The Japanese real estate market, especially in Tokyo, offers an extensive variety of potential investment opportunities in both residential and commercial properties. However, navigating between specific requirements in local markets; mitigating potential risks; understanding Japanese property buying rules and procedures, and at the same time making the most out of your investment can be a daunting task.
Having said this, you shouldn’t be discouraged from capitalizing on the numerous investment opportunities to be found across both emerging and older development projects in Japan. And if you persevere, you’ll find that any initial additional barrier to entry is certainly compensated for by the many advantages on offer in one of Asia’s most robust property markets.
Navigating between specific requirements in local markets; mitigating potential risks;
understanding Japanese property buying rules and procedures, and at the same time
making the most out of your investment can be a daunting task.
In this blog, we take on the challenge of creating a comprehensive guide for foreign investors that want to buy a property in Japan, helping you to minimize risk and maximize your potential ROI.
Why Should You Consider Investing in Japanese Real Estate?
In terms of initial advantages for those surveying this property market, there are a few of key factors that make Japan a strong investment destination:
- One of the safest real estate markets in the whole of Asia
- An increasing number of development projects offering a wide variety of investment options
Japan is one of the safest, if not the safest, countries in Asia when it comes to stable real estate investment and property market conditions.
On top of that, the lack of the legal restrictions surrounding foreign ownership of property compared to other Asian regions is another important factor for outside investors choosing Japan as their target.
For more on this topic, you can refer to our in-depth analysis and insights in our recent blog: ‘Real Estate Investing in Japan: Safest in Asia’.
According to the Global Property Guide,
Japan is one of the safest, if not the safest, countries in Asia when it comes to stable real estate investment and property market conditions.
For more background on the Japanese real estate market, its history, and development, please refer to our article: ‘The Heisei Period in Review: How the Japanese Real Estate Market Evolved’.
The Japanese Real Estate Buying Process for Foreign Investors
If you are a foreign investor planning to purchase a commercial or residential property in Japan, there are many factors to consider, including legal procedures, financing, and cultural differences affecting successful real estate investments — whether you’re buying, selling or renting in Japan.
Ensuring that your investment is not only safe and legitimate but also that it achieves a high ROI, requires a combination of specialized market knowledge and careful due diligence. Often the best way to secure both is to assemble a local team of professional real estate advisors.
A broker, loan officer, judicial scrivener, and tax advisor can all contribute to a successful real estate investment process and make the whole property trading experience much simpler.
There are many factors to consider, including legal procedures, financing, and cultural
differences affecting successful real estate investments — whether you’re buying, selling or renting in Japan.
A successful property purchase in Japan typically involves the following stages:
- Build a relationship with a reliable realtor
- Research property investment landscape
- Site viewings
- Decide on desired property assets
- Express your property purchase intent through the relevant channels
- Negotiations and initial payments
- Contract execution
- Final settlement
Contacting a Realtor and Securing Financing
Your first step as a savvy investor should always be to consult a realtor and outline your preferred location, property requirements, budget limitations, and targeted ROI. This will require signing an agreement with a broker, with a typical commission of 3%.
There are many benefits to using professional, local support when investing in Japan. From legal safety, translations, and advice on unique market trends, to property viewing assistance, price advisory and handling the negotiations, having people on the ground who can push forward with your investment goals can make a big difference when competing against other property investors in an incredibly fast-paced market. This is even more important when you’re targeting properties in the luxury segment where supply is lower and demand from foreign investors is consistently high.
Your first step as a savvy investor should always be to consult a realtor
and outline your preferred location, property requirements, budget limitations, and targeted ROI.
An important thing to remember is that if you’re planning to finance your investment with a loan from a Japanese bank, you should start arranging it before you start viewing any specific properties or sites. Japanese banks can unofficially pre-approve your loan request, which can become a very strong bargaining chip later on when negotiating with the property seller.
Site Viewings and Expressing Property Purchase Intent
Before actually viewing any specific property assets, you should understand that property standards differ in Japan when compared to other property markets around the world, especially Western property markets where typical size and quality standards can vary considerably.
It is generally much harder to find big, spacious residential properties over 100m2 with two (or more) bathrooms in Japan than it is in Europe or the US. This is especially true for large metropolitan areas like Tokyo, where less than 1% of newly built apartments are above 100m2 in size. This largely stems from the limited available space in Japan, a population that is constantly growing and an average cost of land that is among the highest in the world. Even properties in the luxury segment that come with multiple bedrooms and bathrooms will be limited in size compared to Western equivalents.
Space is limited in Japan; the population is constantly growing, and the average cost of land is among the highest in the world.
If you’re looking to perform some initial research on the Japanese property market by comparing specific listings on offer before you commit, you can browse all our rental and sales listings on our website.
If you’re further along in your investment journey and have decided on a specific property you would like to invest in, the next stage is to express an official property purchase intent. To do this, you’ll need to submit a formal letter of intent (for pre-owned properties) or an application to purchase (for newly built properties).
