You can invest in any major developed country that does not have capital restrictions. Why choose Japan, or specifically, why choose to invest in property in Tokyo?
High Occupancy/Low Vacancy
In Tokyo, there are high occupancy rates and low vacancy rates. This is because the population of Tokyo is growing. In 2001, the population of Tokyo exceeded 12 million for the first time, at 12.06 million. By 2013, it had risen to 13.29 million. In other words, between 2001 and 2013, Tokyo’s population grew by an average of over 100,000 people per year.
Where do these people come from? Some of them move from other parts of Japan (e.g. suburban and countryside areas), often for improved employment prospects. This is because Tokyo has the highest minimum wage and the highest average wage in Japan. The foreign population has also surged (reaching 2.82 million in 2019), and many of them settle in Tokyo.
Because Tokyo’s population is constantly growing, competition for a place to live is very fierce. Therefore, tenants are willing to pay high rents. Such renters are also often willing to pay a month or two (or even more) in key money (礼金, reikin). That way, they can secure a place to live, which they might not be able to do otherwise.
Investing in Property in Tokyo Has a High Yield
The yield when renting out real estate in Japan is substantially higher than it is in several other countries in the region. When one decides to invest in property in Tokyo, it is especially high (5.5% average yield across Tokyo’s 23 Special Wards). You can choose to buy savvy investment properties. For example, buy pre-existing buildings instead of new ones. Then you can make even more than that.
Appreciating Land Prices (When One Chooses to Invest in Tokyo)
Back in the Bubble Era (1986~1991), land prices in Tokyo hit an at-that-time all-time high. It was estimated that the 1-square- kilometres of Imperial Palace ground alone was worth as much as Canada. Additionally, the 620 square kilometres of Tokyo Metropolis were worth as much as the United States. Now, in 2019, land prices in Tokyo are even higher than they were during the height of the bubble. Tokyo is not getting larger, but more people are moving to Tokyo—less supply, more demand. The number of foreign tourists has surged, and businesses have sprung up to accommodate them. As a result, there has been an increase in land prices in Tokyo.
No Capital Controls for Those Who Wish to Invest in Real Estate in Tokyo or Elsewhere in Japan
Capital controls are restrictions on foreigners investing capital into a country. They also cover restrictions on the nationals of a country spending their money overseas, e.g. to invest in a foreign country. Basically the inflow and/or outflow of money is restricted. Developing countries are more likely to have capital controls than developed ones.
Japan removed its capital controls from the 1960s to the 1980s. Therefore, it is now pretty much capital control-free. Trillions of dollars flow into and out of Japan every year. Thus, for example, it was possible for Hon Hai, a Taiwanese company, to buy a controlling stake in Sharp. In addition, Vinci Airports was able to buy Kansai International Airport.
Restrictions in Other Countries
Even after capital has crossed an international border, it might encounter restrictions on ownership of real estate. Several countries have such restrictions. For example, New Zealand no longer permits foreigners (except Australians) to buy pre-existing homes there. The purpose of this new law, which has been in effect since 2018, is to protect the housing supply for New Zealanders. Previously, there was so much FDI into New Zealand from wealthy foreign real estate investors that housing was becoming unaffordable. Australia has similar restrictions in place.
Looking at Asia, in Mainland China, restrictions prevent foreigners from becoming landlords. They may own property for personal use if they have worked or studied in China for at least one year. They also have to go through a complicated process and training program. Even then, they may not rent it out, and ownership of the underlying land is still impossible. In the Philippines, foreigners can only own buildings, not land. Indonesia prohibits foreigners from owning real estate, period. Foreigners there only have the “Right to Use.”
Fortunately for the Investor, Not Japan
Japan, by contrast, has no restrictions on foreigner ownership of land or buildings. Not only can you go the tried-and-tested route and invest in property in Tokyo, you can even buy your own private island here. Countries all over the world are throwing up barriers to entry to their real estate markets. How long will it continue to be the case that, in Japan, one can buy property without restrictions?
Since the mid-1980s, the yen has been in the 100s to the USD most of the time. Sometimes it has been stronger, but never weaker. The yen is considered a “safe haven currency.” Whenever there is an uncertain global situation, investors flock to the yen for its stability. Sometimes the yen becomes very valuable. For example, around 1995 and then again from the late 2000s until the early 2010s, it was stronger than 100 to the dollar. However, sudden drops in its value are rare, and it always recovers.
Imagine buying a real estate investment property in Venezuela ten years ago. Perhaps the ROI was good back then. However, now the currency is worth only a tiny fraction as much as it was ten years ago. That would have disastrous consequences for an investor.
With Japanese real estate, on the other hand, things are different. You do not have to worry about making $10,000 from a property one year, then having Venezuelan-style hyperinflation, extreme currency manipulation, etc. These could make your investment worth 1/10th or even 1/100th as much next year. Japan has a stable currency, minimising the amount of exchange rate-related risk.
Smart Investors from All Over the World Choose Japanese Real Estate Investment
Tokyo is growing and its land prices are increasing. This means that if you invest in property in Tokyo, you will experience a high occupancy rate. This is especially true of the 23 Special Wards. Few units will stay empty for long. Yields are high, around 5.5% on average. Even higher if buying pre-existing property instead of new. Being savvy about how to increase its ROI pays off. For example, you can contract with a reform company for low-cost, high-reward refurbishments. Land prices in Tokyo are now at a level never seen before. Not even during the Bubble Era of the late ‘80s and early ‘90s did they reach this high. The trend is upward, so the land your property sits looks like it will continue to increase in value. This is especially as more foreigners pour into Japan and more Japanese migrate from provincial areas to Tokyo.
As Japan eliminated virtually all capital controls by the ‘80s it is now possible for you to take the income that you earn from investing in Japan and remit it back out, overseas. A stable currency means the rent your tenants pay next year will not be vastly less than this year. These are some of the many reasons why smart investors from all over the world choose Japanese real estate.
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