Japan: Capital Growth and Yield

Q : Can My Investment Give me both Cash Flow and Capital Growth? 

A : So, you want the best of both worlds. Most investors familiar with the Japanese property market know that capital growth is highly speculative. While there are growing areas, how long prices will continue to rise is really anyone’s guess. For this reason, investors prefer to focus mainly on cash flow investments. But, there is a method to achieving both cash flow and potential capital growth. First, it’s important to understand that value is in land, not structures because structures in Japan depreciate, while land is the only property component that stands to potentially gain in value. Therefore, owning land and renting out a house would be a better choice over an apartment. The approximate price of a house would be USD $63,000 to $224,000 with monthly income of $412 to $1,246 depending on location and size of the property. A better option would be a small residential or mixed purpose building of three to four floors. Priced from approximately USD $300,000 to $2.5 million, with monthly income of approximately $2,000 to $14,000, you would own the whole land parcel AND generate rental income on multiple units. The next step would be to identify which part of Japan would give you the best yield. Based on the last five years, tier 1 cities like Fukuoka, Osaka, Nagoya and Tokyo have shown compressed yields of between 6% to 7.5% net pre-tax. This is much lower compared to other parts of the country mainly because of the population growth in these cities.

“If you can focus on a small building in a city with higher yield and intend to hold the property for at least five years, you will benefit from potential land value, rental income as well as lower taxes on capital gains.”

 

HOTSPOTS

Fukuoka city has been experiencing the largest organic growth of core families (couples with young children) since 3/11 disasters – earthquake, tsunami and subsequent nuclear spillage at Fukushima, when many families and small businesses relocated to the area. Many believe that Fukuoka is the best city in Japan to raise a family. Known as the gateway to Southeast Asia, Fukuoka is actually closer to Korea, Shanghai and Taiwan than to Tokyo, convenient for international conferences.

Nagoya and Osaka have grown faster than Tokyo on a percentage basis. In some cases, this is due to good governance, in others, a result of conglomeration, designated development areas by the national government, home to new factories, or position as an import/export port.

Therefore, instead of Tier 1 cities, keep your eyes peeled for tier two and three, cities and smaller industrial towns on the verge of growth where property values are on the rise. For example, in the satellite city of Kumamoto, population has grown from 670,348 in 2008 to 734,917 in 2015. That’s a growth of 9.63% compared to Fukuoka’s 3.91%, Kobe 1.31% and Sapporo 1.13% during the same timeframe.

The city’s growth is attributed to one of the largest solar farms in Japan and the world, in operation and attracting business since 2013. Another city to watch out for is Sapporo, a white-collar city, academic with IT and wintry tourism as its main economic drivers. Here you can find yield at 8% net pretax or higher. Since this market is not as hot as Fukuoka and prices have been inching up slower than in other cities, you will find higher yield.

In contrast, you could consider Nagoya, quite industrial, blue-collar, but one of Japan’s biggest cities. Here you will find 8% to 9% interest net pre-tax, occasionally even 10% to 11%. You might also find higher yields in Kyoto, Kawasaki, Yokohama or Yokosuka as well as smaller cities of Kurume, Kobe, Kitakyushu, as well as certain townships in and around Chiba. You might find it harder, however, to source the right property in smaller cities as the turnaround is less frequent.

One final point to keep in mind, gains realized from the net profits of selling short-term real properties (i.e., properties held for less than five years) are taxed at 40%. Net profits of properties held for more than five years will be taxed at 20%.

So, for the best of both worlds, if you can focus on a small building in a city with higher yield and intend to hold the property for at least five years, you will benefit from potential land value, rental income as well as lower taxes on capital gains.

Priti Donnelly is the sales and marketing manager at Nippon Tradings International, a proxy and buyers’ agency representing foreign investors with purchasing, selling and managing real estate in Japan.

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