How to Find Under-Priced Japanese Assets

Beyond Tokyo, Kyoto and Osaka

With Tokyo & Osaka approaching their pre-1990’s property bubble peak, and yields in other investment hot-spots such as Fukuoka, Kyoto and Nagoya also gaining in price and becoming more compressed, opportunity-seeking investors are on the lookout for smaller cities that may still provide higher, yet stable and reliable rental returns.

However, in a country as insular as Japan, where cities other than those already frequented by international visitors remain veiled in language and cultural isolation, the quest for attractive investment destinations can be difficult.

Population Figures & Industry Profiles

From our own perspective, as buyers’ agents and portfolio managers, who are not only looking for quick sales and profits as realtors do – but will also be required to handle client portfolios post-settlement – there are two main factors to consider in this search –

1. Is the population growing?

With Japan being the developed world’s poster child for population decline, it’s crucial for us to ensure that the cities our investors are pouring capital into will be there in the long term – we would want to avoid at all costs recommending investment properties in dying townships that are going to disappear over the course of the next few decades – which means that, in the years leading into their disappearance, tenants would be increasingly harder to find and place in these properties.

2. How robust is the economy?

One-horse-towns with a single industry, as successful as they may be, are always vulnerable to disruption. Tourism hot-spots lose their appeal, traditional crafts or culinary expertise become redundant with technological advancements, agricultural richness dies off with climate changes, and mega-corporations move their factories, employing thousands, to more profitable locations. For this reason, we always want to ensure sustainability and diversity of local employment opportunities – which means there has to be more than one single successful industry operating in our chosen investment destination.

Case Study – Kumamoto City Residential Property

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City Fundamentals

Kumamoto city is a perfect example of all of the above criteria – it’s a medium sized city, with roughly 740,000 population – less than half of it’s nearest metropolitan centre to the North – the far more well known Fukuoka city, which is Western Japan’s unofficial capital and it’s gateway to South-East Asia – but Kumamoto city, as well, is slowly but steadily growing in size. It is also the hub city for Southern Kyushu’s extremely popular onsens (natural volcanic hot spring resorts) and the small townships and villages which cater to the multitude of tourists, both domestic and international, who frequent these resorts.

Aside from tourism, the city is also a regional centre for the manufacturing of electronics and semi-conductors – there are also two mega-solar farms a short distance from the city, one in Kumamoto prefecture itself, and the other in Ooita prefecture, a short drive away – and lastly, being the prefectural capital in a largely agricultural landscape, the city also provides much of Kyushu’s fresh produce – as well as a respectable amount of domestic agricultural offerings to the rest of the country.

Perhaps most significantly, Kumamoto city is virtually unknown to foreign investors – which means property prices, while slightly rising in recent years, along with the growth of the city’s international tourism notorierity, are still very low in comparison with most major cities – which makes for far higher rental yields.

Deal Sample & Analysis

Our clients have been very active in Kumamoto city over the past 6 years, and the most popular asset classes, as in most other locations in Japan, are older, smaller residential units geared towards singles and/or widowed/unmarried pensioners and retirees – as well as small residential or mixed-purpose building blocks of up to 3 floors and 15-20 units in size – both asset profiles that are significantly easier to populate in Japan, and can easily be converted into short term, monthly rental units – a practice which can substantially increase income, particularly during Autumn and Winter, when the hot spring resorts are most popular.

As an example, consider the following property –

* 20 sqm studio unit, listed for sale at 2.1 mil JPY (app. 19,000 USD).

* Rental net income of 17,000 JPY per month (app. 155 USD) net (including all known/fixed monthly costs).

* Annual yield slightly under 10% net pre-tax – can be further increased upon vacancy via leasing to government-supported welfare recipients, who receive a rental allowance of 31,000 JPY – higher than the current tenant’s payment of 25,000 JPY (gross rental income) per month.

* Built in 1985 – up to the latest earthquake-resistant building standards for reinforced concrete structures.

* Laundry bay installed (water supply, drainage, raised platform) – more attractive for potential tenants – particularly single females, who are reluctant to use public laundromats.

* Currently leased by a commercial tenant, a local construction company, which is using the property as employee residence (known in Japan as “company dorm”) – more stable and reliable tenant profile, compared with individual residential tenants – also longer tenancy term potential.

* Building’s renovation history is excellent – all big ticket items (exterior, roof, elevators) done in the last decade – which means the building’s reserve funds pool should be sufficient for all upcoming renovations and repairs required, and monthly building fees are unlikely to be raised significantly in the near future.

* 5 minute walk to nearest tram station (the city’s most comprehensive public transport method – Kumamoto’s train system is rather limited).

Portfolio Considerations

The client who has purchased this particular property already has two others, purchased in the few years leading to this one – both in larger and more central metropolitan locations around the country – one in Yokohama (Japan’s 2nd largest city, in close proximity to Tokyo) and the other in Fukuoka city, to the north – both yielding under 7% net pre-tax – which meant that the property above, which constitutes less than 20% of his current portfolio’s capital allocation – makes perfect sense, as it balances well, being a higher cashflow/lower capital growth potential property, with a slightly higher risk factor due to the smaller size and more industrial/blue-collar profile of the city itself.

(Source: Nippon Tradings International | Pic: “Ziv Nakajima-Magen“)

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