Ebook 2

Ziv Nakajima-Magen
Japan Real Estate

Property Investment
For Foreigners
Part 2
The practical, hands-on stuff: locations & city guides, deal
analysis break-downs, case studies, Q&A, common mis-
conceptions
Introduction – What is this Book About? 3
Q & A: Japan’s Debt & Demographics Issues 4
Q & A: Earthquakes & Other Natural Disasters 6
Q & A: Japan’s Abandoned Homes 8
Q & A: Financing Options & Guest-Houses 10
Q & A: How to Screen Tenants? 12
Where to Buy? 14
Distance from Stations 19
Commercial & Retail Properties 25
Deal Analysis: Kawasaki Condo 24
Deal Analysis: Kyoto Condo 27
Deal Analysis: Fukuoka Office 30
Deal Analysis: Sapporo House 33
Deal Analysis: Residential Building 36
Tech Innovation in Japan’s RE Market 39
Summary 43
2 Japan RE Property Investment for Foreigners – Part 2

Firstly, it’s important to note that this is the second book in our series of
guides to Japan’s real-estate property investment market. While it can
definitely be read on its own, it skips the general introduction to the
market, the pros and cons, unique advantages and challenges, and
general processes that are involved in it – and instead delves into more
detailed explanations, Q&A, deal and location analysis, and so forth. For
a more general introduction to the world’s second biggest property
investment market, please feel free to download the first part in this
series, here.
So what IS included in this book? Well, the nitty-gritty stuff. Things that first time investors to Japan are
normally concerned about before taking their first step, challenges that seasoned investors face on a regular
basis and the ways to tackle those, different types of properties and the advantages and disadvantages that
come with them – and, of course, plenty of numbers to crunch!
We’ll also look at particular locations that suit

various investment criteria, creative
techniques that you can use to deal with
some common hurdles that you may run
across from time to time.
In the next book in this series, we’ll get a bit

more speculative as to what the future may
hold in store – market trends, expert opinions
and projections, more technological
advancements and road-maps for potential
longer term plays.
Sounds like fun? Well, let’s get right down to it!
Japan RE Property Investment for Foreigners – Part 2 3

Q: It’s no secret that Japan is struggling with the impact of ageing
demographics – in fact, it’s the world’s fastest ageing major economy -
and also, as of 2019, operates at extremely high sovereign debt levels –
both of which limit its long-term GDP growth potential to around 1 per
cent per year. Long-term, there are many who wonder how this can
sustain the property market.
A: These two painful topics are the subject of prolonged debate and financial wagers over the last 20
years or so– and are probably far too complicated to address in this context – but let’s give it a try nonetheless.
While they are both certainly worrying issues, the fact is, both of these situations haven’t changed
drastically over the past two decades - and while other economies would be, and indeed have been showing
signs of serious economic malaise when faced with such grim statistics – Japan has been pulling through
admirably, managing to maintain a bustling and healthy consumer market, and remain the world’s third largest
economy in the process – this despite being only 10th in size population-wise!
The reasons for this paradox range from mindset/mentality – the Japanese do not “take to the streets,” embark
on bank rushes or feature any tendency for civil unrest – and all the way to economic factors such as the self-
contained nature of this debt, which is held internally in its vast majority (as opposed to other comparable debt
structures elsewhere). Domestic debt, in a country which is still very much in “modern feudal” mode -
characterised by little, if any, active anti-establishment active - means that the chances of any of these creditors
attempting to make good on what the government owes them, even in case of default, is a very low risk factor.
Additionally, the government can, in theory, continue to compensate with additional easing measures, as long
as these are performed in a balanced fashion – read some of Paul Krugman and George Soros’ comments on
this subject, both experts who can explain this theory far better than this publication will ever be able to do. In
financial circles, the practice of betting on a collapse of Japan’s government bond market has been labelled “the
widow maker” for the better part of the last two decades - and for good reason – many speculators have lost
massive fortunes doing just that.

NTI (Nippon Tradings
International) is a proxy and
buyers’ agency, representing
investors purchasing real-
estate in Japan.
From the initial needs

identification and property
search and refinement,
This is not meant to make light of these problems, by any means – through negotiation,
the solution is widely believed to lie in two complementing policy ownership transfer and
changes, both of which will assist in addressing these problems.
payment, and onwards to
The first is a significant increase in immigration, which would
rent management, portfolio
inject a much needed youth factor, and create an increase in the working
population, as well as in birth rates. expansion & exit strategies –
The second policy change is the increased inclusion of women in NTI is a one-stop-shop, and
the workforce – which could practically double Japan’s available GDP
your gateway to Japanese
production capacity, if tapped. And, while Japan’s prime minister as of
realty – whether you’re
2019, Shinzo Abe, comes from a generally nationalistic, ethnocentric
background, and therefore seems to be finding both of these issues interested in a single, high
difficult to tackle – his grasp of economic realities seems to be forcing income producing unit, or in
him to “see the light” in this respect - as he has on so many other
building and maintaining a
challenges facing the country, such as public fund management,
diverse portfolio in the land
dismantling of government subsidiaries and historical inefficient trade
and import/export monopolies, etc – only time will tell. of the rising sun.
However, both the problems and proposed solutions are extremely long-term views, as will their effect
on the economy and, subsequently, the property market. Meanwhile, as the population decreases and smaller
townships conglomerate into bigger metropolitan centres, Japan’s bigger cities have been enjoying a rise in
both population and property prices, and will most likely continue to do so, at least until the year 2030-2035,
even if population trends remain stagnant. In the short-term, however, and on a cash-flow basis, the most
important factor to consider in this discussion is this – Japan’s property market is, by and large, not a capital-
growth oriented endeavour, regardless of its performance over the last few years. If one is seeking speculation
and growth-oriented strategies, there are far better places in the world to consider purchasing in (Australia, UK,
Singapore and some of Asia’s emerging economies come to mind).
Japan is, however, one of the top destinations in the developed world for high rental yields in a stable,
regulated and reliable environment – and will remain so for years to come. Add to that equation the fact that,
aside from two or three cities, the vast majority of Japan’s metropolitan centres and completely untapped, from
the Western investor’s standpoint – and you’ll begin to see why so many are more than happy to be invested
here, regardless of any property prices, GDP or government bond market trends.

Q: Japan is extremely susceptible to natural disasters such as
earthquakes, tsunamis and volcanoes. Are all buildings in Japan
earthquake-resistant and are all buildings covered by natural disaster
insurance? How do these disasters affect the property market in Japan?
A: The short answer to the first question is - yes, all structures in Japan are earthquake-resistant and all
buildings are covered by natural disaster insurance policies. The levels of protection, however, vary as follows:
1) Generally speaking, reinforced concrete buildings are of course far more resistant than
wooden structures. Japan generally does not use bricks and mortar as building materials, and so most houses
(as opposed to apartment blocks) are wooden-based structures. And, while said wooden structures have also
gone through some earthquake resistance standards re-vamps, such as ensuring reinforced concrete
foundations and pre-built ground/foundation compatibility tests, to name but a few — they are still far more
susceptible to earthquake damages.
2) Reinforced concrete buildings have

gone through several cycles of earthquake resistant
building standards renovations, the latest of which
have been introduced in 1981. Stricter testing
methodologies for reinforced concrete buildings have
been introduced in 2006 as well.
3) Natural disasters are included in

the vast majority of insurance policies (which are
ridiculously cheap in Japan, incidentally) — tsunamis
are not covered specifically, but since they are always
caused by deep sea earthquakes, therefore are
covered indirectly. The level of coverage varies, but is
normally up to 50-60% of the value of the property at
most.
4) Individual unit owners in co-owned

buildings are also covered by the building’s reserve
funds pool (known in other countries as the sink fund
pool) which is used to repair any and all structural
damages to the building and its common areas.
5) Last but not least, in cases where all of the above do not apply for any reason, government
compensation will be provided—although this may take a far longer time than any of the compensation
methods listed above.

