Types of Real Estate Investment in Japan.
There are two types of real estate investments you can make in Japan.
- Direct – Property Investment
- Indirect – Stock Investment.
Firstly, we would like to speak about the types of real estate investment in Japan from a risk/return perspective. The relationship between investment return and risk have the directly proportional nature – higher the risks higher gets the return on the investment. The lowest risk investment type example is putting your money in a bank account and get paid the interest. For real estate investment in Japan, it is the most preferred method, because the banks are very safe. However, the return you get is almost neglectable. Investment in stock is considered to have the higher risk and higher return rate for real estate investment in Japan. It can increase in value rapidly as well as decrease suddenly. There are more risks to confront with in case of stock investment. Property investment is considered a middle-risk middle return type for real estate investment in Japan. In return, you can get more profit than opening a bank account, but it comes with various risks.
There are several property investment types:
- Residential (house, apartment)
- Commercial (office building)
- Retail (shops)
- Logistics (warehouse)
- Hospitality (hotel)
Depending on the scope, there are three types of real estate investment in Japan:
- Buying one unit in a mansion or condo – is the most common type of real estate investment in Japan. The price can vary from 1,000,000 JPY to 5,000,000 JPY. Depending on the bank you can get a partly loan and required to come up with the remaining part.
The scheme is straightforward – you purchase a housing unit becoming an owner and then find a tenant. You not only get income from a tenant, but there is also a chance of capital gain in case if property value will increase.
- Detached house investment – in this case, you purchase a stand-alone house. The price will be slightly higher than the previous type.
However, type 1 and type 2 are convenient regarding property management. Because from time to time every tenant has inquiries or struggles that property owner is ought to resolve. It is the owner’s decision either to try and solve the issue by himself or to outsource it.
- Lastly, the third type of real estate investment in Japan – purchasing a block of apartments or mansions, which requires much more capital, of course. Not many of the banks lend 100% of the property price. Therefore you need to come up with the remaining amount.
Additionally, in case if you have more than one tenant, the issues may be more than you will be able to solve by yourself. It is better to outsource the job to a property management agency, who typically require around 3-5% of the gross rental income for their service. On the other hand, it is better for occupancy rate if you have more than one tenant. Because in case if one or two tenants move, the occupancy rate does not change drastically, as it does with only one tenant. If he moves out from your property, the occupancy rate will drop from 100% to 0%, which will affect the gross rental income. Therefore, when making a direct type of real estate investment in Japan, there are some factors to be aware of.
If you want to make a real estate investment in Japan, but do not want to get involved in property ownership and management issues then indirect investment might be a good option for you. Indirect investment is when the investor buys a stock of a private company, becoming a shareholder. The investor gets a chance to maximize the profit with a minimum risk rate because the property is professionally managed. To be an indirect investor is like to be a passenger on a boat because it is safe. Nevertheless, the return might not be as high as in case of direct investment. There are several ways for an indirect type of real estate investment in Japan, one of which is to buy a stock on the J-REIT – Japanese real estate investment trust market. J-REIT was launched in September 2001, when two J-REITs publicly listed their investment units for the first time. The number of J-REITs increased steadily after that, reaching 42 by October 2007. All J-REITs are listed on the Tokyo Stock Exchange. Here is the link to their webpage where you can find all the essential information.
Property Risks in Japan.
In conclusion, we would like to share some facts that are better to pay attention to making a real estate investment in Japan. Purchasing a house means a long-term commitment. Hence, you want to be sure that the decision made is right and the chosen property is located far away from a dangerous neighborhood. In Japan, because an earthquake possibility chance is higher than average, related property risks are the following:
- Soil Liquefaction – is also called earthquake liquefaction, ground failure or loss of strength that causes otherwise solid soil to behave temporarily as a viscous liquid. The phenomenon occurs in water-saturated unconsolidated soils affected by seismic S waves (secondary waves), which cause ground vibrations during earthquakes. Poorly drained fine-grained soils such as sandy, silty, and gravelly soils are the most susceptible to liquefaction.
The 9.0 earthquake in Japan — the fourth most powerful quake ever recorded — which occurred in March 2011 caused an unusually severe and widespread shift in soil through liquefaction. The following image is an example of soil liquefaction occurred in Niigata in 1964.
Japan’s liquefaction occurred over hundreds of miles, surprising even experienced engineers who are accustomed to seeing disaster sites, including from the recent earthquakes in Chile and New Zealand.
- 木密 – Mokumitsu – area built up with inflammable wooden houses in Japan.
In some residential areas in Japan, houses were built a long time ago and consist of an inflammable wooden structure. Therefore, in case of a fire disaster the risk of its spreading increases at a high rate. The typical example of such calamity is the Great Hanshin-Awaji Earthquake which occurred in Kobe city. Many of the buildings damaged by this earthquake were built before 1971 when the new earthquake resistance standards were introduced. The following image is the example of mokumitsu area and the disaster that can occur.
However, currently, Tokyo area is involved in the “disaster prevention urban development promotion plan” that made after the Great Hanshin-Awaji earthquake took place in 1995. According to this plan, the government is willing to sponsor maintaining works for the areas that are expected to suffer considerable damage during the earthquake. The ultimate goals are the following:
- Formation of a fire spreading barrier,
- Establishment of a safe urban area,
- Securing evacuation places.
If you need any additional information, you can contact us at any time. We will be happy to assist you with the property purchase process. We hope this information will be helpful for people who are involved in or considering to invest in real estate in Japan.