The next step is to start the negotiation process. This is crucial for securing a good deal with a healthy investment yield outlook. During this stage, both parties’ draft legal documents; undergo final due diligence and fulfil a number of formal obligations. This is also the moment when having finance secured in the form of an unofficially pre-approved loan from a Japanese bank can be a strong bargaining chip.
Official ‘Explanation of Important Matters Regarding the Property and Transaction’ document for property purchases includes:
- Owner title registration
- Ownership type
- Property legal description
- An outline of legal provisions in case of contract cancellation
As Japan is a very trust-based society, a cash deposit is typically also required at this stage, which can total up to 20% of the property value.
After the deposit is paid, the final settlement takes place at the buyers’ bank and is handled by a judicial scrivener. The transfer of the remaining balance is then paid, and property ownership is officially transferred, concluding your real estate transaction in Japan.
For more information about each of the required steps of the property investment process in Japan, take a look at our blog ‘Buying a House in Japan as an Expat’ or contact us directly for specific advice on your goals and requirements so we can help you build a stress-free and effective investment strategy.
Japanese Real Estate Investment Risks
Despite being regarded as a safe investment haven compared to other Asian real estate markets, Japan has some unique risks and barriers that should be factored into your investment strategy.
Natural Disasters
Earthquakes, tsunamis, and typhoons are a very real threat in Japan. Here are some tips for mitigating the potential damage they could have on your investment:
- Check with your real estate agent if the property you are interested in is located in a tsunami evacuation zone
- Avoid investing in bayfront areas like Odaiba in Tokyo
- If you are investing in Tokyo, refer to the local tsunami hazard map, which each ward in Japan is required to prepare, according to Japanese law
- Buy a property that is built using the most recent earthquake protection standards (ideally featuring steel-reinforced concrete (SRC))
- Keep in mind that holding fire insurance, although not regulated by law, is essential if a mortgage is involved.
To minimize risk even further, and for your own peace of mind, explore Japan’s Earthquake Insurance System from the Japanese Ministry of Finance, which indemnifies against damage caused by fire, destruction, burial or washing away, resulting from an earthquake, volcanic eruption, or tsunami.
Demographic Risk
Japan has the fastest ageing society in the world, which analysts say is contributing to a shrinking population. This factor, combined with national migration trends to large metropolitan areas, results in higher potential vacancy risks in smaller towns and less urbanized prefectures.
However, mitigating this risk is very simple: limit your property investments to big cities like Tokyo, and you shouldn’t have any significant problems finding tenants for your property. This is especially true for 5 central wards in Tokyo (Minato, Shibuya, Shinjuku, Chuo, and Chiyoda), inside the Yamanote Line loop. These areas not only attract thousands of young Japanese people each year drawn by potential opportunities for their professional careers but also a steady number of foreign individuals who decide to move to Japan.
Limit your property investments to big cities like Tokyo, and you shouldn’t have any significant problems finding tenants for your property.
This is especially true for 5 central wards in Tokyo, inside the Yamanote Line loop.
If you would like to dig deeper into the impact that demographics and low vacancy risk might have on your future property investment in Japan, take a look at our recent article that explores how location choice can have a huge impact on your investment: ‘Real Estate in Tokyo: Investing Inside the Yamanote Line Loop’.
Contract Issues
Although rare, there is still the potential that you may face difficulties with contract issues. To avoid this, always make sure you review the ‘Explanation of Important Matters’ document with careful diligence before signing the contract. Having legal advice at a time like this can be incredibly useful. By law, this document must be disclosed to the investor during every real estate transaction in Japan.
Items to carefully review with the help of legal advice:
- Owner title registration
- Ownership type
- Property legal description
- Provisions in the case of contract cancellation
- Reserve funds for repairs and renovations (if applicable)
For additional safety, steer away from leasehold properties, which can come with unclear renewal rules, considerably higher prices, and restrictions on the possible changes you can make to the building. A freehold property that includes the land and building will be a better choice in most cases.
Always make sure you review the ‘Explanation of Important Matters’ document with careful diligence before signing the contract.
By law, this document must be disclosed to the investor during every real estate transaction in Japan.
Old Vs New Japanese Real Estate
There are plenty of opportunities in Japan to invest in both new development projects and the older, often cheaper existing properties — both options have their pros and cons.
New Japanese Real Estate
Not surprisingly, new properties in Japan are much more expensive than used ones. On top of this, the speed of the depreciation process of real estate is much higher than in the US or Europe, due to natural disasters. Residential properties in Japan constructed using concrete are fully depreciated after 47 years, whereas residential properties constructed using timber are fully depreciated after 22 years and are only sold for the value of the land they stand on.
In some parts of central Tokyo, the depreciation of the building’s value can be offset by the increase in land value.
Timber residential properties in Japan are fully depreciated after 22 years and are only sold for the value of the land they stand on.
Old Japanese Real Estate
The most important advantage of investing in an older property is the lower price. This can result in a better return on investment as rental rates on properties both new and old are relatively similar, with used properties naturally being slightly lower.
