Japan’s real-estate property investment market, as you may or may not know, is Asia-Pacific’s biggest market, and the second biggest global market in the world. But it is difficult for foreigners to invest in Japan’s real estate.
Properties in Japan are among the cheapest in the developed world, particularly in the lower end of the market, the property transactions are extremely well documented, with an official paper trail that stretches out to the moon and back – and the purchase and management is always legal, extremely well regulated, and with full recourse for both buyers and sellers.
Japan’s Real Estate should be property investors’ paradise because of its:
- Affordability – following two and a half decades of deflation
- Transparency – common in developed countries
- Relatively high rental returns (4-10% annual net pre-tax returns, on average, for residential properties – depending on their locations and profiles)
But why it hasn’t gained the exposure it deserved?
Invest in Japan’s Real Estate – Language and Culture Gap
For foreigners, however, this huge real-estate property investment arena can be quite difficult to operate in, for two main reasons.
The first is the language and cultural gap – the vast majority of professionals, corporate entities such as banks, government authorities and third-party service providers in Japan, are usually unable to provide services in any other language other than Japanese, and in many cases will outright refuse to work with anyone who isn’t native Japanese, even if they do speak, read and write the language. This is doubly true for properties outside the country’s two main metropolitan centres of Tokyo & Osaka, as well as a few other foreigner-rich locations such as Naha in Okinawa, which has many US army bases – Niseko ski village in Hokkaido – and similar examples.
And, while that obstacle can be surmounted by using companies like specialized investment companies, there’s a second huge problem which comes into play almost immediately after the first few cheap properties one manages to buy, which is financing.
Financing Is the Biggest Hurdle
Financing Japan real estate investment for non-resident foreigners is almost non-existent.
This sad state of affairs isn’t due to any government restrictions on banks – far from it – there is nothing in Japanese law which prohibits banks from allowing non-resident foreigners to open bank accounts in Japan, take out loans and mortgages, or otherwise use banks’ financial services.
In fact, the government continuously declares and puts policies in place to make it easier for foreign investors to operate in the country. The issue stems from the simple fact stated above – that companies, big or small, in the land of the rising sun, are terrified of doing business with foreigners, due to the language and cultural gap – and this applies to banks as well.
Sure, they’ll quote other reasons, such as their “anti-money-laundering policies”, “shortage of English speaking staff” and so forth – and portions of those reasons are true – but the crux of the matter is that banks, like most businesses in the country, be they big or small, are extremely foreigner shy, to the point of complete panic.
And so, foreign investors capacity to invest is limited to whichever amount they are willing to or are able to allocate for cash purchases in Japan.
Even if they are willing to accept the extremely strict borrowing criteria that the few rare banks who are willing to lend to them, they are still subject to things like:
- A minimum loan amount of approximately 1 mil USD
- A 50% cash up-front requirement (means a very low cash-flow yielding investment),
- Restricted to only properties in the heart of Tokyo (which means even lower yields)
- Zero diversity in their portfolio
- High capital outlay which just doesn’t make any sense
Others will necessitate an extended existing income history in Japan, verifiable by tax return statements (which often doesn’t exist for most investors, who will claim all possible deductions on their cash-purchased properties, then sell those and recycle the funds into new acquisitions, in order to minimise their tax payable).
All of the above means that, non-resident foreigners who invest in Japan’s real-estate property market are almost exclusively cash-buyers – which, in turn, means that most of them only invest a fraction of what they’d be willing and happy to invest in the country, if only they could acquire the financing for it.
The New Trend of Financing
With the modern technology and global community such as Airbnb, crowdfunding, peer-to-peer lending, there may be a business opportunity for investors who may want to provide loans to these foreign buyers – those investors would most likely fit the following profile –
- They must have a minimum of approximately 20,000 USD to offer investors as a loan – this is normally the cheapest – yet still rentable – property price tag in Japan at this point in time
- They would probably have an interest in, or at least a passing acquaintance with Japan and its property market, and want to gain more portfolio exposure in this arena
- They are not interested in investing this money in Japanese real-estate property directly on their own – either because they’re not interested in the hands-on management of such a portfolio, or because they already have such investments themselves and now wish to diversify their financial exposure – or for any other reason
- They must be happy with a return of 4-6% in annual income on these loans – as most investors will not pay anything beyond that, for fear of entering negative gearing territory, should their properties become vacant, or rental income otherwise significantly reduced for any reason
- They must be comfortable with the idea of owning the properties securing these loans, should the borrower default on their financing agreement
As for the terms of the loan itself – these will be entirely up for discussion between the lender and borrower. Most property buyers (the borrowers) would most likely be mainly interested in “standard” mortgage arrangements of 70-90% LTV, payable over a period of 10-25 years – whereas the lenders may be interested in shorter terms and different ratios – a negotiation will need to be held to find the sweet spot that suits both the lender and borrower.
Security, aside from the obvious – the property itself – could be further boosted via various checks & legal provisions drafted by the lender, or by choosing to lend only to investors who already have other properties in Japan, purchased in cash and paid in full prior to the new investment – which would serve to naturally screen potential borrowers even further. Lastly, a lender could, of course, choose to lend only to residents of their own country, to further enhance their recourse options in case of default.
The Demand for Financing Japan’s Real Estate Is Huge
A typical Japan property investment company, such as Nippon Tradings International, is normally approached at least two or three times a week by existing or potential clients who are interested in purchasing Japan real-estate investment properties via bank mortgages or other financing schemes.
You will be surprised to know that the Bank of China is one of those rare banks which will agree to lend funds for Japanese property purchases for non-resident foreigners, but only for those who are already doing business with them in other countries, and only for very specific property profiles.
Alternatives of Direct Japan Property Investment
Having said that, besides putting 100% to directly own a Japan property, you can gain exposure to Japan’s property market through Japan Real Estate Investment Trust (commonly known as J-REITs).
For example, below is a list of J-REIT ETF which you can invest in.
Although these ETFs are trading in Tokyo Stock Exchange, a foreigner has no problem to buy them through your stock brokers.
This article is co-authored by me and Ziv Nakajima Magen ([email protected]), Partner & Executive Manager of Nippon Tradings International (NTI), a Japan Real Estate Property Investment specialized in assisting investors in capitalising on Japan’s real-estate property market.
If you are any question about investing in Japan property or Japan Real Estate Investment Trusts, simply leave your comment below.
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