Never waste a good crisis: Where are the current opportunities in Japan’s real estate market?

We have been receiving quite a few inquiries over the past couple of months from buyers looking to pick up some bargains amidst the current turmoil. After several years of being a strong sellers’ market, the real estate market in Japan has made an abrupt about-turn and has shifted into a buyers’ market from around mid-March onwards.  

And yes, while there are some bargain sales out there, buyers need to know where to look.

Short-stay, Airbnb type properties 

Revenues dropped sharply in March, and bookings in the coming months look close to zero. In March, 193,700 foreign tourists visited Japan, down 93% from the previous year. The last time monthly foreign tourist arrivals dropped below 200,000 was in February 1989. Figures will be worse this month. On April 3, the government introduced an entry ban to foreign nationals from 75 countries until the end of the month, although it may be extended.

 At a press briefing on April 17, the Prime Minister asked people to refrain from traveling during the Golden Week holidays coming up in late April/early May. Many accommodation providers, including hotels and ryokans, had been holding on in the hopes of a boost in bookings during Golden Week, but the crisis seems likely to continue.

Retail shops, restaurants

If you have taken a walk around Tokyo in the past couple of weeks you may notice all the temporarily shuttered shops, restaurants and cafes. Some of these may never re-open. Those that have remained open are suffering from low sales.

Retail properties may offer high yields but tend to be the riskiest in an economic downturn. Once a tenant moves out, it could be a year or longer to find a new one, leaving landlords in a precarious situation. Smaller, privately owned restaurants and shops, right up to major nationwide franchises have been petitioning their landlords for rent reductions or rent waivers in a last-ditch attempt to survive. 

Investment-grade properties

This includes whole buildings and single apartments. A rise in unemployment could see more vacant rooms. This could hurt over-leveraged investors relying on rental income to pay the mortgage. If it seems like property values are on the decline, banks may start tightening their lending criteria, especially for investment loans. This could dry up investor demand making these properties difficult to offload. 

What about the residential sector? 

With the exception of investment-grade assets, the owner-occupier segment of the residential market is less likely to feel any immediate effects of the coronavirus and economic uncertainty. Home loan interest rates remain at record lows. Banks, for the most part, only provide home loans to borrowers with stable full-time jobs. Unless we see mass corporate restructuring and layoffs, we are not likely to see many distressed sales in this sector for the time being. 

If you are a distressed seller in the residential market, there are currently a multitude of real estate companies that pay cash for quick settlements. A seller that needs to make a quick sale does not need to list it publicly. 

Non-distressed sellers are likely to wait until the situation improves before listing their home for sale. This could lead to a drop in available listings.

There are some discounts occurring in the residential sector, but as we are still in the early stages these bargains are few and far between. If the crisis drags out, we may see stronger downwards pressure on residential pricing. Transactions have already fallen to record lows.

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