Why do people buy low-yielding properties?
Here at Nippon Tradings International we deal with a variety of enquiries from clients looking to buy property in Japan and about half of these clients are interested in investment properties. In most cases, these clients, who are looking to invest between 5 and 100 million JPY, will be buying rental properties that provide a source of income (referred to as Owner-Change Bukken/オーナーチェンジ物件) in Japan. At the lower end, between JPY 5 million and JPY 15 million, we would normally be looking at a one-bedroom apartment for single tenants, as this is what is available in this price range in the larger cities. While prices and yields obviously depend on the area, we usually look for properties that are within 10 minutes or less of the nearest train station (up to 1.3km or so), under 30 years old in the case of concrete properties, under 20 years old in the case of wooden properties.
But how have Japanese people fared with such investments? Some have done very well, but certainly not all. Such investments in central Tokyo have low yields, and tenants obviously move out occasionally, leading to a property being vacant for at least a few months, generating no income during the vacancy. So why do people make such investments? For today’s column, we look at the experience of a young property investor in his 30s, with 10 years’ experience in property, but more successful than most with that much experience.
– Here are the characteristics of the property he bought:
– 60m2 family apartment, built 10 years ago
– About 15 million JPY
– Coupon yield of 6.5%, but actual yield of less than 2.5% when all the figures and costs are calculated
This investor, who is not just any investor, but has vast amount of experience writing on real estate under the online moniker Pooh-san, says that he has bought higher yielding properties before, but in the case of the current property, the aim is to sell it at a higher price when it becomes vacant. The protagonist in this story has used financing for the property, but states that he would have bought the property even if he had had to pay cash (as many of NTI’s clients do).
Rental income is not the only way to invest in property. Within Tokyo, property prices are still rising and, if necessary, units can easily be renovated to make them even more valuable for resale if a new tenant is not found first (or if no effort is made to find a new tenant). However, against this backdrop, many properties are being sold by cash-strapped owners who have not fully recovered from the effects of the COVID years, resulting in many good deals in the Owner-Change market.
The same property is bought for investment purposes (i.e., investment income despite the low yield), but can later be sold because of the actual demand for the property in the market, not for investment purposes. There is a distortion between the property in the buyer’s market for rental property, which generates income, and the market for the property itself, which does not generate income. Especially because the property in question is a family-sized property (60m2), it can also be sold to owner-occupiers, in which case its sales price wouldn’t depend on the rental income it can generate, rather on the market trends in that particular city – while investment properties (studios, 1-bedroom units) are priced based on their rental yield.
Japan is not known as a ‘buy-and-flip’ market, but in the case of properties like the above, buying and flipping becomes one very realistic strategy to keep in case the tenant leaves, and even with the hope that the tenant leaves at some point. Of course, with Japan’s strong tenant protection laws, it will be the tenant’s will that plays a large part here.
But still, why invest your hard-earned (or borrowed) money in such investment properties when you cannot be sure which way the market will go, or even the tenant in your property? One is for reasons of speed. High yield properties often move very quickly, making it difficult for all but the most well-connected buyers with cash on hand or a ready line of credit to make the move and get the property, especially in Japan’s very efficient markets (this efficiency applies both to the efficient market hypothesis and to the efficiency at which properties move). But low-yielding properties tend to stay on the market longer and are sometimes bought by people with a strategy in mind, like Pooh-san above.
If you are only buying a single property, the above strategy may not be what you want to implement, but in the case of buying several properties, or a single property with an eye to more in the future, the above strategy of buying a property with a lower yield may be a way of entering the market in a more sensible way, knowing that either a safe, albeit low-yielding, investment, or perhaps a future sale with high capital gains, may easily manifest itself. When looking at the change of ownership market, it would be wise to look carefully at the secondhand market in the area for properties that are not change of ownership.
If you have further questions on NTI’s services, including for investment properties and points to keep in mind before investing, feel free to get in touch by email.