Tapping Tokyo’s resilient residential property market

/ EdgeProp Singapore |

July 29, 2022 8:00 AM SGT

Tokyo’s residential property market is underpinned by strong fundamentals, including robust demand backed by population growth in the city and tight supply (Picture: Bloomberg)

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The Japanese real estate market remains one of the most resilient in the Asia Pacific region. In 2021, out of the US$177 billion ($246 billion) in direct real estate transactions recorded in Asia Pacific, US$41 billion came from Japan, according to research compiled by JLL in its Apac Capital Tracker 4Q2021 report.

Foreign investors continue to flock to Japan, thanks to the country’s mature and stable real estate market, its ultra-low interest rates as well as favourable exchange rates. In June, the Japanese yen fell to a new 24-year-low against the US dollar.

Japan’s residential market, in particular, has seen robust activity, underpinned by the multi-family housing sector.

In 2020, despite headwinds caused by the pandemic, Japan’s multi-family sector hit record-high transaction volumes of US$9.4 billion, according to data compiled by Allianz Real Estate.

The strong fundamentals of the Japanese residential market and attractive macroeconomic conditions have also drawn interest from retail investors from around the world, including Singapore. JLL Singapore’s head of international residential sales Chua Shir Yee notes that Japan is the second most popular international destination for Singaporean property buyers after the UK. “In terms of [JLL Singapore’s] international sales, Japan makes up roughly 30%,” she says.

Capital appreciation, healthy yields

Chua adds that Singaporeans who purchase property in Japan predominantly focus on Tokyo. The majority of purchases were made for investment purposes, as buyers look to reap steady capital appreciation offered by properties in the capital city. Tokyo house prices grew at a CAGR of 5.6% between 2014 and 2021. Even at the height of the pandemic, prices remained resilient, growing by 14.2% in 2020.

The property market continues to be supported by Tokyo’s growing population. Between 2013 and 2021, the population in Tokyo’s five central wards grew by around 15%. While the pandemic resulted in a slowdown in the city’s population growth as border closures and lockdowns restricted movement and migration, a rebound is expected as Japan opens up again. JLL is projecting the number of households in all 23 wards in Tokyo to continuously increase until 2040.

Meanwhile, Tokyo continues to see a dearth of supply in new residential properties, underpinned by a scarcity of land and high construction costs. Hence, property prices in the Japanese capital are expected to remain resilient in the coming years, offering investors steady capital appreciation. JLL is projecting prices in the central five wards to grow at a CAGR of 5.2% between 2021 to 2025.

Rental prices in Tokyo also continue to chart steady growth, backed by a very active rental market. For properties located in prime Tokyo areas, Chua estimates investors could earn rental yields ranging from around 3% going up to 4.5%.

Artist’s impression of an apartment at The Parkhouse Kojimachi Residence, development in Tokyo’s Kojimachi district in the Chiyoda ward that is currently being marketed by JLL (Picture: JLL)

Lower barriers to entry

Besides steady returns, Japan is an attractive destination for foreign investors because of lower barriers to entry relative to other countries. Unlike places like Singapore, Hong Kong, Australia and Thailand which impose varying restrictions on foreigners looking to buy property, Japan has a more relaxed stance, with little distinction between foreign and local buyers. This also includes an absence of any additional taxes for foreign buyers.

Japan also has one of the lowest acquisition costs among developed nations, says JLL’s Chua. Foreigners looking to purchase a property in Japan are required to pay a real estate acquisition tax (similar to Singapore’s Buyer’s Stamp Duty) of 3% for land and 4% for buildings on the property’s value, a registration tax ranging between 0.1% to 2%, and other legal and administration fees.

Finally, these acquisition costs usually make up around 2% to 3% of the property purchase price, which Chua says is lower than places like Singapore, where it can reach 4% or more.

In terms of holding costs, all property buyers in Japan — no matter foreign or local — are required to pay an annual property tax of 1.4% on the property value, as well as a city-planning tax, which is 0.3% on the property value for properties in Tokyo.

Owners who rent out their properties will also be subjected to tax on their rental income, while those that sell their property will be subjected to a capital gains tax of 30.63% on net gains, or 15.315% if the holding period is more than five years.

Property owners who do not stay in Japan will also be subjected to withholding taxes on their rental income (at a rate of 20.42%) and capital gains (at a rate of 10.21%).

Focus on the central wards

For Singaporeans looking to buy property in Tokyo, Chua advises focusing on the five central wards in Tokyo of Minato, Chiyoda, Chuo, Shibuya and Shinjuku because these are where the main business and commercial districts are concentrated.

An intersection in Shibuya, one of the five central wards of Tokyo where property investors in the city tend to focus on (Picture: Bloomberg)

Another useful way to look for potential areas to invest in is via the Yamanote Train Line, which loops around the central Tokyo area. Chua adds that capital appreciation for properties tends to be highest around the southern half of the Yamanote Line, especially in areas surrounding major train interchanges like Tokyo, Shinagawa and Shinjuku.

Prices for properties in these areas usually start from around $750,000 for a studio or one-bedroom apartment although Chua says prices may be higher for properties built by reputable developers in Japan like Mitsubishi Estate, Mitsui Fudosan and Sumitomo Realty & Development. While premiums commanded by such developers may sometimes go up to 10%, Chua cautions against buying properties from an unknown developer. “The quality and resale value of properties tend to be stronger for reputable developers,” she adds.

Affordable Osaka

For investors looking for a more affordable entry into the Japanese property market, Osaka is another location to potentially consider. Prices for a studio or one-bedroom apartment in Osaka typically start from around $350,000, says Chua.

Osaka is a fast-rising market that is steadily garnering more interest among investors, given the lower quantum required and the city’s strong fundamentals. Capital appreciation in Osaka has outpaced Tokyo in recent years, with property prices growing at a CAGR of 6.8% between 2014 and 2021. Looking ahead, JLL is projecting prices to grow at a CAGR of 5.5% between 2021 and 2025.

Artist’s impression of the lounge space at Fine Residence Osaka Honmachi, a 99-unit apartment in Osaka’s Nishi ward marketed by JLL (Picture: JLL)

For Singapore buyers interested in purchasing properties in Japan, JLL Singapore is currently marketing a vast selection of properties across both Tokyo and Osaka. It can offer endto-end assistance to buyers throughout the investment process.

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