Private investors with smaller budgets need to be aware that they face a much higher risk level when investing in Tokyo’s real estate market.
While a budget of several hundred million Yen will afford you a variety of options, anyone looking to spend under 100 million Yen or even under 10 million Yen on real estate in Tokyo will either be looking at older blocks of flats (‘apaato’) in outer areas or single apartments in more central areas. These type of properties can be very risky for investors, simply due to the high supply and risk of relying on a sole tenant.
In 2013, 356,000 new rental apartments and homes were built in Japan. According to a 2008 survey by the Ministry of Internal Affairs and Communications, 52.4% of the 8,200,000 empty homes and apartments across Japan were rental properties (as opposed to second homes, abandoned properties or homes that were empty while being advertised for sale). The vacancy rate amongst rental properties (including public housing) was 18.7% nationwide in 2008, while the total number of vacant rental properties had almost doubled over the past 20 years.
The vacancy rate in central Tokyo is closer to 10%, while it could be up to 50% in unpopular areas in the outer suburbs. Tas Corp estimates that the vacancy rate in wood-frame ‘apaato‘ apartments in Tokyo’s 23 wards is around 30%, while the vacancy rate in reinforced-concrete apartment buildings is between 10 ~ 11%.
Investors, therefore, should anticipate an occupancy rate of around 80% (or 90% in central Tokyo) and adjust their sums accordingly.
Also, occupancy rates may worsen over time. Brand new properties offer higher occupancy rates and higher rents, but over time it can become more difficult to attract tenants as the property ages and becomes out-of-date or worn out. Landlords who can afford it will need to redevelop and rebuild their apartment buildings if they want to achieve higher rents. This is why the average life expectancy of a building is just 27 years – it might still be suitable for occupancy but in a competitive market a new building will provide an opportunity for better rents and lower vacancy rates.
If the average rental building needs to be re-built every 27 years to remain competitive, landlords are going to be less willing to spend a fortune on the construction process each time. Cheaply-constructed buildings become out of date, deteriorate more quickly and it doesn’t take long before they fall out of favour with tenants and need re-building again. This endless cycle is a defining trait of Japan’s rental market.
Lately there have been a lot of real estate investment seminars targeting the average salaryman. Buying land and building an apartment building is beyond the budget of the typical Japanese worker, so they are limited to investing in single apartments – primarily small studios.
In recent years, rental apartments below 30 sqm have made up 60% of the new supply.
Risk of putting all your eggs in one basket
If you purchase a single apartment as an investment and the sole tenant moves out, your rental return effectively drops to zero. Unavoidable expenses such as building fees and property taxes can turn this into a negative investment.
If we assume vacancy rates to be around 20% nationwide, it would be reasonable to assume that there is a risk that your apartment could be empty for 1 in every 5 years.
When calculating your expected rental revenue and return, it is important to include the potential time that your property could sit vacant.
Purchasing a block of 50 apartments with an average vacancy rate of 20% would mean that around 40 of the apartments will be occupied and providing rental income. In this situation you can anticipate rental income of around 80% of the fully-occupied rate and better property management could see this figure improve.
A single apartment, however, can either operate at 100% or at 0%. This can be a risky bet.
New rental properties continue to be built each year, adding to supply and increasing competition. Furthermore, the younger generation, who form a large share of the residential tenant market, are shrinking in number as the population ages.
Real estate investment in Japan is not a ‘sure thing’ and buyers must take extra care when selecting their investment property and be fully aware of the risks involved. If your budget is smaller, real estate investment trusts (REITs) offer a way to obtain exposure to the property market at a lower risk.
Tas Corp Residential Market Report, April 2014.
ZakZak, April 27, 2014.
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