There are a number of good reasons for buying a residential income property in Japan. These include:
- Relatively low risk for relatively good returns compared to the “risk-free” rate, which is the rate of the local benchmark long-term bond yield. Earlier this month, for the first time, the Japanese government issued benchmark 10-year bonds with negative yields. In comparison, yields for residential income properties in Tokyo’s central wards are averaging between 4.5% to 5% (according to HOME’s).
- Opportunity for capital gain. This point is dependent on how much confidence you have in the effectiveness of Abenomics going forward and the potential economic upsides of the 2020 Tokyo Olympics! That being said, there are certainly both institutional and individual property investors investing in Japan now who do not discount the potential for capital gain in residential property.
- Japanese residential real estate is still a good value compared to other Asian countries (think Hong Kong and Singapore).
- High construction standards and building material standards in Japan.
- Stable demand due to the country’s population trends and the relatively low home-ownership rate in Japan. In 2013, the home-ownership rate in Japan was about 62%. This compares with home-ownership rates of over 90% in such countries as Singapore and China. Please see this article on Japan’s demographic trends as they relate to income properties: “Tokyo’s Growing Population: What it means for renters and investors“
- Political stability and an established legal framework and high levels of public safety.
However, the main issue with owning a rental income property in Japan is the language barrier when it comes to dealing with potential tenants.
What are some of the main things you should think about when you are considering buying a rental property in Japan?
Real Estate Japan recently conducted an email interview with Mr. Nils Herchenroeder from the Solution Business Division at Tokyu Housing Lease Corporation on the topic of owning a rental income property in Japan. Tokyu Housing Lease Corporation is a leading property management company in Japan.
Q1: What are some things that prospective investors should be aware of when they are considering the purchase of a rental income property in Japan?
A: With regard to leasing agreements, there are two types: an ordinary rental agreement and a fixed-term agreement.
An ordinary rental agreement with tenants in Japan has a duration of two years, but there is legally no limit as to when a tenant has to vacate the property. This means that it can potentially be difficult to evict a tenant who is delinquent with rent, etc. While it is possible to negotiate with a tenant for a rental increase if rental demand is strong, the tenant has to agree to the new conditions. This means there is no guarantee that you as the property owner can raise the rent under an ordinary rental agreement.
Instead, investors may think about offering a fixed-term lease for several years to potential tenants. At the expiration of a fixed-term lease, the tenant can be asked to vacate the property. The investor can either put the unit on the market for a higher rent or they can put the vacated unit up for sale on the second-hand market. The disadvantage of fixed-term leases is that rental units leased under fixed-term agreements usually command a lower rent compared to what can be charged for under ordinary rental agreement.
If you are a non-resident property owner (Japanese or foreign), another consideration is that there is a withholding tax of 20.42% on the rental income.
Additionally, it is said that over half of the tenant market in central Tokyo consists of corporate tenants with special requirements who will avoid renting units and buildings where they have to deal with a non-resident owner. This is why it is important to hire a local PM which can use a Master Lease PM Agreement to attract corporate tenants.
Q2: What are the main risks people should be aware of with respect to investing in residential income properties in Japan?
A: Tenants in Japan enjoy strong tenant rights under Japanese law. A tenant has the right to renew an ordinary lease agreement almost indefinitely. This means it is potentially very difficult to evict a tenant who is delinquent on rent.
As explained above, it may also be a challenge to raise the rent if you are leasing a property using an ordinary rental agreement. That being said, Japan still remains advantageous for investors and landlords because even in a bearish market rents tend to not decrease quickly.
Japan has very high earthquake building standards and technology, but Japan is an earthquake-prone country. Buyers should factor in earthquake risk when weighing the decision to purchase property here.
Q3: What is the average vacancy rate investors should expect for income properties in Tokyo? Is it different in other parts of Japan?
A: Though there have been minor fluctuations, average occupancy rates have been above the 95% threshold (Source: Savills World Research, Tokyo, Q4 2015). Osaka’s occupancy rate is very similar to Tokyo’s (Source: Tokyu Housing Lease Corporation, Kansai branch).
Q4: How prevalent is rental delinquency in the residential rental market in Japan?
A: According to the Japanese Property Management Association, for the first half of 2015, the average delinquency rate (the rate at which tenants are late in paying rent), up to one month was as follows: 2.7% in the Tokyo metropolitan area, 3.6% in the Kansai (Osaka, Kobe, Kyoto) area, and 3.2% nationally.
The delinquency rate, where the tenant was more than two months delinquent, was as follows: 1.5% in the Tokyo metropolitan area, 1.8% in the Kansai area, and 1.5% nationally.
Q5: I live in Japan and own a rental property here. Why should I use a property manager (PM) rather than managing the property on my own?
A: The main issue with owning a rental income property in Japan is the language barrier when it comes to dealing with potential tenants. Using a PM company can make the operation of your investment property much smoother.
Even if you speak Japanese, the other main reasons for using a PM in Japan are the following:
- Hands-Off Investment. There are many aspects to property management, which makes it a very time-intensive process, similar to a full-time job. A PM can take of this work (monthly accounting, following up with tenant delinquency and the eviction process) in a timely manner.
- Problem resolution. Tenant complaints (for example, repairs, neighbourhood trouble like complaints about noise or bad smells) need to be taken care of immediately. The PM’s job is to resolve these issues quickly and cost-effectively.
- Paperwork and Repair/Renovation Work. A PM takes care of leasing management, contract renewals and cancellations. They can also manage the return the property to “original state” and do any necessary renovations on behalf of the property owner.
- Indirect relationship with tenant. Owners who use a PM do not need to have direct contact with their tenants. This can help to prevent conflict.
- Japan’s unique laws and culture. Japan has unique laws and culture with respect to leasing. A PM can take the hassle out of trying to master the minute details of your rights and obligations as a landlord because they will handle these things on your behalf.
Q6: What are the main benefits of using a PM for owners who live overseas?
A: If you are an overseas owner, a PM can take care of transferring the rent money to your overseas account, since it is very difficult to open a bank account in Japan as a non-resident. Also, a PM can take care of recurring costs like property tax and building management fees, etc. with a proxy payment system. Other benefits include:
- Language. A PM will handle all tenant relations, so you do not need to worry about communicating with your tenants in Japanese.
- Legal. A PM will also take care of all contracts so that they are compliant with the law.
- Tax. A PM is also an invaluable resource for advice on any tax issues that might arise.
- Turning over the property. As an overseas owner, it can be cost-prohibitive for you to come to Japan every time you turn over the property to a new tenant. Your PM can handle all the aspects of getting a property ready for leasing up and handing over to a new tenant.
If you are interested in learning more about Tokyu Housing Lease Corporation’s property management services, please fill out the inquiry form below and a representative will get in touch with you shortly.
Top photo: An apartment building in Osaka