“The Tenant is King” – Japan Real Estate Guide (2)

Short answer – don't invest in Japan for capital growth or preservation – it's a pure cash-flow investment.

Long answer –

1) capital value – Personally, I don't think you should count on capital appreciation or preservation anywhere you buy, as it's pure speculation, particularly in the last five years. Example – my "smack-dead-middle-of-dream-suburbia" Melbourne property, which I've just sold, a property which used to gain 10-15% cap value in good years – has made an average of 3.4% in the last five years (not bad considering conditions actually) – and Australia's supposed to be one of the best places in the world, CG-wise!
Give me 10-15% reliable cash-flow over the CG casino philosophy any day of the week.

2) tenant base – We invest in areas where population trends tend to differ to the rest of Japan. This year, for example, we've been dealing mainly in Kyushu, focusing mainly on Fukuoka prefecture and Fukuoka city – an area where core family population figures (couples plus young children) are actually rising, in stark contrast to the rest of Japan. The two main factors affecting this unusual trend are substantial private and commercial migrations from Tokyo (those who can afford to wish to distance themselves and their operations from Fukushima), as well as increasing business interest from China and Korea (who are in closest proximity to Kyushu, in South-West Japan). More business means more employees, which in turn means more tenants (particularly for the types of units we normally recommend, single/core-family sized studios and 1-bedders). If that's not enough, it's my honest and firm belief that vacancy rates in Japan, when compared on a case by case basis to other countries, are hugely skewered, as Japanese don't like to allow government (eq. of section 8 or housing) tenants – we have no problem with these, as we don't suffer from the Japanese stigma – and from experience, these folk find it very hard to get housing as owners shun them (and they're normally just sick, disabled or elderly, nothing like the types of people you'd get in housing or section 8 in Aus or the USA). Add to that the fact that the average Japanese tenant tends to stay in one place far longer than its Western counterpart, and you'll begin to realize why our tenant base if very far from depleting.
Last but not least, Japanese authorities are actually considering an overhaul in migration laws to allow incoming migrants to boost population and work force – this has already started (major laws changed several months ago), and there's probably more to come, in the explicit purpose of battling this shrinking population issue.

3) stable income – as a result of the above, coupled with the fact that the Japanese yen is one of the world's more stable currencies, we don't really give a stuff about capital growth/shrinkage/levelling – the income continues to flow and be attractive, as the yen is not likely to "crash and burn" anytime in the forseeable future – if anything, it takes great efforts to keep it from rising, if the last year is anything to go by – and this is in the midst of the GFC, and with the country still battling devastation from last year's earthquake, tsunami and subsequent nuclear spillage.

All of the above is written to demonstrate why we don't rely or care about capital value – the cash-flow is that good and that reliable.

Regardless of all that, it seems that for the first time in two decades, there may actually be some capital growth in Japan as well – while, again, we DO NOT speculate and DO NOT recommend translating this kind of 2 quarter trend into an "investment strategy", it seems like the "big boys" are fairly confident in their capital growth potential, as this (partial) selection of business news from the last year will demonstrate – 

Goodman group/Macquerie – "High Hopes for Jap assets" – http://www.theaustralian.com.au/business/australian-listed-companies-have-high-hopes-for-japanese-assets/story-e6frg8zx-1226021389618

China/Singapore JV – $1.6 Bil – http://online.wsj.com/article/SB10001424052970204791104577108230835329396.html

Deutsche Bank Group – "2012 – the start of the J-REIT decade" – http://www.nippontradings.com/japan-real-estate/deutsche-bank-2012-the-jreits-next-decade/

Fortress Holdings – $1 Bil – http://www.bloomberg.com/news/2012-06-27/fortress-said-to-target-1-billion-for-japan-property-fund-1-.html

Goldman Sachs – $3.4 Bil – http://www.businessweek.com/news/2012-07-01/goldman-aims-to-expand-reit-to-300-billion-yen-as-market-bottoms

Angelo Gordon – undisclosed sum allocated for Jap expansion – http://www.businessweek.com/news/2012-07-16/angelo-gordon-seeks-more-japanese-properties-eyeing-recovery

There's heaps more, but I've probably bored you enough by now. ))

The fallout map's becoming clearer and clearer as months pass (not thanks to the government, but rather thanks to international groups and concerned citizens) – but we're with you there, we started our investments in the furthest-most regions from the accident location (south-west, over 1,300 kms from Fukushima) – and do not progress further east until we're absolutely certain there are no hot-spots or other similar problems.

Having said that, the Japanese aren't going anywhere – they continue to live in Japan (even in close proximity to Fukushima, which is beyond me), and they're your tenants, not international business-folk or tourists. As sad as it may sound, the vast majority of tenants (particularly for the type of older, smaller units we normally source) can't afford to leave the country and, being Japanese, the vast majority doesn't even consider this an option – their "Shoganai" mentality (translated as something similar to "ce-la-vi", or "oh, well, what can you do") premates everything, including their response to the nuclear accident. Unfortunate for the younger generations, I hope this changes – but quite fortunate and lucrative for the foreign investor as a result.

For general information, the last documented hotspot found (and this is back in March) is at the Eastern border of Nagano, somehwere around the middle of the country – and hundreds of kilometers from anywhere we'd recommend purchasing (not that purchasing in Tokyo seems to bother anyone, if those links above are anything to judge by).

And here's another analyst's (ex-credit rating chief) opinion regarding the economy there, regardless of property prices –

http://www.businessweek.com/news/2012-07-26/fading-account-surplus-to-end-japan-deflation-mikuni-says

Yes, it's remarkable how small the units are, even for entire families. People very proudly show off their "huge" 50 sqm units to visiting friends and family, and rightfully so- they cost them a fortune

On the upside, it's amazing to see how well designed and brilliantly equipped these little holes in walls are. Seamless storage spaces appear at the push of a button or the pull of a lever, electric, telephone and cable outlets are ingeniously concealed out of sight, but in perfect locations and convenience, and clothes lines, extension cords and even entire beds disappear into the walls every morning. The famous "capsule hotels", where businessmen loved to bunk when away from home are prime examples.