The weak yen and the huge price gap between Japanese properties and other international real estate markets have led investors around the world to shift to the Japanese market, the second-largest real estate market in the world. In this appetizing, fast-paced market, properties are sold within days of the listing. With the upcoming Olympics, real estate in Tokyo is of particular interest. Although the yield is lower than in other parts of Japan, understanding how to make the most of the city’s thriving occupancy rate can pave the way for rewarding opportunities.
1. Olympics and Short-Term Rentals
Booming tourist influx ahead of the 2020 Olympic games and not enough hotels to accommodate the demand has opened the door for the Airbnb type rental business. While this venture can be risky, for some, the profits are worth the risk. For example, a nearby hotel in Tokyo charges ¥18,000 a night per person, whereas a short-term rental owner has been charging ¥10,000 for the first person and ¥2,500 for each additional guest, so five people could theoretically stay there for the price of one person in a hotel. One of his units is a 30 sqm one-room apartment that he purchased for ¥10 million. The market rate for the unit as a rental is ¥80,000 a month, but he rents it out to Airbnb members and makes an average of ¥410,000 a month. After subtracting expenses and loan payments, he enjoys a return on investment of 25% a year. While the return would vary depending on location, the income is still higher than the current high yield market.
While the income has the potential to be more profitable than the long-term lease approach, unfortunately, it is not that simple. Based on the government’s rules and regulations, only large real estate conglomerates managing short-term stay building complexes will dominate the sphere of the short-term stay market, pushing out private operators and smaller companies in Tokyo and the surrounding area. Furthermore, the new legislation gives local municipalities complete discretion on allowing or ceasing short-term rentals at any time for reasons which could be as relatively insignificant as resident complaints in the area.
There are a couple of solutions: One option to get around short-term stay legislation limitations is to own the entire structure—whether it's a house or a small building—and set your lease term to one month or more. As the building owner, you do not need to abide by the building management’s restrictions. The second option is to apply for a hotel license, which has become far cheaper and easier to do since 2016. The minimum requirement is five separate units. The government has relaxed the previous requirement of a manned reception desk.
2. Net Pre-tax Yield
What type of yield can you expect? Across Japan, you can find properties with yield, net pre-tax from 6% to 12% depending on location. Central Tokyo properties are usually 4% to 5% and the outer suburbs at 6.5% at most. Keep in mind, any properties in Tokyo over 6% net pre-tax may have a less attractive feature such as four to five floors without an elevator, or over a 15-minute walk to the nearest train station or bus stop. If you are open to satellite cities such as Kawasaki, Yokohama or the Chiba area (where Narita airport is located), etc. you might find yield closer to 8% to 9% net pre-tax.
Be aware of "net yield' as opposed to “net pre-tax” on Japanese realtor listings. This yield does not include purchase costs (realtor fee, purchase tax, legal and registration fees, buyers’ agent fee or insurance), which can come up to 15% to 20% on top of the purchase price. The yield may also not include the property manager's fee of 5% to 6% of the gross rental income.
3. Sublease
One of the benefits of investing in Tokyo real estate is that the city has far more options for potentially securing a sublease contract than other parts of the country. A sublease provides the benefit of stability and regular rental payments without having to use a property manager or worrying about tenants not paying, although such instances are rare in Japan. If or when the subleasing company doesn't want to renew the lease anymore, or wants to pay less, you can always go back to standard leasing.
4. Diversified Risk
All in all, the Japan property market is a very large, active and healthy market as far as rental cash flow is concerned, and the last few years have also seen prices rising in the top tier locations for the first time in a long while. The market has opportunities to suit individual criteria. To minimize risk and generate the most profit, diversifying your portfolio could include various holdings from 6% in Tokyo to midway in popular satellite cities and 12% in attractive industrial towns.
