There are two main categories of land ownership rights in Japan – freehold and leasehold. Freehold is the most common type of land ownership, although there may be some properties on leasehold land. Leasehold is broken into two types – surface rights and right to lease.

• Freehold – Shoyuken.  The absolute ownership of land and building. For freehold apartments, each apartment comes with a share of the land underneath the building.

• Surface Rights – Chijoken. The land is leased, while owners of the building and units have the right to buy/sell as they please. This form is commonly used for leasehold apartments built in recent years.

• Right to Lease – Chinshakuken. The land is leased, while owners of the building and units may sometimes be required to attain the landowner’s approval before they can transfer or sublease. Also, before rebuilding the structure on the land, the landowner’s permission must be obtained. This form of leasehold is mostly used for houses on leasehold land, or older apartment buildings.

FREEHOLD:

The most common, or preferred, type of land ownership is freehold whereby you have absolute possession over the land underneath your house or a portion of the land underneath the apartment building.

For an apartment building, each individual unit has a portion of ownership of the land upon which the apartment was built. This figure is expressed as ratio (usually the individual apartment size in relation to the total size of all the units in the building). Therefore, larger units in a building will have a larger land ownership than the smaller units.

What does this mean for apartment values?

Because a freehold apartment includes ownership over a portion of the land, the apartment value will never depreciate to zero. As the building ages, the portion of the value attributed to apartment itself may depreciate, but at the same time the value attributed to the land may increase. A newer apartment’s price or value may be 70~80% land value, while an older apartment’s price or value may be closer to 90% land value or even higher. In some cases it is possible to find some apartments that can be purchased for less than the value of the land.

Benefits

• Freehold apartments always have a residual value (land), no matter how old the apartment gets.
• You can theoretically hold the property for eternity, although buildings may be redeveloped eventually.

Disadvantages

• Freehold apartments are generally priced higher than leasehold types.
• Property taxes are high when the share of the land has a high tax value.

FIXED-TERM LEASEHOLD:

Fixed-term leasehold refers to the newer leasehold system whereby the land lease is for a fixed period of time. At the end of the lease, the land is usually returned to the landowner. This is different to the old leasehold system, whereby the lease is usually renewed.

Sometimes private individuals or developers will build a house or apartment building on land that is leased from someone else. The benefits to the developer include much lower initial costs, as purchasing land can amount to a large portion of total project costs. Many leaseholds require the occupant to pay the owner of the land a monthly fee.

For apartments in particular, a fixed term land lease starts from the date set between the developer and the landowner, not from the time you purchase a unit in the building. If you purchase a new apartment in a building with a remaining 60 year land lease, and then re-sell your apartment in 20 years time, the new buyer will be left with a 40 year lease on the land. For some lease agreements, upon completion of the lease term, the land may have to be returned to the land owner in its original condition. This means tearing the building down. Part of the monthly restoration fee paid by all unit owners will go towards this demolition fund. However, should the costs to demolish the building exceed the current funds available then all of the current unit owners may be required to pay the remaining amount. Another type of leasehold is where the landowner will purchase the building at the end of the lease term.

Benefits

• Prices are usually cheaper than freehold apartments (approximately 30% cheaper in major areas), providing you with a nicer property in a better location.
• Because prices may be lower, there is a possibility of higher rental yields (tenants will not usually be concerned about the land being leasehold).
• Property taxes are lower.

Disadvantages

• You will need to pay a monthly land rent to the owner.
• You never actually own the land underneath the property and eventually you may have to move-out in order to return the land to its owner (if it is a fixed-term lease).
• Fixed-term leasehold properties may be more difficult to re-sell, and capital gains are unlikely.

Examples of leasehold apartment buildings include Hiroo Garden Forest, Azabudai Parkhouse, Minamiaoyama Park House, Ginza Tower and Park Court Azabu Toriizaka.

Minamiaoyama Parkhouse (Surface Rights) has a 50 year fixed land lease. At the end of the term, apartment owners are required to hand over the property. Because the units must be handed over, the unit owners are not required to pay for demolition. Each unit owner must pay a monthly lease fee of between 6,750~9,730 Yen/Month.

Hiroo Garden Forest (Surface Rights) has a 50 year fixed land lease. The land is owned by the Japanese Red Cross Medical Center. At the end of the lease, the building must be demolished. A demolition fund is set aside for this and should the demolition costs exceed what is available, the unit owners must pay the remainder. Should the funds available exceed the costs, the remainder will be returned to the unit owners. The selling price of the apartments by the developer is made up of the price of the unit plus a compensation fee to the land owner. A unit priced at 89.3 million Yen includes a compensation fee of approximately 70 million Yen for the land owner, with the remainder being the cost of the individual apartment.

Each unit owner must pay monthly land rent, monthly fees towards the demolition fund, as well as an initial upfront payment to the developer (between 3~8 million Yen). This complex is part of the Hiroo Garden Hills complex. The Hiroo Garden Hills apartments are all freehold. The Garden Forest units are brand new, so for the same price as a 25yr old aging apartment in Hiroo Garden Hills, you could have a brand new apartment of a similar size in the Garden Forest development.

Azabudai Parkhouse (Fixed Term Leasehold and Right to Lease) has a 51 year fixed land lease. At the end of the lease, the building must be demolished. Each unit owner must pay monthly land rent (5,582~14,815 Yen), and an initial upfront payment to the developer (2.8~7.4 million Yen).

As the fixed-term leasehold system is relatively new, there have been few, if any, cases of fixed-term land leases being completed yet. Some people are uneasy about what exactly will happen when the land lease comes to an end.