The past several years have been eventful ones for Japan, and perhaps no area of the economy has generated as many headlines as the property sector. One of the first to see a rebound following the advent of Abenomics, the industry has continued to attract interest even as concerns mount over the state of the global economy. The Wall Street Journal and the Nikkei Asian Review alike attest to the appeal Japanese real estate carries for international investors: the J-REIT market has grown almost 10% from the start of the year even as the Nikkei Index has contracted to a similar degree, and foreign investment in such funds reached the highest level in over eight years this past February.
The Tokyo Stock Exchange’s JREIT Index has diverged significantly from the Nikkei 225 since the introduction of negative interest rates
All the buzz surrounding Japanese real estate– the high yields, the easy financing, the growing value of assets– naturally leads to musings on whether to believe the hype. Despite negative press concerning the wider Japanese economy however, real estate, especially in Tokyo, remains a bright spot worth considering.
Tokyo’s Population is Still Growing
The doomsayers are everywhere: Japan has the lowest birthrate in the world; Japan’s population is declining at a dangerously high rate; in fifty years, Japan will be a hollowed out empty husk of its former self. While Japan’s fertility rate is low (although not the lowest: according to the CIA World Factbook Hong Kong, South Korea, and Singapore, among others, are all lower), and the national population is expected to decline to nearly one third of its 2015 level by 2100 according to the United Nations, the country’s urban centers have not yet felt the impact of this trend as have its regional prefectures. Japan’s population may have fallen by approximately 140,000 from 2015, but Tokyo’s actually grew by a nearly equal 120,000 over the same period. Migration to the city is up as younger citizens pour out of the countryside and this urban polarization has stymied the population decline evident in other regions. This won’t last forever, and Tokyo’s overall population is expected to go into decline sometime after 2020, but the rate of decrease will not match that of the rest of Japan. Certain areas of the city, including central wards such as Chuo, Minato, and Shinjuku are expected to grow from their current levels through 2040. Tokyo is only going to become more important to Japan as a whole going forward, and demand for real estate in the city is set to stay high.
Population decline is set to hit Japan as a whole harder than in Tokyo, and certain central areas of the city can still look forward to growth
Property Values are Up– and Staying Up
Another common myth about Japan is that capital gain is impossible, that property values have been in a slump for decades and that the country’s real estate loses value like a used car. In reality, Tokyo’s property market is more active now than it has been in years: used apartment prices have been on a steady rise for over twenty months now within Tokyo, and land values rose nationwide recently for the first time in eight years. Abenomics and the easy credit it provides have been very favorable to the real estate sector, but lest one flash back to the property bubble of the late 1980s consider the difference, illustrated below, between the freefall prices went into in the early 1990s and the relatively small decline seen during the global financial crisis. Smart purchases within central city areas frequently maintain their value and are well positioned to gain from the current economic climate.
Used apartment prices have risen for 22 consecutive months within the Tokyo Metropolis
Commercial and industrial property values are also up and near their 2007 levels. Note the difference in scale between the bubble years of the late 1980s and the “mini-bubble” that emerged shortly before the global financial crisis
Financing Terms are More Desirable Than Ever
Negative interest rates have garnered their fare share of press since their introduction by the Bank of Japan in February as domestic banks, faced with the prospect of paying the BoJ to store their extra reserves, have begun rolling out their most favorable terms ever. Foreign investors need not be left out in the cold, as several institutions also exist that will lend to offshore residents. Even non-recourse loans are possible given the correct circumstances. Investing in Tokyo does not necessarily have to be a cash game.
Tokyo Has Never Been More Popular Internationally
Take a look at the below chart, ranking each country by their number of foreign visitors in 2014:
In 2014, Japan was the seventh most popular destination in Asia for foreign tourists
Japan ranked 22nd globally, below Asian neighbors including South Korea and Malaysia, with about 13 million inbound tourists over the course of the year. Now look at the relevant figure for 2015:
In four years the number of tourists coming to Japan has more than tripled
19.7 million inbound tourists touched down in Japan last year, a more than 47% increase from 2014 and just shy of the goal set by the government of 20 million foreign visitors by the 2020 Olympics. Japan has proven so successful at attracting international attention that earlier this March that target actually doubled to 40 million, and as the country’s capital and largest city Tokyo has borne a significant portion of this boom. The city’s infrastructure is still catching up to increased tourist demand, opening the way for many interesting opportunities. It ranks as Airbnb’s fastest growing market, and the government is currently looking into relaxing its restrictions on short term stays. Even disregarding the Olympics, Tokyo is taking its place among the major world cities as an international destination.
Occupancy rates at Tokyo hotels were higher than some of the world’s most popular destinations
Yields in Tokyo Compare Favorably to its International Neighbors
Investors from all over Asia flock to Tokyo to achieve yields they cannot back home. Global Property Guide keeps a running record of gross rental yields for luxury residential properties, and Tokyo stands out among its peers:
Central Tokyo residential rental yields are among the highest in developed Asia. Note that these figures are for large apartments, which typically command lower yields than smaller units
The office market in Tokyo is no slouch either, with low vacancy rates and increasing rents:
Tokyo has the lowest office vacancy rate out of all major cities in the Asia Pacific, and was the only East Asian city to experience year on year rent growth in 2015
As markets such as Hong Kong and Singapore stay flat or experience falling rents, Tokyo has emerged as an attractive port of call for international and domestic investors alike.
The discourse around Tokyo is dominated for many by myths, hype, and hearsay, but that conversation does the city a disservice. Strip away the overblown concerns about the declining birth rate, the Olympic buzz, the specter of the 1980s bubble, and what remains is what countless investors have known about for years: a global urban hub with some of the greatest infrastructure in the world and a property market that outperforms many of its peers. We are happy to assist any parties wishing to invest in Tokyo real estate.