As for the effects on the property market -
Japan’s property market is, sadly, well versed in
natural disaster, as are its insurers and property
holders. From that particular aspect, and for
individual property owners, it’s business as usual, and
no effect overall.
From a more local perspective, a singular

earthquake or even a series of closely occurring
earthquakes and aftershocks would not cause any
serious dent in market fundamentals.
To take one location as an example –

Kumamoto city, where a strong and deadly
earthquake occurred in 2016, was, and will most likely
remain a very attractive market with a growing
population and economy, drawing interest from
investors world-wide, and with prices still rising.
It also boasts socially aware local governance
which supports its ageing population in a much better
fashion than many of Japan’s municipalities, and some
interesting industries to watch out for – not the least
of which is one of the world’s largest mega-solar
farms, built in rural Kumamoto prefecture and
drawing many employees and businesses to the area.
If this were to become a repeated occurrence of some concern, with the area officially declared more earthquake-
prone than others, it would most likely have a deeper localized effect on its property market as well.
Having said that, Tokyo, which is one of the most earthquake-prone areas in the country, and where scientists have
all but assured that a major and devastating earthquake is slotted to occur anytime by 2050 at the latest, does not seem
to be suffering from any such downturn – which perhaps reflects on the confidence in Japan insurance companies –
perhaps on human short-sightedness – or perhaps a combination of both.

Q: There is talk of a large number of properties that have been
abandoned in rural areas due to non-occupation, as the aged pass away
and the young move to larger metropolitan centres. Is the government
doing something about it before it affects property prices?
A: the empty houses issue needs to be looked at in the correct perspective. Firstly, it's not only in rural
areas that these properties have been abandoned, but all over the country, including Tokyo and other big cities.
The main reason for this phenomena is not, however, the declining population (more on that in chapter 1,
above), but the fact that the vast majority of Japanese prefer to live in modern, serviced apartments or, as they
are called here, "Mansions". This enables them to live in the city centres, as opposed to the suburbs or smaller
towns, which require a long commute to work and back - and also saves them the need to pay the high tax
associated with land ownership, as well as the maintenance and renovation costs associated with house
ownership, in a country which tends to use light and quickly degrading building materials for most houses.
Furthermore, the fact that the average Japanese family these days has just barely over one
child, statistically, with many remaining single or childless until the day they die, means that the pre- and post-
war large family homes – houses that have been built in times when families used to live and work together
under the same roof, care for the elderly in the same house, and have a high number of children – have become
mostly obsolete. And so, the younger generation prefers to leave these old homes to rot, rather than pay the
costs involved in demolishing, re-building or renovating them.

When the land portion on which these homes
are built is compliant with the minimum legal limit for
new construction, new homes or small apartment
blocks are often built on them, usually by developers
who are more than happy to take these old properties
and the land off the descendants' hands - but in many
`Qaz cases modern legislation does not allow for re-

construction, and these old lots are either left as they
are, or occasionally purchased and turned into parking
lots. This, however, has virtually no effect on property
prices and/or vacancy rates, except statistically.
Property prices in the heart of the big cities continue
to rise (in Tokyo and Fukuoka cities more than in
other metropolitan centres), due to increased interest
in Japan's property market and an improvement in its
economy since 2012.
Regardless, however, and as previously

discussed - Japan's declining population is a matter
which does need to be addressed - not due to any
fear of its effects on property prices, but more due to
the unsustainable burden this phenomena places on
the diminishing younger generation. And while
domestic robotics, a booming industry in which Japan
is a world leader, offers some mitigation of this
problem, it is only a partial solution.
The real solution was, is and continues to be two-fold, as mentioned: an increase in immigration, which Japan is
seriously considering for the first time in decades - and a drastic improvement in female work force participation and all
decision making processes, both in the public and private sectors.
Other, more subtle issues, are social skills improvement, which is drastically lacking in a country which has placed huge
emphasis on team and community contribution, sadly neglecting individual happiness & satisfaction – as well as a fear of
change and risk aversion.
PM Shinzo Abe has appointed several task forces and committees to these issues, and has placed female work force
participation at the heart of his economic policies, which at this point in time seem to be having a positive effect - perhaps
THE most positive historically.
From a property investment perspective, and until this problem is resolved, however, which could take a few more
decades at the very least - singles' studio and 1-2 bedroom apartments and apartment buildings for small families remain the
investment class of choice - as rural townships continue to conglomerate into the larger metropolitan centres.

Q: As a non-resident of Japan, can I buy any property in Japan without
restrictions? I am thinking of buying a 200-year-old residential landed
property in the outskirts of Tokyo for my own stay purposes, and maybe
as a guesthouse as well. Am I entitled to get a loan from a Japanese
financial institution? If yes, what is a typical loan margin and tenure?
What kind of interest rate can I expect?
A: Some heritage properties in Japan are indeed culturally protected, and cannot be sold to non-
residents (in fact, not even to resident non-Japanese, and even Japanese nationals must commit not to make
any significant changes to them). Kyoto city, for instance, has a large proportion of such properties – and
considering the age of the building in the example above, it would be wise to check in advance, regardless of
the seller's agreement to part with the property - to avoid disappointment or last minute cancellations.
A property lawyer or judicial scrivener (“shihoshoshi” in Japanese) can easily clarify this issue, if they
receive the property’s true address as per the title deed or registration certificate.
In regards to mortgages, these are quite attractive in Japan, can be for any number of years and up to
90-100% LTV (Loan to Value) - at interest rates that are often lower than 3%. However, these loans are usually
not available to non-residents, excepting some large international banks such as HSBC or Bank of China – and
even these banks only provide this service to those who hold significant business with them in other countries.
Other, local banks, will require a minimum 5-6 years of local residency, with a steady and sufficient
Japanese income stream. Furthermore, many of these banks will have other criteria, such as a minimum
purchase price per property, a minimum number of properties to be financed, a minimum year of build, or
specific locations corresponding with the bank’s own location and operational jurisdiction.

However, if one indeed plans to use the
property as a guest-house, it may be worthwhile to
incorporate in Japan, either as a wholly local company,
or as a branch office of a foreign company, and then
apply for a business loan - which could be secured
against the property itself. This would naturally require
some research, such as the criteria relevant to these
loans, the preparation of a thorough and viable
business plan, and the profitability of the required
incorporation and upkeep fees.
Additionally, although legislation has been

amended in 2016, and company directors do not
necessarily have to be Japanese residents, having a
Japanese partner for these types of ventures is
generally a good idea for many reasons – not least
among them the fact that local entities are often quite
reluctant to deal with foreigners, as elaborated on
extensively in the first book in this series.
Also, specifically for guest-house and inn/hotel type businesses, one must carefully review the licensing
requirements for particular areas, buildings, facilities, and associated compliance issues, of which there are many.
Legislation for accommodation type businesses in Japan has gone through a few overhauls, and will most likely
go through at least a few more in coming years, so it is highly advisable to hire the services of a lawyer or other expert
in this field before embarking on such a venture.

