An investment in Tokyo residential property
will prove to be stable with enormous potential to grow your
money. There is continuous pent up demand in Tokyo for residential
rental properties. An abundance of real estate agents bring you
a continuous stream of rental candidates. The demand is so great
that tenants are the ones who pay the commission to agents to
find suitable homes. In many cases, upon signing the contract,
the new tenant even agrees to pay "Key" money in addition
to the traditional 2-3 months' security deposit. This is a traditional
gesture of thanks to the property owner for allowing rental of
their new home.
Most often property owners who
specialize in renting apartments or houses to foreigners do not
require Key money from them. The reason being they wish to avoid
the hassle of explaining the tradition. Instead, these property
owners compensate by charging the foreign tenant a higher rent
and larger security deposit.
Standard rental contract terms
are written for a two year period and the tenant has the right
to terminate the contract at any time, with one to two months'
prior notice (depends on contract). But tenants typically continue
contracts for long periods of time due to the heavy costs associated
with moving to a new home (key money + agent's commission + moving
costs, etc.).
The inclusion of a "Guarantor"
is another standard practice. If the tenant is negligent, the
Guarantor is obligated to assume full responsibility on behalf
of the tenant. So common sense practice is to preliminarily always
make sure that the Japanese Guarantor is financially fit to easily
cover any potential tenant instigated damages.
Fully furnished apartments have
gained in popularity the past 10 years. They are typically rented
on a monthly basis and thus charge quite a bit more than unfurnished
apartments. However this type of property requires many additional
costs for maintenance, services, marketing, etc. The law also
mandates a one month minimum rental contract. Anything less than
one month would require a hotel operation permit. Short term
rentals usually incur a higher risk of vacancy.
There are a few potential negative
outcomes that landlords must consider: First, tenants are protected
by law for unreasonable rental rate increases; Second, even if
there is a clause in the rental contract specifying the landlord's
right to terminate, the tenant still has protection. So the landlord
cannot simply change his/her mind during the rental period, even
if for seemingly valid reasons. Landlords must follow certain
legal procedures to clean up each situation. Simply pushing the
tenant out or changing the key to the front door are not options,
even if the tenant has past due payments. The prudent action
to take is to minimize risks by preliminarily hiring an experienced
and knowledgeable property manger from the outset.
Mansion (Condominium)
A concrete building that
is subdivided into individual units is called a "Mansion"
in Japan.
One room
mansion (Studio)
The purchase of this type
of rental unit is a popular real estate investment choice for
investors with small amounts of capital. As a basic guideline,
a new studio unit is typically 20-25 sqm's with an accompanying
purchase price range of 20-25 million JPY. Monthly rent is in
the range of 90,000 - 120,000 JPY. There is tremendous demand
for "single person" dwelling units. These are usually
rented out unfurnished. This is the smallest real estate investment
option in Tokyo, other than REIT's or real estate funds. With
the right timing, you might be able to find an entire Mansion
and acquire it from the developer prior to them going to market
selling units.
Family mansion
The category with the largest
number of properties for sale is the IBR-1Bath (35-50 sqm) to
3BR -1Bath, sometimes with powder room (60-90 sqm) family sized
layout. Prices in central Tokyo fall in the 1 million to 2 million
JPY /sqm range - for brand new units, and 20-30% less for older
units (depending upon how old, as older usually means cheaper).
The gross rental yield is typically 4-5% (annual total rent /
property price). These are usually rented out unfurnished, even
sometimes with no air conditioner (but higher rental incomes
usually require a refrigerator, washer/dryer and window shades/drapes)
The Family Mansion category also commands strong rental demand
in Central Tokyo, however these are not typically attractive
to foreigners as a rental unit, especially not to western country
executives.
Most apartments and houses designed
to foreigners' tastes are rarely for sale. Key points of contrast
are: 1) Japanese entrances and floor materials are not suitable
for life with shoes worn in the house. 2) The concept of suitable
number of household bathrooms and the concept of a bath, are
different. These issues are manageable for many foreigner couples
and singles. But for typical western families, especially Americans,
a 3BR -1Bath, 4BR -1Bath, or even larger sized mansion unit,
will not appeal to them. If your plan is to rent out your 3BR-1Bath
unit to native Japanese, there should be no concern, but if you
invest with expectations to rent it out to like minded foreigners
desiring a household footprint and layout suitable to the lifestyle
in your home country, then most certainly a family mansion will
be too small.
Apartment
An apartment has a landlord
managing and collecting rental income from multi-dwelling units
throughout an entire building. The word apartment is not attractive
to most Japanese people. The image most Japanese have for this
word is a "cheap rental place" accompanied by a mundane
lifestyle. Apartments are often called mansions just for name sake, but technically mansions must be collectively
owned.
Some nice apartments have been
built in the good area of Tokyo, mainly targeted to foreigners.
