Tokyo real estate rebounds
For those who have been waiting for a recovery in the Japanese real estate sector, there is great news. According to a recent article in the Financial Times, Tokyo is once again the most active city in Asia for real estate investment, as of the second quarter of 2012.
Globally, numbers also bode well. According to data from property consulting firm Jones Lang LaSalle, Tokyo ranks fourth in the world for total real estate investment in 2012, after London, Paris, and New York. This is a dramatic jump from the 26th spot last year, reversing four years of stagnation.
According to the Jones Lang LaSalle data, global real estate investment climbed eight percent year-on-year through 2007, peaking at $759 billion that year. The picture abruptly changed in 2008, however, when the figure tumbled 30 percent. A lack of debt financing and shattered investor confidence precipitated this free fall. The US real estate market took the brunt of the losses, while Asia remained more resilient. Even with its relative buoyancy, Asia?s market is still performing below 2007 levels.
Despite attracting 50 percent of Asia?s investment volume, the Japanese market has been mired in a slump for the last four years. Commercial property prices remain at 40 percent below their 2007 peak. The slump has roots in the 1990s. Yet, a glimmer of light can be seen on the horizon.
Seeing the light
Since early 2012, investors have been eagerly snatching up properties in Japan. This renewed vigor coincides with a 25 percent rise in the real estate investment trust (REIT) index of the Tokyo Stock Exchange, a wave of new development and renewed backing from the financial sector. These indicators could mark the start of better times ahead; something foreign investors are starting to notice.
In May, Bloomberg reported that Goldman Sachs, Mitsubishi Estate, Mitsui Fudosan, and Nomura Real Estate Holdings were striving to introduce new private REITs, assuming that Japanese property values had bottomed out. In practice, REITs act as property owners and pay investors dividends on income generated through rent. A second spike in real estate investment activity also came in October. Bloomberg reported that during this period Storm Harbour and Mitsubishi Estate made plans for more than ?21 billion worth of direct investment this year.
A driving force behind this turnaround is an increased flow of financing. Foreign banks remain skittish about real estate financing, but Japanese financial institutions have gradually warmed up to the idea of real estate loans once again. Data from Nomura Research shows a six-fold improvement in the lending attitude toward the real estate industry since 2008. Although this is still far below 2007 levels, this relative bullishness has been a boon to recovery.
Currently, Tokyo is the epicenter of Japan?s recovery. Other metropolitan markets like Osaka are still losing value. Rents in Osaka fetch only about 40 percent of comparable properties in Tokyo. The Financial Times notes, however, that sharp investors should not write off these secondary markets, where investment yields can nearly double those of Tokyo.
Buyer beware
Individual and small investors keen to enter Japan?s property market must heed Japan?s unique opportunities and pitfalls before taking the plunge.
Thankfully, Japanese law provides a well-regulated process for acquiring property. Investors who have purchased property in less accommodating countries breathe a sigh of relief upon hearing this. Japan is also free of the rampant graft that exists in many Asian countries.
On the other hand, the process can be complex and time-consuming. The best piece of advice to any potential investor is this: find a good agent. For foreign investors, it can be most helpful to consult a company geared towards helping foreign investors.
When considering an investment strategy for Japan, the typical approach is purchasing property to rent out. In other economies, such as the US, this usually means purchasing with an eye on appreciation. However, this approach doesn?t gel with the depressed prices of Japan?s market. Seeing capital gains through appreciation could literally take a lifetime. Purchasing and renting a place offers far more potential.
According to a study by Nomura Research, 20 percent of Japanese families are living in privately owned rental apartments, and that number is increasing. The proper purchasing strategy can result in gross rental yields exceeding 10 percent.
In Japan, the majority of a property?s value lies in the land, while the physical building usually accounts for less than 20 percent of its value. And depreciation is rapid and harsh. The building structure will lose 60 percent of its value in 30 years if it is sold at that point, according to data from Akasaka Real Estate.
By contrast, rental rates on a 30-year old building only decrease 30 percent. Given these factors, one of the most profitable investment strategies in the residential sector is to purchase properties near their maximum depreciation point. This will result in the highest rental yield.
A crash course on Tokyo apartments
Tokyo real estate agency Akasaka Real Estate offers potential investors several tips to help maximize return on investment. Here they are in condensed form.
First of all, it is wise to invest in smaller unit properties. Japanese people are increasingly living alone, driving down the demand for larger units. Small apartments like studios or 1LDK units offer the greatest rental potential, as well as a higher rental yield.
Rather than fixating on the glitzy boulevards and upscale enclaves at the center of town, it is a good idea to look outside Tokyo?s center but not beyond the city?s 23 wards. The areas beyond the 23 wards are largely suffering population and price decline. Find units that already have a renter. The obvious advantage of this is that there is no need to find a tenant and rental income rolls in from the very first month.
While single units are the way to go, avoid custom and designer units. Their higher costs will drive away most potential tenants. Standard apartments are most palatable to the largest pool of renters.
When investing in Japanese residential property, Akasaka Real Estate also wans buyers to be wary of issues related to access, zoning, and roads. These factors can severely impact the value of a property.
While larger road frontage can increase value, the widening of an existing road could create zoning problems. It is important to understand the property?s state, and potential future changes that could affect its access and zoning.
Another area to keep an eye on is building and maintenance issues. Every building is going to require a certain amount of maintenance, which comes with a price. It is important to understand the fine print surrounding these costs.
Other factors like the proximity of a red light district or cemetery can also drag down the price of a property, as can the occurrence of a suicide in a specific unit. Another red flag is a leasehold building, which sits on land owned by another party. This situation could induce headaches and hurdles. Not to mention the extra cost of the leasing the land. Leaseholds typically last 20 or 50 years and renew automatically when the term ends.
Foreclosure properties are common in the West. Many pounce at the chance to grab a bargain at a foreclosure auction. However, Akasaka Real Estate recommends investors to avoid purchasing a foreclosure in Japan, citing the long wait required for foreclosure proceedings, the need to evict squatters, and the stigma attached to a foreclosed property which is inherited by the new owner.
For intrepid investors who can follow this advice, all signs in the Japanese real estate market point to buy. It?s hard to say when this window will come again.
Source: http://accjjournal.com/the-comeback-kid/?utm_source=rss&utm_medium=rss&utm_campaign=the-comeback-kid
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