Q: I understand there is no credit check system in Japan, so how do I
check out a potential tenant for my downtown Tokyo apartment? Are
there credit guarantee companies and if so, how reliable are they?
A: Credit guarantee companies or rent insurance companies, as they are known in Japan, are quite
reliable, and are one of the three types of guarantees a tenant can potentially provide when leasing a property
(the other two being a security deposit, or personal guarantors – which can be of various degrees of reliability,
from friends or colleagues, through family members, and all the way up to employers). Guarantee companies
will interview a potential tenant, review their income status and require documentation to prove it, prior to
approving them – and will often refuse to issue the insurance contract and advise against the tenancy, if they
are unsatisfied with the results.
Generally speaking, Japanese tenants, while not as officially verifiable as tenants in most Western
countries, also tend to be far more reliable, and would rarely have payment issues compared to other countries.
In close to 200 properties managed by our company, we have so far had less than 5 tenants with chronic
payment issues, and only 3 who absconded altogether (the rent insurance paid three months of missing rent on
two of those tenants’ behalves, as well as for the cleaning and removal of personal items following that – in the
one case in which they’ve managed to locate the tenant and take them to court, the landlord got their rent
compensation throughout the entire court case period).
Perhaps most importantly, tenants in Japan would almost never intentionally damage a property, use it
for illegal purposes, squat/allow unauthorized sub-tenants to move in with them, or any of the other ills often
associated with bad tenants elsewhere – and, surprisingly enough, this is also true for the lowest end of the
tenancy market. The reason for this is that, culturally, “doing the right thing,” or behaving in the “correct” way
is one of the main pivots of Japanese society – strictly governed by social expectations, concepts of respectable
and honorific behavior and “proper” societal norms– which, to the average Japanese, can be a far stronger
deterrent than legislation and fear of financial repercussions. This is doubly true in the case of company
employees, whose biggest fear is that their bosses and colleagues may somehow find out that they have
behaved inappropriately. Strange but true.

Japan’s current 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.
In spite of this, however, the future of Japan's economy, although better than it has been for the last two
decades - it still very uncertain, for the reasons discussed in the previous Q & A chapters.
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 bank
on growth to any significant degree. This is the strategy we have been pursuing in our own personal property
portfolios, as well as the one we have been advocating to our clients as a company.
Based on this strategy, we would therefore advise to "go against the herd," and avoid over-heated,
internationally renowned locations in Japan, in which hordes of foreign investors have been purchasing since
late 2012, when the Japanese economy “bottomed out” and started exhibiting growth again. 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 central Okinawa (where many of Japan's US army
bases and its personnel are located). 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.
All of this 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, which is quite
rare for such a large city (Japan's fourth in size population-wise).
The yield in other 2nd tier cities 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 industries (academic, professional
services, tourism etc) 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 centers 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 first few pages
of the population growth chart below, is quite substantial – just bear in mind that, in cases of cities where growth appears to
be in the double or triple digits, this is more often the result of smaller towns having been officially amalgamated into their
larger neighbours in re-zoning operations – so actual “real” population growth numbers should be reviewed prior to any
decisions being made (English translation source: “Wikipedia”) -

Title of the book 15
Title of the book 16
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 centers are virtually
unknown - Tokyo, for instance, is not in the top three locations at all. The table above, updated as of 2015, is 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.

It’s a well known fact that Japan’s public transport systems are among
the world’s most efficient – from subways to trains, bullet trains and
even tram and bus services, they tend to be frequent, convenient
(barring rush hours) and almost always on time. And, when they’re
late, more often than not due to a track suicide attempt, commuters
will receive an official note to their bosses, wives or other VIPs, as well
as a deep bow and sincere apology.
What not many know, however, is how crucial the
vicinity to public transport is for property investment
purposes. A long walking distance to the nearest subway
or train station can vastly reduce the price of a property,
as well as significantly increase vacancy times, since many
tenants will prefer to rent at a more convenient location –
even at the price of paying far higher rents.
Not All Transportation is Created Equal!
While there are more than a few cities in Japan,

such as Nagasaki and Kumamoto, where overground or
subway trains are not the norm, the latter are by far the
preferred means of transportation. While many Japanese
own cars, these are often just used on weekends or when
commuting out of town (and even then, the price of
motorway travel in Japan is very steep, so domestic flights
or bullet trains are often used instead) – also because
traffic and parking, particularly in the larger metropolitan
centers, can often be an expensive and time consuming
nightmare.
Bicycles (and, to a lesser extent, scooters & motorcycles), which are also owned by a huge portion of the
population, are the preferred method of transportation over short distances, but when one needs to go to
work, often more than a few kilometres away from home, many people will prefer to use the train, to avoid
arriving at work sweaty, tired and ragged-looking. Similarly, when carrying many or particularly large items, a
bike is simply impossible to use. In cities where trains aren’t convenient or non-existent, as mentioned above,
people will default to the most common and convenient public transportation method, such as trams or buses –
but if they have the choice, they will always choose to live as near as possible to a train or subway station – with
the general rule of thumb being that, anything over a ten minute leisurely walk is considered inconvenient.

Exceptions to the Rules
Being in the business of rental property investments, we here at NTI have been following this rule of
thumb religiously, with the following few exceptions –
1. If the walking distance to the nearest station is between 10-15 minutes, but the station is one of
the city’s main transport hubs, the longer walking time may be acceptable for tenants, since the added value
of being within reasonable walking distance to the most convenient public transport station in town is well
worth the extra few minutes of walking per day.
2. If the property is a larger property in the city’s quiet residential suburbs, which comes with
convenient car parking, it is likely to be rented by a family, which will most likely own at least one car, and
often two – in those cases, the tenants are likely to prefer a large and comfortable home, and are very likely to
be commuting via their vehicles in any case – so public transport becomes less of an issue.
We have learned the hard way, however, that when the above rules aren’t followed, the property’s
profitability can be hugely impacted as a result, as the case study below will demonstrate –
Case Study: When you Get it Wrong
First, a bit of background – since we take great care in our customer service, and also due to the fact
that we are, in the vast majority of cases, going to be the ones managing our clients’ portfolios on their behalf,
our primary directive is always to keep properties tenanted and as profitable as possible, in a hassle-free
environment. In one case, however, due to a compounded error which occurred in communication between
our research staff and sales management, we have recommended a property in Jonan-ku, Fukuoka city, which
lies at a distance of 17-19 minutes’ walk to the nearest train station. A typing error presented this property as
being only 9-10 minutes’ walk, however, and considering its other redeeming factors – 10-12 minutes’ walk to
Fukuoka university’s main campus – top floor location – corner unit – freshly renovated – high return – it
seemed like a no-brainer, and the client, based on our advice, went ahead and purchased the unit.

Six months after purchase, the tenant has informed us that they will be vacating the unit. We took care
of the cleaning, small repairs and basic renovation required (new wall paper, wooden floor polishing, etc), and
were confident that we will have it re-populated in no time at all. Only after three months had passed without
any potential tenant coming to even view the unit, let alone apply to rent it, we started realizing something
was very wrong. Taking a closer look at the building itself, we recognized how badly we've stuffed things up–
approximately 28% of the units in the block were vacant, and a quick look at a maps website revealed the real
distance to the nearest train station. Reducing the rent significantly also did not help, and in order to prevent
the client from losing money through our faulty representation of the property, we volunteered to pay all
building fees on their behalf, until we find a tenant. A quick survey with other property managers revealed this
will not be forthcoming, and so we recommended a quick fire-sale, to minimize losses and re-invest the funds
in a more attractive property. Fortunately for the client and ourselves, we were able to secure a buyer within
several more months, and between the six months of rental income and the only slightly reduced sale price,
we were able to provide the client with his funds back, at close to break-even status.
The experience of having a property stand vacant close to a year, however, is a very unpleasant one,
and in most cases, far more costly. Point well taken, and lesson learned – in Japan, distance to convenient and
efficient public transportation is one of the most important criteria when purchasing investment properties -
and overlooking it can be one of the worst mistakes a buyer (or buyers’ agent, in our case) can possibly make.