But there have been very few nice apartment buildings available
to Japanese for quite some time. So in contrast, mansions have
gained in popularity amongst Japanese as being modern. But a
new trend has emerged this past decade, many new high-rise mansion-type
apartment buildings have sprung-up and are becoming popular assets
for large developers and Real Estate Funds. They usually combine
several types of unit layouts throughout the building. Many are
considered very suitable for multi-national ex-pat tenants. These
are a great target for foreign investors, but there are not many
available for purchase. Some operate as serviced apartments throughout
an apartment building and in other places throughout only a portion
of the entire building.
 home
The purchase of
single family homes for investment purpose is not an attractive
investment choice. Usually the price is too high (land is expansive)
and thus yield is too low. Some western style single and duplex
homes have gained in popularity amongst foreign company employees
in Central Tokyo, such as in Yoyogi Uehara, Azabu or Hiroo Aoyama.
Rents range from approx. 1 million to 3 million JPY per month.
Those are usually owned by long term land owners.
Commercial properties
are popular to hold as an asset. Compared to residential properties,
they are more sensitive to the affects of economic change and
require more sophisticated management know-how. A typical commercial
unit encompasses an entire building, so it is not suitable for
small scale investors. Office condo units are not popular in
Japan. The rental amount is usually indicated in terms of "per square meter
per month",
yet another Japanese unit measure is the "Tubo", which
is approximately 3.3 sqm's. "Tubo" is not the legal
way to calculate and convey measured units, however "long
time" past customs used this measure, so many people still
prefer it. You had better make sure to verify the unit of measure
when computing the price or lease amount (a misunderstanding
can occur even amongst fellow Japanese).
Office buildings
There are a multitude of
sizes and scale of office buildings throughout Tokyo. Large scale
IT ready buildings charge the highest monthly rents, e.g., 20,000
JPY per sqm. They attract high level tenants of excellent credit
standing who take large spaces for long contract periods. Smaller
or older buildings carry higher vacancy risk. They charge monthly
rents of approximately 3,000 - 6,000 JPY per sqm. Office vacancy
rates in Central Tokyo are very low, at less than 3% in recent
years. It is a "landlords market". Even a very small building, such as a
40 sqm's
per floor, 5-story building with no elevator, will command high
tenant demand if the location is in a popular and fashionable
area. Areas such as Ginza, Aoyama or Harajyuku.
The standard lease contract for
office space is 3 years. More detailed and flexible conditions
can be inserted in office lease contracts, compared to residential
contracts. Commission for the tenants' agent and costs related
to tenant improvements and/or recovery costs are the tenant's
obligation upon moving out (some buildings provide ready to occupy
furnished offices while others just provide a shell).
Many buildings also charge maintenance
fees along with 10 months worth (or more) of security deposit,
in addition to the monthly rental, if the quality of the building
is above average. A condition in the contract called "depreciation
cost" can usually be applied so that 10-20% of the deposit
will not be returned to the tenant.
Commercial
space
Commercial spaces are usually
portions of office or mansion buildings. Not many individual
units are available for sale. The commercial space in such buildings
usually make-up the most visibly noticeable and most easily accessible
portions of the building, thus earning the highest rent in the
building. That is especially true of ground floor spaces facing
busy pedestrian trafficked streets. Such commercial spaces are
always in great demand and very hard to acquire. Tenants are
almost always obligated to incur costs to improve the space.
Such prime property commands the highest security deposit, e.g.,
20 months or more. Monthly rental and maintenance fees are standard.
Spaces in shopping malls depend on the mall in question, some
only charge for space, others also charge a percentage of gross
sales of each business. Triple Net (NNN which is popular for
US commercial leases) is rarely applied in Japan.
Hotels Hotel investments basically
include two possibilities: 1) Property owner and operator. That
not only requires an astute hotel real estate investment, but
also hotel business management experience. 2) Property owner
with hired hotel operations management. The practical ways for
a foreign investor to do this would be to either hire a hotel
operator or lease out hotel management operations.
Build from
scratch or renovating
This option is open to
property owners who have acquired a high yield property asset.
Of course much more hassle must be incurred for a higher risk
vs. reward ratio. Only real estate experts should attempt this.
The Central Tokyo areas
of Chiyoda-ku, Minato-ku, Chuo-ku, Shinjyuku-ku, Shibuya-ku are
the most popular areas for investment amongst Japanese and foreign
investors alike. They command the highest property prices in
Japan. Each of 23 wards ("ku"=ward) within the Tokyo
metropolitan area have different towns and can be graded differently
depending upon their location. Selection of location is the key
issue for success with real estate in Tokyo. The same is true
of any other big city throughout the world. In periods of deep
recession, like in the early 1990's, various types of properties
in better locations throughout Tokyo experienced significant
price drops, but virtually none experienced difficulty acquiring
tenants to collect stable rental income.
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