You have either invested in real estate already, or you know somebody that has. Unless those investments were made in Japan, then forget everything that you think you know- it’ll make things a lot easier to digest and you’ll get up to speed quicker. Japan is a very special market in which to invest, as from the ground up, things are a little different….
You Are Unlikely To Make Capital Gains
That’s right. It is highly unlikely that you will be participating in the conversation’s of your friends who invested in San Francisco in 2009 or Mumbai in 2010 and managed to sell their properties for twice their acquisition price a few years later. The value of your Japanese real estate investment, for most of us, will lose value on a yearly basis. Investment alarm bells ringing?
Not exactly. Because of the way the Japanese tax system works, a real estate investment is looked at in two parts; the land and the building itself. The land retains its value over time for the purpose of tax. The building itself has a predetermined “lifespan” over which it loses a portion of its taxable value on an annual basis- until it reaches the end of its lifespan and it becomes…worthless.
Does that mean that if you were to sell it on the market at that time, the market price would be zero? No. It would still have a market value. The taxable value and the market value are two different things. The market value of the building would however be less than you paid for it. It is possible that the value of the land has appreciated during the holding period, but if this is the case it will be the result of either:
a) Urban planning or development in the area which has increased official land valuations
b) Inflation. Because historically, the rise in real estate prices is tied to inflation
Accordingly, if you think that you can buy an apartment in Japan, hold onto it for a few years, and then sell it for more than you paid for it, you are probably mistaken.
So why do people invest in Japanese Real Estate…?
Yields To Take To The Bank
Japan has one of the strongest real estate markets in the world. In fact, it is second only to the United States in transaction size (which does not account for the difference in the size of the two countries…). Foreign people can own real estate without restriction, irrespective of the type of real estate, and have the same ownership rights as a Japanese person. Owners do not even have to live in Japan (some investors buy ‘off-plan’ before they have even visited). Japan’s unemployment rate is at a 24 year low of 2.4%. Japan has the highest number of “middle-class” people in the developed world and is a model for economic prosperity, despite its small size relative to other economic giants like the US and UK. As of April 2018 there are 1.59 jobs for each and every applicant in the Japanese job market. Rental yields are robust and reliable. Japanese house renters have some of the lowest rent delinquency rates in the world (largely based on cultural differences to the West where it comes to respect of property…), and all renters are routinely made to enroll in renters insurance (which they pay for themselves!) which means that the landlord gets paid, no matter what.
Its important to note that “High yields” stop being high yields at the end of the year if you have periods of vacancy or rent delinquency and no rents are being paid. Not only do Japanese property investments have similar, and sometimes higher yields than other properties in other developed markets, they are more reliable, and will always be so due to the structure of the Japanese market and its legal system.
Tax Efficient Real Estate Investing
So you know that Japan is the “income stock” of the real estate investment world, and not the “growth stock”, and that’s just fine. Things do get more interesting if you dig down further and consider that your ‘total return’ on investment is that realised after tax, and if you are able to pay less tax, you net a higher return. Now, Japan is not a tax-haven- you still have to pay taxes. However, Japan likes real estate investments. Our income stock might be able to produce some alpha…
As mentioned above, that “annual loss of value” on the building part of your investment can be declared by investors on an annual basis as a “loss” or expense, along with any and all other expenses related to their investment (management, consulting, repairs, travel to and from.., commissions, registration fees etc.). This total is then offset against your total rental income in your annual tax adjustment. The result- a tax refund from the tax-man in March. For those who have high incomes and pay a lot in income tax, it is possible to set-up tax-sensitive real estate investments which secure tax rebates for up to 50% of their annual taxes for four consecutive years after purchase. That doesn’t happen in San Francisco…
– Japanese Ministry Of Health, Labor and Welfare Annual Statistics Handbook
– Japanese Ministry Of Internal Affairs and Communications
– Prudential Real Estate Investors A Bird’s Eye View of Global Real Estate Markets
– Japan Institute For Labor and Policy Training Employment Stats 2018