High demand for luxury apartments in Tokyo

The market for luxury apartments in Tokyo has seen a rapid improvement and is at a point where some are comparing it to the mini bubble that occurred prior to the Lehman collapse in 2008.

In June 2014, Mori’s latest high-rise project – Toranomon Hills – was completed. The 52-storey building contains office space, the Andaz Hotel and 172 apartments. Approximately 70 of the apartments were offered for sale with an average price of around 3,000,0000 Yen/sqm, making this the most expensive apartment building in Japan. The sales office was inundated with inquiries prior to sale and lucky apartment buyers were selected by a raffle-type system. All apartments sold out.

Although it is difficult to say that the new apartment market is doing well across the board, the number of luxury developments seeing same-day sellouts is increasing. The share of new apartments priced over 60 million Yen is also rising. In 2013, they accounted for 19.8% of the new apartment supply, up 6.7 points from 2000. The contract rate for new apartments in October hit a five year low of 63.3% in greater Tokyo, but the contract rate for new apartments priced over 100 million Yen has remained over 70% for the past five months. For new apartments in the 200 ~ 300 million Yen range, the contract rate has been between 75% ~ 100%.

Investors are pouring their funds into luxury apartments in central Tokyo. With the 2020 Summer Olympics and the weakening Yen, foreign investors from Taiwan, Singapore and China are actively seeking real estate opportunities in the capital.

Inheritance tax changes boosting market

Wealthy Japanese looking to reduce the value of their estate for inheritance tax purposes are also very active in the apartment market. Compared to assets such as shares, which are taxed at their full face value, the inheritance tax value of real estate is valued much lower than actual market prices. While a house and land typically has a larger land value and higher tax value, high-rise apartments have a much smaller land ownership share and a much lower value for inheritance tax purposes. As an example, a high-rise apartment with a market value of 175 million Yen may have a tax value of just 32 million Yen. These buyers are said to be the main driver behind the current boom in the luxury apartment market. Agents have started including details on inheritance tax values in their property brochures, and ‘Great for Inheritance Tax Deduction!’ has become a common sales point.

Inheritance tax brochure
A brochure for a high-rise apartment in Akasaka with an asking price of 175,000,000 Yen boasts an inheritance tax value of just 32,440,000 Yen.

But the tax office is watching carefully over these transactions. In one case, a father passed away one month after purchasing a high-rise apartment for 293 million Yen. The family reported the value of the apartment as 58,020,000 Yen to the tax office for inheritance tax purposes. They sold the apartment 12 months later for 280 million Yen. The relative speed of the transactions caught the attention of the tax office, who later taxed the heirs based on the apartment’s original purchase price of 293 million Yen. Most audits by the tax office are conducted within two years of filing, but they are expected to become more strict after the revision to the inheritance taxes in 2015.

Sources:
Business Journal, November 2, 2014.
News Post Seven, November 2, 2014.

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