Making the Most of Your Japanese Real Estate Investment
After understanding why you would want to invest in Japanese property; outlining the full real estate purchase process from the perspective of a foreign investor; evaluating the potential risks, and comparing investment opportunities of old vs new buildings, it’s time to take a look at how to maximize your ROI and potential yields for your property investment in Japan.
Japanese Real Estate Investment Costs
First, you’ll need to understand that there are certain purchase costs in Japan that just can’t be avoided. Understanding what these are will allow you to calculate your total costs and potential ROI more accurately.
Fees
Judicial Scrivener: Usually between JPY 100,000 – 150,000 (dependent on professional service fee charged)
Real Estate Agent’s fees: Property price x 3% + JPY 60,000 + 10% Tax.
Other costs: insurance, house cleaning, etc.
Taxes
Asset Tax: Estimated Value x 1.4% (between transaction date to December 31)
City Tax: Estimated Value x 0.3% (between transaction date to December 31)
Registration Tax: Estimated Value x 2%
Stamp Duty: between JPY 10,000 to 480,000 (dependent on price)
Acquisition Taxes: Land: Estimated Value x 1.5%; Building: Estimated Value x 3%. If a commercial property: Estimated Value x 4%
Notes:
Most taxes are based on the Estimated Value of the property. This is valued by the government every year.
All fees and taxes should be paid at the time of transaction. Although, Acquisition Tax is paid between 3-6 months from the date of transaction.
Above tax rates are for the general case. Deductions are possible on a case-by-case basis, depending on property type and purchase purpose.
Location, Location, Location
The most important factor you have control over as an investor is: property location. As previously mentioned in this article, we highly encourage choosing large metropolitan areas as the destination for your real estate investment. However, this is only a general rule and depending on your investment strategy, opting for locations outside of city centres may offer you the investment characteristics you require.
| Inside central urban areas | Outside central urban areas | |
| Capital Gain | High | Low |
| Capital Gain Timeline | Long | Short |
| New Development Projects | Few | Many |
| Risk of Vacancy | Low | High |
| Property Value | High | Low |
| Property Price | High | Low |
As you can see, choosing properties in Japan’s most developed urban areas presents certain disadvantages, including higher property prices and longer periods of time before a return on investment. On the other hand, central locations offer many new development projects to choose from; a low risk of vacancy; higher property values, and in some cases (especially in the central wards of Tokyo), greater real estate value appreciation conditions compared to the depreciation rates typical for more suburban areas.
Please keep in mind that these are only general guidelines, and proper due diligence is always advised when deciding on particular property investment in Japan. To ensure the best possible ROI and investment safety, the more context, data, and market insight you can get, the better.
If you would like to consult a real estate specialist capable of guiding you through the nuances of the Japanese property market and outlining the best investment opportunities available today, contact one of our agents who can provide tailored advice and support depending on your requirements.
Japanese Real Estate Rental Yields
Gross rental yields (the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs) in the Tokyo metropolitan area range from 3.4% to 5.4% — with yields getting higher as apartments get smaller.
When it comes to purchasing, compared to other global cities, Tokyo prices per square meter are not as expensive as for example New York, but still considerably high, ranging from $8,700 to $13,800. This appreciation trend is likely to go on for many years to come, with many people attributing this to Abenomics: the political and economic system of Japan under the current prime minister Shinzo Abe, who consistently injects money into the financial system, resulting in lower interest rates and increasing asset prices, including within the Japanese real estate sector.
Gross rental yields in the Tokyo metropolitan area range from 3.4% to 5.4% — with yields getting higher as apartments get smaller.
Property Management
For peace of mind, the ability to outsource management, and the chance of securing a stable cash flow within a unique property market, a good property management service is crucial. Here are some of our tips for finding the best professionals and services in the property management field in Japan:
- Only choose licensed, official property managers. Unlike real estate brokers, property managers in Japan are not required to be licensed; however, having a nationally recognized license can be a good measure of professional experience and knowledge.
- Always make sure your property manager is able to help you save time by offering you a high level of insight into specific property segments and handling logistical tasks like property viewings and negotiations on your behalf.
- Check if your property manager will be able to transfer your rental revenue to an overseas bank account.
- Make sure that regular reporting on revenue flow and ROI is included in their services.
Following this checklist, you should be able to significantly increase your chances of finding a reliable property manager in Japan that will help you save time, money, and reduce your stress during the investment process. You can find more information on this topic in our article: ‘Tokyo Property Management Guide’.
Key Takeaways
Japan, being one of the biggest and most institutionalized real estate markets in the world, offers safe property investment opportunities with good ROI. By following this guide and making smart choices, you should be able to increase your ability to profit from this highly lucrative investment market.
By committing to diligent market research; collaborating with experienced realtors and property managers; wisely choosing your investment locations, and minimizing typical property investment risks, every investor has the potential to capitalize on the Japanese real estate market.
Source:
