Japan is a country which strikes me as a dichotomy. On one hand, it is a closed culture with language barriers and foreigner shy. On the other hand, its residential real estate market is a huge attraction for foreign investors. How does Japan hold the spot as the second largest real estate market in the world, behind the U.S.?
Unlike many other countries, there are currently no laws or regulations in Japan prohibiting the purchase of real estate by foreigners. This allows 100% ownership of deeded, freehold property, registered to a foreign address. Overseas investors can even buy, and own real estate without ever having visited the country. And, with prices affordably low, from $25,000 to $50,000, and returns, excitingly high from 7% to 12% the attraction is easy to understand.
From my conversations with overseas buyers, here are a few key points of what investor’s take into consideration when purchasing real estate in Japan and why Fukuoka is a buyer’s choice.
Investors look for stable, growing locations with improved infrastructure. Fukuoka is the capital city of Fukuoka prefecture and Western Japan’s biggest and most prominent metropolitan centre. This modern developed city attracts investors for both, quality of living, and a lower cost of living than first tier cities such as Osaka and Tokyo, and much more affordable to purchase.
Where there are tenants there is rental income. There is no shortage of tenants in Fukuoka and it’s easy to see why. For one reason, it is home to Fukuoka Airport, which services international and domestic flights, and acts as a key hub for business and travel in South-East Asia, and as the primary gateway to Japan for an increasing number of travellers from those countries. Second, Fukuoka hosts more than 2 million tourists annually, mainly from South Korea and China. Third, universities in or near the Fukuoka prefecture enrol nearly 10,000 students per year.
Not only is it easy to find occupied properties, but in this lucrative market tenants hold secure jobs. Fukuoka’s economy is largely focused on the service sector. It is the headquarters of large corporations, Iwataya and Kyushu Electric Power, Kyushu Railway Company (JR Kyushu) and Nishi-Nippon Railroad, as well as many small IT, logistics and high-tech manufacturing firms. It is also home to several regional broadcasters including Fukuoka Broadcasting Corporation, Kyushu Asahi Broadcasting, Love FM, RKB Mainichi Broadcasting and Television Nishinippon Corporation. Fukuoka also has its own stock exchange.
Location, Location, Location
Fukuoka is a popular residential area where vacancies are far lower than the regional average, and are now at a historical low of just under 4% for class A assets. It is a convenient and direct commute to central Tokyo and has a number of shopping areas, hospitals, schools and home to some of Japan’s top universities. A favourite spot for residents in the area is Ohori Park, the city’s central green lung and recreation area.
Although apartments, detached houses, buildings and land are available for purchase, small properties in Fukuoka city with one or two rooms, a kitchen/kitchenette are an investor favourite. A smaller unit means lower maintenance and renovation costs, low property taxes, which translates to a higher return.
Overseas investors also look for a well-maintained building to mitigate the risk of any unexpected and sudden renovation debt or hike in building fees. They tend to look for dates of repairs such as to the exterior walls and roof. The building should have sufficient accumulated funds in its renovation/repair pool or sink fund, as it is commonly known in the U.S., for regular maintenance, improvements and renovations. There is a preference for buildings built on or after 1981, which is when the latest earthquake resistant building standards were updated.
Tenant stability ensures secure cash flow for an investor. As an example, an investor was satisfied with his recent purchase of an apartment because the tenant was 58 years old, employed as a carpenter at an interior design company and opted for robust insurance coverage on up to six months of rent. For the buyer, the tenant’s insurance mitigates the risk posed by his short payment history. In addition, this profile would likely translate to a longer tenancy than an elderly person or a younger person who might consider starting a family or moving up in their career and into a larger unit.
A well-maintained building and stable tenancy in a booming area, coupled with an attractive yield at an affordable price, is a sample of what Japan’s property has to offer. Real estate is a hot commodity in areas like Fukuoka, and often purchased within a few days of listing, with the most attractive ones lasting a day or less. Seller resistance to negotiation suggests that prices will likely continue to rise in coming years. From safer, less adventurous investments providing better capital growth potential, to a more diversified portfolio of properties all around the country, generating rental income – overseas investors are opening their eyes to the attractive property market of Japan.