Investing in Japan Real Estate – Part 6 – Spotting Underrated Hot Spots

05 Dec, 2016 –

Japan Real Estate

Nagoya Terminal

As promised, we’ll now delve deeper into the actual purchase criteria, as far as locations in Japan are concerned, and try to pinpoint a diverse, hedged, profitable strategy, including reasonable risk mitigation.

GUIDELINES AND CAVEATS

Firstly, it is important to note that, while big market players such as investment banks, sovereign funds and various other institutional investors have pegged the last four years of Japanese property price hikes in big cities as a reliable trend – and have indeed positioned themselves accordingly by purchasing prime properties in central locations in Tokyo and Osaka – not everyone shares this speculative view. As discussed previously in our Q&A sessions, Japan is still suffering from some very serious economic issues which have yet to be addressed. The main two issues are the declining birth rate, which leads to Japan being the world’s most rapidly ageing society – and its’ colossal debt to GDP ratio – now well over 200%(!)

And while Prime Minister Shinzo Abe has taken some serious steps aimed at re-introducing healthy inflation, forcibly pushing down the value of the Japanese yen to improve exports, and tackling various monopolies, public funds management problems, declining wages and Japan’s severe lack of entrepreneurship spirit – the future of Japan’s economy, although better than it has been for the last two decades – is still very uncertain, and would depend on further issues requiring urgent attention, such as female inclusion in the workforce and general life satisfaction, increased migration/ racial and cultural diversity, and so forth.

What this means for us as property investors is that, if we are to look at the last three decades as a general benchmark, it would seem prudent to focus on stable, reliable monthly cash-flow as our prime criteria, and consider any potential capital appreciation to be a bonus, or icing on the portfolio cake, rather than banking on it to any significant degree. This is the strategy we have been pursuing in our own personal property portfolios, as well as the ones we have been advocating to our clients as a company.

PrintPORTFOLIO DIVERSITY

Based on the above data and strategy, we would advise to “go against the herd”, and avoid over-heated, internationally renowned locations in Japan, where hordes of foreign investors have been purchasing over the last few years. This means that, aside from some very unique cases, we would normally not recommend properties in central Tokyo, Osaka, Niseko (in the country’s northern ski Mecca of Hokkaido), and Okinawa (location of many of Japan’s US army bases and their personnel).

If we also take into consideration the declining population, it would seem wise to carefully review population figures as well, to ensure a lasting and stable tenant base for years to come.

Going for underrated gems

The above leaves us with two main location profiles in which we find ourselves most profitably and reliably active as investors –

1. “Second tier” metropolitan centres such as Nagoya, Sapporo, Fukuoka, Kawasaki and Yokohama – while returns vary in these locations from 5-12% net pre-tax per annum, some of these cities also offer good capital growth potential. Fukuoka city, for instance, has enjoyed property price rises very similar to Tokyo in the last four years. Sapporo city, which has been rising in price more slowly, still offers very high returns, often in the double digits, which is quite rare in such a large city (Japan’s fourth in size population-wise) – the rest of these locations fall somewhere in between the two – but all of them feature a diverse economy of either blue collar industries (manufacturing, export/ import, logistics and factories, etc), white collar (academic, professional services, tourism, etc) industries or a healthy mix of both.

2. Smaller, or otherwise less known towns and cities which, for some reason or another, also enjoy a stable or growing population and a bustling economy. Some examples include Kumamoto (solar industry), Sagamihara (construction), large ports such as various towns in and around Chiba, Kobe, and regional/ internal tourism centres such as Matsuyama, the largest city in the Shikoku landmass, or Kitakyushu (western Japan’s industrial hub, with a population of close to a million people). The list of these promising smaller townships with growing or stable population, as you can see in the chart here, is quite substantial.

A healthy portfolio mix would consist of approximately 60%-80% “safer” (and slightly lower yielding) properties of the first type, with the rest of the portfolio consisting of more “adventurous” and potentially higher yielding properties of the second type – the actual mix would depend on the investor’s risk appetite, and the composition of their investment portfolio in other countries or market sectors.

This may come as a surprise to some, but in reality, some of Japan’s fastest growing metropolitan centres are virtually unknown – Tokyo, for instance, is not in the top three locations at all – the chart here, updated as of 2010 (new data covering the period up to and including 2015 should be available at some point next year), is taken from Wikipedia’s “Japanese Cities by Population” list, sorted by annual growth percentage, and including only those areas where this number is positive. And while there are some unique cases in which we would invest in a city which doesn’t appear in this list, we would normally not stray too far from it. And there’s really no need to, since, as you can see, this list provides more than enough opportunity for the savvy investor to build a robust, geographically and socio-economically diverse Japanese property investment portfolio.

Happy investing!

(First Published in “Asian Property Review“, Pic – Nagoya Airport / “kinpi3“)

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