The price level of apartments in Japan has skyrocketed since 2012, and it is predicted that market prices will peak around the 2020 Tokyo Olympic Games. In this article, we give an overview of the main factors that affect the appraised value of investment properties in Japan.
We hope this information will be useful to people considering the purchase of an investment property in Japan but also current owners thinking about selling.
Scroll to the bottom of the article if you are a current property owner (whole building, single unit, house, commercial, or other) and would like to receive a free, no obligation property appraisal from Real Estate Japan.
The graph below shows the price forecast for newly constructed apartments by the Japan Real Estate Institute. Apartment prices in the 23 wards of Tokyo are expected to decline after 2019.
Now, many people in Japan are concerned about a property “price crash” and are considering the quick sale of their property.
However, it is never true that the same market conditions apply to real estate across the entire country.
Depending on the property, those who continue to hold onto their property may find that it will lead favorably to future asset formation. Also, depending on the condition of your particular property, its value may rise, regardless of whether the overall market rises or falls.
When you are considering selling, it is important to firmly grasp market conditions and consider who can purchase your property. The above chart is based on data from the Nihon Keizai Shimbun (January 6, 2018). It shows the purchase amount of real estate in Japan and the proportion purchased by foreigners. Looking at this, the percentage of Japanese real estate purchased by foreigners is on an increasing annual trend, and in 2017 about 24% of Japanese real estate was purchased by foreigners. This figure is expected to rise in the future.
When considering selling, it is important to identify these current market conditions and future market trends.
It is also important to consider the individual conditions of the property or properties you own, as described below.
Top 5 things that affect the appraised value of investment properties in Japan
The appraisal method for residential and investment properties is different. The discussion below applies to investment properties.
- Vacancy rate
- Year built
- Repair history
For investment properties, it is common to calculate the price by dividing the net revenue of the property by its assumed yield. As a calculation method, the value of the property is sought by rebating the profit for one year based on a reasonable return yield that could be obtained from the property.
For example, suppose you purchase an apartment for 10 million yen and lease it out for monthly rent of 100,000 yen. In this case, since the profit generated in one year is 1,200,000 yen (100,000 x 12 months), the yield will be 12%. This yield is called net yield.
However, net yield is not an indicator of revenue. It is necessary to deduct costs from annual rent income. For rental management, various expenses such as property tax, administrative expenses, repair funds to be paid to the management company, fire insurance fees and mortgage interest are considered costs. So, the actual profit (net income) is calculated by deducting these expenses.
It is common to obtain yields used for assessment by referencing yields for similar properties in the surrounding area. In summary, determining the yield is the most important point in appraising the value of investment properties.
#2 Vacancy Rate
When assessing the value of an investment property, it is important to know whether the apartment is fully occupied or almost fully occupied.
In the appraisal method used above (calculation of price based on yield), the yield assumes that the building is fully occupied and is generating a full revenue stream, so it is meaningless when there are a lot of vacancies in the building. Therefore, it’s important that you operate your apartment building so that there are only a few vacancies, regardless of the time of sale. To lower the vacancy rate, it is important to properly manage the building, for example, by doing all necessary maintenance and repairs.
If the apartment is far from the station or the location is not very good, it may be disadvantageous at the time of appraisal. However, if the building is fully occupied, there is a high possibility that it will get a good appraisal. In this way, it is up to the owner(s) to properly manage the building in order to support as high an appraisal as possible.
#3 Year Built
In the assessment method explained above, the rent rental rebate is a measure of the price of the investment property, so the rent at the time of appraisal is important in the assessment. There are various factors that affect rent levels. One of them is the year the property was built.
Looking at the graph above, you can see that rent levels decline with the year built. Note especially how the rate of decline up to the 10th year of construction is steep; after that it is more gradual. Based on this, it is possible to predict the current and future selling price.
As as the case with residential properties, with respect to the convenience of location and the actual livability of the apartment, people tend to want a convenient and comfortable living environment, rather than just a large apartment layout. Sale prices tend to be higher for apartments that have higher convenience factors.
The following points are representative items that affect the desirability of a property’s location:
- Located within a 10-minute walk of the station / multiple train routes available
- Facilities such as convenience stores, banks, hospitals are nearby
- There are few competing condominiums in the are
- Low noise / good security
#5 Repair history
The repair history is the construction record concerning the building’s components and equipment. In order to sell your property profitably, it is necessary to keep track of the repair and maintenance history to present to potential buyers in the future.
The sale price will also tend to be higher immediately after a building is repaired.
When selling a property, the year built is important, and it is generally difficult to sell an old property. However, if you properly maintain and repair a building, you will more likely be able to sell it at an acceptable price. In particular, in the case of a single apartment or a whole building, it is often said that purchasers want you to present a repair history.
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