According to JETRO (Japan’s governmental external trade agency),
Japan boasts the world’s second largest retail market, with a sales
value exceeding US $1.3 trillion (150 trillion yen).
Being a mature, quality and luxury oriented consumer market, the
country has been a natural destination for any and all global brands
seeking to establish their presence in Asia for many years, with
spectacular results. 35% of Asian tourists from countries such as China,
Taiwan, Hong-Kong and South Korea, who are traveling to Japan, cite
their main reason for visiting as “shopping”. Local Japanese shoppers
are also a force to be reckoned with – often labelled as “obsessed with
consumerism culture,” for better or worse.
Key sectors in the country’s retail market are high-end specialty stores, apparel specialty stores, and
lifestyle/environmental products – all of which are readily available not only in shopping hot spots such as Tokyo’s
Ginza, Omotesando, Shibuya and Shinjuku, but all over the country, in other large metropolitan centres such as
Osaka, Nagoya, Fukuoka and Sapporo, to mention only a few.
Shopping malls, supermarkets and street shops are bustling with activity during all hours, fashion is a major
driving force for men and women alike, and even the two “lost decades” of deflation, which the country has only
recently broken out of, did not seem to diminish the Japanese passion for shopping – as a walk down the street
down any of these major shopping districts would have demonstrated at any point in time during those years.

Current Retail Status
As the graph in the previous page, taken from Mitsui Fudosan’s 2018 statistics publication clearly shows,
total retail in Japan is generally on the rise, aside from a small slump, due mainly to a sharp drop in Chinese tourist
numbers between 2014-2016, as a result of increased import duties in the mainland.
However, it is worth noting that, as the e-commerce trend continues to take the world over by storm, brick
and mortar shops are feeling the pain - which translates into stagnant rents in all but the top high street shopping
areas. And, while retail sales are likely to improve with the 2019 Rugby World Cup, 2020 Olympics and 2025 World
Expo, all major global events which are going to be hosted in Japan, and are expected to continue and increase
tourist numbers – one should keep their fingers on the pulse as far as the years beyond that time frame are
concerned.
Regardless, two interesting main trends evident from that same graph, are the following –
1. Supermarket shopping has long surpassed department stores, as far as total retail sales numbers are
concerned. This trend has further intensified in 2017, as more and more clothing, goods and apparel are now sold
online - while Supermarkets, selling consumable goods such as foods and beverages, aren't as vulnerable to online
competition.
2. The by far large majority of retail sales in the country, however, aren't in either department stores (or
“Depaato” as they’re known here), or supermarkets – but rather in “other retail” – namely, street shops, train and
subway station shops, outlet malls, and other small businesses (as well, again, as online).
How to Profit from These Trends?
• While ownership of a shopping center or mall can be an attractive

investment, buying and managing such a property is an expensive exercise,
and requires a Japanese presence for the purpose of running the business,
and all it entails. Furthermore, should rents remain stagnant or decrease, it
may be far more feasible for foreign, remote investors to put their funds
into smaller, “street level” commercial retail properties, which can be easily
managed via standard rental leases (straightforward rental- yields oriented
investments, as opposed to ongoing, hands-on business management).
These shops are also far cheaper, which provides investors with far better
diversity, and also enables them to hedge their investments, as opposed to
investing in a single, high priced shopping centre.
• The huge boom in internet shopping, and its expansion to the

inclusion of same or next day service, has led to huge growth in the logistics
real estate market (factories, packing houses, warehouses &
shipping/delivery hubs) in the suburbs of most of the country’s large
metropolitan centers, as well as specific purpose smaller facilities within the
cities themselves. This is another sector well worth looking into. And, since
this particular market is currently red-hot, with demand far outstripping
supply, creative approaches such as acquisition of existing older properties
erected on medium to large land-plots, with a view to demolishing and re-
construction, is a highly profitable strategy.

Investing in Shopping Centres
If you do, however, want to consider purchasing entire shopping centres, just be aware that there's a big
difference between commercial units in otherwise residential of mixed purpose apartment blocks (street shops) -
as opposed to wholly commercial buildings or shopping centers (malls and department stores).
While ground floor shops or offices in a mixed purpose building can be purchased by anyone, similar to a
residential property, and then leased out to business owners - the situation is quite different with wholly
commercial blocks, which are normally entirely owned by a single, licensed operator. That operator runs the entire
complex, and provides utilities and services to its entire renter community. This means business operators would
be required to apply to the building or centre management when they wish to lease shop or office space – and
those spaces would normally only be available for renting, and not for purchase individually.
The operator, on their part, would be required to provide certain services such as infrastructure, in-house
advertising space, floor and building maps references to the business, daily or weekly rubbish disposal, cleaning of
all common spaces, security, fire safety provisions, etc.
While it is definitely possible for foreign investors to purchase and run an entire commercial space
structure, and while there are management companies who will be able to then operate the center on your behalf
- this of course adds an entirely new layer of complexity to the investment, which becomes more than a simple real
estate and rental management transaction.
In effect, you will now be running a fully pledged business operation, which would often require hiring,
providing for and training of staff, out-sourcing of advertising, stock management, etc. The closest equivalent is
probably purchasing and running a hotel or other guest or short term stay accommodation business, as opposed to
a straightforward real estate property investment.

Kawasaki city, aside from its immediate proximity to central Tokyo –
15-20 minutes by train – is also a growing Japanese city, with a current
population of just under 1.5 million, and growth of around 0.75%
yearly.
The city’s economy is predominantly white collar in nature, mainly heavy industries, electronics and high-tech
development. Considered one of the most attractive residential areas nation-wide. And, while it still offers slightly
higher yield than Tokyo itself, this is changing rapidly –attractive deals are extremely rare and far between.
Studio unit + Kitchen & balcony – 5.2 mil JPY (app. 46,700 USD)
Advantages –
• Exceptional yield for this location – just under 10% net pre-tax annually!
• Small unit (studio, 16.73 sqm + balcony) – minimised repair and maintenance fees, and a discounted property
tax bill, reserved for units under 200 sqm
• In spite of its small size, the unit features a separate, walled off kitchen area, which is rare for units of this size
• Current tenant – single male in his 50’s, technical staff at a local college, in residence 15 years (!!!). This may
seem unusual in many countries, but quite common in Japan, and points to a potentially even longer tenancy. No late
payments or other issues over this entire period of time. Solid gold
• Security deposit paid by the tenant is non-refundable, and can be used for cleaning or repairs upon vacating –
saving a good few hundred dollars in the future

Advantages (continued) –
• Dedicated laundry machine area set-up in the unit – alcove, tap, drain, etc. This, as well, is unusual for such a
small property – and a necessity for most modern residences. Saving of $800-900 for installation of this amentity
when the unit becomes vacant
• Building is very well maintained, and quite small (only 20 units) – major renovations, including re-water
proofing of the roof and exterior done within the last six years, thereby minimizing the risk of any significant out of
pocket expenses or raising of building monthly fees in the near future
• Built in 1991, up to the latest earthquake resistant building standards, introduced in 1981
Disadvantages –
• The tiny unit size means typical tenants would be

exclusively singles. Generally speaking, this means
shorter tenancies when compared with larger sized
units, which tend to attract longer-staying tenants such
as families – as singles may more frequently change
their status via marriage, work dynamics such as
relocation to a different company branch or, at some
point, moving in with their elderly parents, as is often
the case in traditional Japan
• The building’s reserve funds pool, used for

renovations and repairs, has a relatively low amount in
it, compared to the number of units in the building and
their approximate cost
• Building located a 15 minute walk from the

nearest train station – not a disaster, but out of the
ideal 10 minutes comfort zone which would guarantee
a large tenant base

Deal Analysis
Weighing the advantages and disadvantages one against the other, the client has decided to approve
this particular deal, due to the following reasons –
1. The high return, aside from obvious profitability, also means more potential manoeuvring room in future, due
to increased building maintenance/repair/renovation fees. Kawasaki properties very rarely yield anything over
7% net pre-tax annually – so 10% yields are a spectacular bonus, considering these central properties usually
also tend to gain in value over time.
2. Building profile is excellent –coupled with its location, all but guarantees a steady stream of potential future
tenants – this fact, along with the current tenant’s security deposit, more than covers for any potential
vacancy expense risk.
3. The fact that the unit is small isn’t really an issue, considering location – Kawasaki city is one of the most
sought after residential areas in Japan, as mentioned, and its proximity to Tokyo adds value as a potential
“bedroom community” for company employees working in Tokyo and far from home. The walking distance to
the train station, considering all of the above, is more than surmountable.
4. The low reserve funds pool status is more than accounted for by the excellent renovation history – funds seem
to be well managed, and risk of sudden large renovations, as mentioned, quite low.
5. The small size of the building makes it easier for developers to purchase the land and compensate existing
owners, in case of re-development or total-loss damages sustained by natural disaster – providing
compensation to 20 unit owners is a relative “walk in the park” for any serious developer considering a new
building or commercial project on this land.
Summary
As mentioned above, the very existence of a Kawasaki property
generating such high yields is extremely rare, so the scales in this
particular case were tipped towards green-lighting the deal in any
case – it would have taken a very red risk flag for us to pass on it.
Considering the above, slight disadvantages - all of which were

more than manageable and accounted for by other, positive
mitigating factors - it was indeed an easy decision to make, and a
worthwhile addition to any portfolio, large or small.
Without a doubt, had we not acted upon this listing almost

immediately upon receiving it, it would have been gone in a matter
of days, if not hours – we were fortunate and responsive enough to
get our foot in the door ASAP, netting an excellent deal for our
clients, a young professional couple from Australia, in the process.

Once the national capital, and still Japan’s undisputed most important
cultural and historical centre. Medium sized population wise (just
under 1.5 million inhabitants), the city boasts no less than 17 UNESCO
world heritage sites, is home to 20% of Japan’s official National
Treasures, and 14% of its official Important Cultural Properties – these
include temples, shrines, (including the previous imperial palace and
surrounding gardens), the world famous philosophers’ walk with its
many tea-houses and meditation spots, the geisha quarter of Gion, the
famous golden pagoda, and more.
Regardless of all of the above, the city is also a major economic centre. Main industries are information
technologies, electronics - and, of course, international and national tourism – all in all, a fantastic investment hot-
spot and, as a result, normally quite low on yields and high on purchase prices.
Studio unit + Kitchen & balcony – 3.7 mil JPY (app. 34,000 USD)
Advantages –
• Exceptional yield for central Kyoto – similar to the

previous example - close to 10% net pre-tax per
annum!
• Tiny unit (1 room, 15.25 sqm + small balcony) – makes

for minimum repair and maintenance fees, as well as
for a discounted property tax bill, reserved for units
under 200 sqm
• East facing balcony – plenty of sunlight – attractive

feature for potential future tenants
• Current tenant – single male in his mid-sixties, retired

– has been in residence for the past five years, without
any late payments or other issues – and paid a security
deposit equal to approximately one month of rent
• Location is super-central, within 9 minutes walking

distance to the city’s main train, subway and bullet
train transportation hub – Kyoto station. Building is
located on the banks of Kamogawa, the city’s main
river, which crosses it from North to South. One of the
best locations in Kyoto

Advantages (continued) –
• Built in 1989, which means that it, as well, is up to the latest earthquake resistant building standards for
reinforced concrete structures, introduced in 1981
• Belonging to the “Asahi Plaza” building brand, a famous national developer which takes pride in well
maintained, well populated buildings – a long list of maintenance and renovation items performed over the past
decade and earlier seems to indicate this to be true for this particular development as well
Disadvantages –
• As per the Kawasaki deal - the tiny unit size

means typical tenants would be exclusively singles.
Generally speaking, this means shorter tenancies when
compared with larger sized units, which tend to attract
longer-staying tenants such as families – as singles may
more frequently change their status via marriage, work
dynamics such as relocation to a different company
branch or, at some point, moving in with their elderly
parents, as is often the case in traditional Japan
• Here as well, the building’s reserve funds pool

used for renovations and repairs, has a relatively low
amount in it, compared to the number of units in the
building. Furthermore, monthly building fees collected
from owners have been raised in 2009, to
accommodate for the extra renovations and repairs
required with age, but an up and coming major
renovation scheduled for 2016 will cost more than the
amount currently reserved – which means the building
management company will most likely apply for a loan
to cover the difference. While this in itself is standard
practice, it may mean that any additional, unexpected
repair or renovation required in the near future may
necessitate either a further hike in building fees, or a
one-time payment charged to all unit owners – both
cases will reduce the monthly yield to some degree
• Tenant is aged, which naturally may mean

potential future hospitalization, disability or death

Deal Analysis
Weighing the advantages and disadvantages one against the other, the client has decided to approve
this particular deal, due to the following reasons –
1. Exactly as in the previous example - the high return, aside from being more lucrative, also means more
potential manoeuvring room in future due to increased building maintenance/repair/renovation fees. Central
city properties in Kyoto, as well, rarely yield more than 7% net pre-tax – so anything gained beyond that is a
spectacular bonus, considering these central properties may also gain in value over time.
2. Building profile, again, is excellent – and coupled with its location, all but guarantees a steady stream of
potential future tenants – this, along with the current tenant’s security deposit, more than covers for any
potential vacancy risk derived from his age.
3. The fact that the unit is small isn’t really an issue here too, considering its location– again, plenty of potential
single tenants would be more than happy to rent a room conveniently located at the heart of one of Japan’s
major cities. Additionally, any attractive location in Japan (the only major exception being Sapporo city, in the
Northern landmass of Hokkaido) only features single or couple sized units at these yield levels, as a general
rule.
Summary
All in all, the deal seems to be quite attractive – an affordable unit generating such high returns, in the heart of one
of Japan’s most prominent cities, is an exceptionally rare gem. There is a slight risk factor involved, due to the
tenant’s age and building reserve funds/renovation plans and history, but more than easily mitigated by its
redeeming factors.
The client, a retired property investor from Singapore, whose main criteria is yield and location, having considered
all of the above, has decided to go ahead with the deal, as mentioned – their first purchase in Japan, and an
excellent start to a hopefully profitable and hassle-free portfolio..

Having so far examined purely residential properties, we’ll instead
focus on a commercial property instead. While Japanese commercial
properties are very similar to residential ones in most aspects, there
are a few differences which are worth considering –
1. Commercial properties tend to command higher rents and yields as a general rule, when compared to residential
properties of similar profiles.
2. Rent fees for commercial properties tend to be more volatile and sensitive to economic trends – while residential
rent fees remain mostly untouched in Japan throughout a single tenancy, commercial rents can and often will be
increased or decreased based on regional averages, whenever a tenancy lease is renewed. This is mainly because,
an established business with existing clientele, which is running at a reasonable profit, will always prefer to stay in
its established location - and so factor rent increases into their balance sheets and business projections, as a
general rule.
3. Similarly, occupancies and vacancies are also more volatile as far as commercial properties are concerned.
Whereas residential tenants will always need a place to live, businesses can and will re-size, move or stop
operating altogether, whenever things take a downturn.
4. Commercial properties often suffer more wear and tear, in comparison with residential properties, as they are
used more extensively and by more occupants. If the business leasing the property has walk-in traffic and
clientele, (such as a shop, after-hours school, etc), these damages will be even more pronounced – with the
highest usage and damages reserved for businesses serving food and drinks, such as bars and restaurants.
Fukuoka City Office – 2 Rooms– 5.9 mil JPY (app. 52,000 USD)

Fukuoka city has been the target its of a large exodus of Tokyo families, businesses and company employees since
2011. Due to geographical position as Japan’s gateway to South-East Asia, a vast influx of Chinese investors crossing
over from the north-west and purchasing large quantities of investment properties, would seem to also indicate the
promise of this area. Monocle magazine has included Fukuoka city, the prefecture capital, in the world's top 10 most
live-able cities in 2014, and CNN has marked in no. 3 in its “Top Places to Visit in 2019” recently, due to its appeal as
far as history, natural landscape, and most significantly, its culinary scene are concerned. Since 2012, the city has
been enjoying significant property price hikes, on par with Tokyo and Osaka.
Advantages –
• Location – in the heart of Fukuoka’s central

business district, Hakata (pictured on the right) - and a
short 5 minute walking distance to the city’s main
transport hub, Hakata station (bus/subway/train/bullet
train). Without a doubt, the best spot in the city for a
business/office
• Dual-purpose unit – current tenant is a Chinese

trading company – but the property may be used for
residential purposes as well, practically doubling the
potential tenant base. The size of the unit – 36.5 sqm –
would also be suitable for a couple with/without a
young child or two, further enhancing the potential
tenant base, and, as a result, greatly reducing potential
vacancy times
• Exceptional yield for this location – 8.4% net pre-

tax per annum – unusual for central city properties in
Fukuoka, and ever rarer for properties of this size
• Tenant has rent insurance, covering up to 3

months of delinquency, as well as any potential
damages under their responsibility, court action
required and interim vacancies, etc – the best possible
tenant security
• Three large renovations performed on the

building between 2013-2014 (exterior, water supply &
drain pipes, new elevators installed).

Disadvantages –
• Built in 1980 – one year prior to the introduction of the latest earthquake resistant standards
• Previous building management company replaced in 2013 due to financial mismanagement
• Current accumulated renovation/repair funds quite low, covering less than 5% of the purchase price per unit
owner
Deal Analysis
The new management company has immediately taken action to address the large renovation items required, since
their hiring in 2013 – the building now seems to be in good hands. The lack of large accumulated funds is slightly
disturbing, but with three large renovations already performed, chances of another large item being required in the
near future is greatly reduced. Furthermore, the exceptionally high yield for this profile and location provides the
investor with a buffer in case of monthly fees being raised or a one-off payment required, as annual yields will still be
most likely acceptable, even for the purpose of selling the property if they so wish.
Coupled with the fact that, in this particular location, prices have more than doubled in the course of the last five
years, growth potential, while only a secondary criteria, is also quite likely – and more than compensates for the older
build.
The tenant, in place for more than two years upon purchase, seems to be well established and profitable – with no
late payments or other issues, and a rent insurance policy and cleaning/restoration fee most likely covering any
substantial potential vacancy expenses.
Summary
Considering all of the above, our client, a Thailand-based family office, has decided to add this property to their
already substantial portfolio – this purchase marked their second commercial/mixed purpose property purchase, and
provided them with further diversity and hedging, in an already highly profitable investment portfolio.

Single family homes, as opposed to condo units, offices and shops, are
often the investment asset of choice in many countries, due to the
larger land parcel attached to them, which makes for better capital
growth potential - and also due to the flexibility inherent in ownership
of said land parcel, as far as future renovations & re-development
prospects are concerned.
In Japan, however, houses tend to take a back seat to condo and other building units, at least as far as investment is
concerned - mainly because of the building materials and standards in use – wood and metal as opposed to brick
and mortar in many cases. Also, larger, family-sized properties such as houses are harder to find tenants for, due to
the decreasing population trend – singles and couple without children are simply far easier and faster to populate
properties with in most cases. Lastly, capital growth in Japan is far from a given for the decades ahead, as discussed
in the first chapter of this book. Houses also require more maintenance on average, due to that larger floorplan,
and also due to the owner’s responsibility for all exterior and structural issues which, in the case of co-owned condo
buildings, are covered in most cases by monthly contributions to the reserve funds and management pools. As a
result, houses can carry more “surprises” in store, as far as expenses are concerned, and aren’t as stable and
predictable, income-wise, as condo residential or commercial units in co-owned blocks.
One of the downsides of owning individual units in co-owned buildings, however, is the fact that the use of the
property is limited to owner co-op bylaws and regulations – and so, short term rentals, sub-leasing, commercial use,
etc, are far less of an option for landlords, which reduces income potential – whereas house owners are often free
to do as they wish with their property, including very creative hacks such as turning it into a shared house, guest-
house, etc. Additionally, while family tenants are more rare and can take longer to source, they tend to be longer
term tenants, as opposed to singles, whose life circumstances can change far more often, for various reasons.

Sapporo City
Japan’s 5th largest city, with a population of just under 2 million people, Sapporo is the largest city in Hokkaido, the
country’s Northern-most landmass, which is characterized by long and snowy winters. It is also Japan’s 4 th most
popular tourist destination, drawing over 13 million visitors annually, particularly for its internationally renown winter
festival, which takes place towards the end of January annually.
As opposed to Japan’s other large cities, however, Sapporo is much cheaper – because of this reliance on tourism, the
city suffered a massive decline in visitor numbers following the 2011 Tohoku Tsunami and subsequent nuclear spillage
in Fukushima. Although Hokkaido is a far cry from those locations, international tourists were concerned, and the
city’s economy suffered as a result – and so didn’t enjoy the price hikes that the rest of the country’s major cities have
benefitted from between 2012-2016 – or at least not nearly to the same degree. The tourists have returned since
2013 or so, but property prices haven’t recovered significantly as of 2019, which makes for fantastic potential rental
yields.
Main industries are, of course, tourism, academic education and retail – a robust, mainly white collar economy, with
the only disadvantage being much longer vacancies on average, since the relatively harsh winters mean that very few
tenants change their residence between the months of September and March.
Sapporo House – 6 Rooms– 3.8 mil JPY (app. 34,000 USD)

As mentioned above, prices in Sapporo are phenomenally low. The house in question, built in 1973, has 5 bedrooms,
a living room, large kitchen/dining area, and takes up 125 square meters of a roughly 193 square meter land plot.
Well maintained and renovated throughout the years, and while it isn’t in walking distance to a nearby train or
subway station, it comes with a carpark, like many houses in Japan.
Single mother + 3 children in residence for the past 7 years, no payment or other issues to date, paying approximately
360 USD per month, for an annual net pre-tax yield of about 10.6%.

Advantages –
• Obviously, the cost and yield are phenomenal – no

further explanation necessary
• As mentioned above, a family tenant, who, with any luck,

may stay in the property for life, or at least for a good few
decades
• The house appears to be in good shape, at least as far as

visible items are concerned – the exterior and roof have been
well maintained and do not require any maintenance in the
foreseeable future
• Quiet and popular residential area
Disadvantages –
• The age of the structure would dictate more maintenance and renovations overall, during the property’s life cycle
• All of the general disadvantages mentioned above, inherent in the purchase of a stand-alone house, as opposed to a
unit in a co-owned building.
• The previous owner of the property has been taking care of snow-clearing from the roof and surroundings of the house
during the winter months– an added expense of approximately 300 USD, or slightly less than one month rental income
annually.
Deal Analysis & Summary

In this particular case, the buyer, an asset management company based in Hong-Kong, has intentionally targeted
houses, as opposed to individual units or small buildings – as they preferred to focus on the advantages inherent in owning an
entire land parcel, as specified above – and also due to the lower demolition and removal costs projected for future re-
development purposes (far lower for small wooden structures, as opposed to metal framed or reinforced concrete builds).
Due to this preference, they have already considered and accepted the vast majority of existing and potential
disadvantages listed above – and so, it was only a matter of finding the appropriate property that would satisfy their budget
and yield requirements.
The additional expense of the snow-clearing “perk” provided to the current tenant, easily factored into annual
projections, while reducing overall yields, also provides for a satisfied and loyal tenant, which further increases the stability of
the investment at the time of purchase – all in all, making for an easy deal to approve from their perspective.

