change in the future and needs to be factored into your due diligence calculation before investing in a property if you are obtaining finance from a Japanese bank. Finally, properties and gains from investment properties are subject to a number of taxes in Japan, which could be subject to increases in the future.

By Mareike Dornhege (Updated on Feb 20, 2019)

Similar to this: 

Old versus new properties in Japan: Which to choose?

Guide to finding a real estate agent in Tokyo

Tips to reduce stress when buying real estate