Small unit blocks are an excellent and balanced combination of both
good rental returns AND capital appreciation potential, and are usually
the asset class of choice for investors who can afford them. They offer
both flexibility and creativity of use, which individual units in co-
owned blocks do not – but also stand to gain more in value if and
when prices go up, as the landlord owns the entire land parcel on
which they are built.
The sweet spot, as far as most investors are concerned, lies in two or three story buildings with 4-18 units. These
tend to be more affordable, and also cheaper to maintain, as they do not require an elevator – which tends to add a
large annual upkeep factor. Elevators are only legally required from 6 floors and upwards in Japan – but units on the
4th and 5th floor of buildings without elevators tend to be harder to populate when vacant – as most elderly tenants,
as well as single mothers, will usually avoid those due to the hard climb involved.
These buildings would normally be wood or steel-frame based, and so would have a much shorter life expectancy
than their reinforced concrete monster “big brothers” – and would require more regular maintenance and repair –
but are also far easier to demolish and dispose of when the time comes to re-build. This makes things far easier and
cheaper, as far as creative freedoms are concerned – since owners can renovate and turn them into guest houses,
share houses, or even completely destroy them and re-utilise the land for other purposes, such as building a house,
a warehouse/logistics facility, or even a parking lot. Lastly, owning the entire structure opens up far more
possibilities as far as creative leasing goes – options which would not normally be available to owners of individual
units in co-owned buildings, who must comply with building management rules and regulations, which are usually
far more restrictive.

Befu, Fukuoka, 6-Unit Residential Building – 45 mil JPY (app. 400,000 USD)
Fukuoka city, discussed earlier, in the deal analysis presented in chapter 11 (page 31), has several attractive and
recently rejuvenated city centres and hot-spots – one of the most popular ones is Ropponmatsu, where a newly built
court-house, adjoining office and residential developments have sent property prices and demand soaring since 2016.
As is usually the case in most cities around the world, the next suburb down the train or subway line would normally
be the next immediate beneficiary from these projects, and would be the best possible place to buy – simply because
prices may not have gone up as of yet, or at least not as sharply as its popular neighbouring suburb – but are all but
guaranteed to do so within a few years. Befu, which is the next station on the subway line heading out of the city
centre, is that suburb – and so it was still possible to purchase the ten year old, 6-unit residential building pictured in
the previous page, as late as December 2018, for only 45 million Japanese yens (approximately 400,000 USD).
Located only a few minutes walk from Befu subway station, with spacious and modern studio units, full of light and
equipped with high ceilings, laundry machine alcoves equipped with taps, drainage, etc – AND loft bedrooms(!), the
building has been operating at full occupancy at the time of purchase, and indeed throughout the decade passed
since it has been built. The seller has taken care to install a structure, high-speed internet network, with unlimited
download capabilities - which is provided to all tenants, and is included in their monthly rental payment. This, along
with the location and modern interiors and exterior of the building itself, have served to attract a relatively affluent
tenant population, mainly professional singles in their late twenties or early thirties, who can appreciate this type of
accommodation, and are happy to pay the price for it.
With all purchase and regular running costs – cleaning, gardening, insurance and internet services included – the total
rental return for this property has been clocked at approximately 5.5% at the time of purchase – which, while not the
best that can be had in the city, is remarkable for a property this young. The added value of owning a 120 square
meter plot of land in the centre of the city, in a suburb which is quite likely to gain significantly in value should the
economy continue to fare well, is self-explanatory. The property is also within short walking distance to a university
campus, several schools, the local ward/city hall and a hospital.

Disadvantages –
So, with all of the above, what are the actual disadvantages of
this seemingly perfect property?
• As mentioned above, owning the entire structure, and

the lack of monthly building fees which are meant to cover all
structural expenses, means a more prominent uncertainty and
risk factor. The building is very young, so it is highly unlikely that
any big ticket items will require attending to in the next decade
or two – but as the years pile on, these wooden and steel-
framed structures do require ever-increasing maintenance,
renovation and partial re-builds.
• The added benefit of potential capital appreciation is only

as good as the national and regional city’s economies are.
Should these continue on track, the owner stands to win on all
fronts – but should tail-winds restrict further growth, the slightly
lower rental income compared with individual units, and added
structural expenses, can put a damper on profitability.
Deal Analysis & Summary
Generally speaking, buildings tend to make excellent investments for buyers who have capital expenditure flexibility –
meaning, those who can afford to put aside the safety buffers required for sudden maintenance, renovations and repairs at a
higher scale than those normally required for individual units – and are also confident enough that they will be able to
accumulate substantial savings over the course of a decade or two, if and when the time comes to re-build, or demolish and
dispose of the existing structure in lieu of a new project to be planned and built on the same land plot.
In this particular case, the buyer, a high-earning middle-aged professional from the USA, fits the profile precisely, and
has been aiming towards this exact type of investment from the get-go.
The dis-advantages inherent in this type of property, therefore, have been considered and accounted for, and it was
only a matter of researching, sourcing and conducting due diligence on a property which would tick all of the boxes mentioned
above – which was exactly what this particular building has done for his portfolio. And, while this property was his first
purchase in Japan, his pre-existing assets in other countries also provide him with the diversity and hedging required to make
this type of slightly higher-risk investment worth his while.

While Japan is considered by many to be a techno-geek’s paradise,
those of us living here know all too well that, maid robots, vending
machinery & entertainment gadgetry aside - in reality, tradition and
long-entrenched old-skool practices often trump innovation, at least as
far as business is concerned.
As mentioned in the first guide in this series, Japan is a highly paper-oriented and manners-conscious society, which
often sacrifices efficiency for “the proper” way to do things, in many aspects. The Japanese will, in most cases,
forego deals and money-making opportunities, simply because the “other side” of the deal didn’t comply with
cultural expectations and norms. And, as far as technology goes, any disruption to “the way things are/have been”
is very difficult to implement, regardless of any actual dollar or yen benefits to the procedures being undertaken.
And so, much to the frustration of foreigners, who are often far more comfortable with the “move fast and break
things” mantra of Silicone valley, they will often find that things that have been taken for granted in other parts of
the world, have yet to be embraced in the land of the rising sun. Some examples of these technologies include such
mundane things as web-based payment systems, electronic signatures (and in some cases even electronic
remittance of funds), 24/7 ATMs and internet banking systems, and even email correspondence.
In recent years, however, some particular innovations have finally wormed their way into the Japanese business
environment and, as is always the case - once the Japanese do make the decision to embrace change, they do so
with extreme gusto and speed – often far more so than in other parts of the world, where decisions are made
quicker, but implementation can take many years and trials.

Below are several such examples of technological innovations which are, for all practical purposes, revolutionizing the
real-estate industry, from the ground up – starting with construction techniques, expanding into individual buildings
and homes energy consumption and utilization, and all the way up to city and town planning levels –
Robot Construction Workers, Drone Surveyors

The thorny crown of “world’s fastest ageing society” has led to some unique challenges in Japan, which in turn have
given a huge boost to the Robotics industry – in which Japan has already been a global leader for many decades. From
household, medical and care industry robots, and all the way to customer service & office administration - such as
Softbank’s super-popular robotic assistant, “Pepper”. Innovations in automated labor and drone technology have now
found their way to the construction industry. The government’s highly publicised “i-Construction” campaign, pushed
and backed by the Japanese ministry of infrastructures, will financially support public works projects that plan to use
drones and other technology for streamlining works – and these projects are already well under way in many of
Japan’s cities and rural areas.
Drones, which almost instantly provide aerial information, such as bird’s eye views of construction sites, are being
regularly used for surveying purposes. Robotic arms do the heavy lifting, reducing the number of people required to
carry heavy loads by half, with human workers guiding and coordinating the machinery instead of physically carrying
and lugging around huge 200 kg reinforcing rods, which previously required six or seven pairs of human arms – highly
reducing physical accidental damage risk in the process as well. A single operator with a tablet device can now guide
up to five automated dump trucks, bulldozers and vibrating rollers with GPS systems around building sites, providing
task lists to these semi-autonomous vehicles, which roll around the grounds, going about their respective businesses.

This automation, aside from increasing production and efficiency and providing a partial solution to the decreasing
worker numbers issue, also serves the additional purpose of re-igniting interest in the construction industry by
Japan’s younger generation, who have been shunning construction work due to the long hours, intense physical
labour and low pay associated with it in the past – an astounding 30% of construction site labourers are over 55, as
the latest survey suggests, with only 10% of them under the age of 30 – a stigma which may change as the
construction industry’s environment becomes more “white collar” with automation implementation.
The Zen of ZEHs

The Zero Energy House (ZEH), while far from being the prevalent construction standard in Japan or anywhere else in
the world, is gaining traction fast, with several prominent companies such as Daiwa House Group, Sekisui House and
MUJI - all internationally renown Japanese home builders – well into the process of rolling out their own ZEH
initiatives. These companies utilize various technologies in the quest to build homes which produce as much energy as
they consume, resulting in a neutral or negligible energy footprint.
These technologies include familiar aspects such as solar panels and better insulation technologies, as well as newer,
even more innovative practices such as Argon Gas-Filled, Triple-Pane, Low emmisivity-Glass (“e-Glass”), aluminum-
resin composite shades and “double-skin” insulated walls. Other innovations are Home Energy Management Systems
(HEMS) , which allow residents to control their air conditioning and energy use through an iPad app, as well as to
monitor and visualize their energy consumption and savings. Another uniquely Japanese commercial application aptly
named the “Ene-farm” (Energy Farm) is a refrigerator sized hydrogen based generator, which uses natural gas and
oxygen to produce house-hold use electricity, and further utilizes the heat generated by the machine itself for
domestic water heating purposes.
Green, Smart & Well-Connected Cities

ZEHs are one of the key components in the “Green City”
initiative, of which Japan is a member, with its capital, Tokyo,
leading the way nationally, having cut its power consumption
by 20% since first implementing the metropolitan
government’s environmental guidelines. Under the Green
Building Program, building plans for structures with more than
5,000 square meters of floor area must meet a comprehensive
set of standards for sustainable, eco-friendly building practices
before receiving a building permit.
To take their green building practices global, in 2006 Tokyo
joined C40 Cities, a global climate leadership initiative in which
cities around the world share best practices for sustainability.
The government’s Green Building Program is presented by C40
Cities as a case study in sustainable urbanization. As C40 Cities’
global initiatives expand, Tokyo unites with the organization in
its efforts to promote more environmentally friendly urban
growth models.
Being environmentally aware, however, is only one building
block of our current era’s “Smart City” movement – a
concentrated effort towards building future cities which
promote a new industrial concept brought about by the
internet, and to take steps toward improving the efficiency of
the workforce and energy sector.

A notable feature of smart cities is that they are built around information and communications technology (ICT) —
from Wi-Fi and the Internet of Things (IoT) to big data, artificial intelligence (AI) and cloud computing. According to
IHS Technology, a global business intelligence service provider, “smart cities encompass a broad range of different
aspects to describe cities that have deployed — or are currently piloting —[ICT] solutions across three or more
different functional areas of a city.” In Japan, smart cities are largely funded via government subsidies. The smart
cities market here, which stood at around ¥1.12 trillion in 2011, is expected to grow to ¥3.8 trillion by 2020.
Aside from energy production and consumption “green” practices, some of which have been discussed above, and
others of which include features such as smart energy meters which can point out areas in which each and every
building can further reduce its energy footprint, local municipalities are also experimenting with a variety of new
intelligent transportation systems — including park-and-ride systems, on-demand bus services, light rail transit
services, and two-wheeled, battery-powered vehicles — to optimize and reduce energy consumption, as well as ease
pollution and congestion issues. Vehicle automation and the sharing economy may further change the transportation
climate in big cities in way which we can hardly even predict yet.
The Future
In the more distant future, however, although perhaps sooner
than we believe, some experts think and hope that focus,
while always derivative from IT innovations, will shift from the
technology of smart cities to more social and cultural
considerations.
Dr. Andreadis, a molecular biologist, shares her vision of a

smart city with readers of “Japan Today” as being one that’s as
self-sufficient as possible, organic (rather than created by top-
down planning), responsive to the needs of all its inhabitants
(not just the human ones) and reliant on robust, low-impact,
non-intrusive technology –
“We already know we need well-coordinated traffic lights,

subways and bike lanes; hospitals with reliable back-up
generators; small parks, grocery shops, and schools that are
down the block from our house. We will also need heavy-
duty recycling, composting, and efficient heating/cooling
systems; mixed-use zoning, which results in much better
safety and maintenance of shared spaces than CCTV
cameras; as many street trees as street lights and as many
solar panels as gas-driven boilers; community and roof
gardens (growing vegetables, not just flowers); and even a
rational admixture of wildlife — not just pigeons and rats,
but also peregrine falcons and coyotes.”

SUMMARY
That’s it from us, here at NTI, for this second part of our guide – we do hope you’ve enjoyed this deep-dive into all
the minute details that make or break portfolios here in the land of the rising sun.
As you may have noticed, this part differs from the first guide in the series, in that it skips the introductions, and
assumes some familiarity with Japan and it’s various quirks, unique social and business environments, and the vast
cultural gap between it and the rest of the world.
In the next guide in this series, we plan to take the macro view again, and present you with interviews with
various professionals in their respective fields – from accountant and lawyers, building, asset and fund managers,
investment facilitators and large commercial deal brokers – as well as go off the beaten path and present you with
various contexts which may not seem intuitive – things such as crowd-funding platforms for Japanese real estate
property investments, more details about the short-term and guest house markets, a peek into more far-ranging
perspectives such as equity markets, the sharing economy, gender differences, and international relationships, both in
Japan itself, and between it and the rest of the world.
In other words, now that you’ve established some familiarity with the world’s second-biggest property investment
market, and hopefully have managed to dig down into the nuts and bolts of how things work here, we plan to present
you with a more wholistic approach to investing in this vast and exciting market and give you more strategic tools to
evaluate various industry sectors, market fundamentals, and perhaps most importantly – ways to perfectly time your
market entries, exits, expansions and diversified moves.
We hope you’ve enjoyed this e-book, and sincerely wish to hear your opinion on it – do send us your
comments, questions and requests for more topics which you’d like us to cover in the future, directly via email, on
info@nippontradings.com – or via our website – which is packed full of more resources, which will hopefully benefit
you in your investment journey. You can also tune in to our podcast on your apple device or listen directly, find us on
our Facebook page and discussion group, on Instagram and Twitter. The author can be reached via his LinkedIn profile.
(All photos in this book captured by the author and may

not be reproduced elsewhere without his explicit permission)
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Ziv Nakajima-Magen

Japan Real Estate

2 Japan RE Property Investment for Foreigners – Part 2

We’ll also look at particular locations that suit

In the next book in this series, we’ll get a bit

Sounds like fun? Well, let’s get right down to it!

Japan RE Property Investment for Foreigners – Part 2 3

Japan RE Property Investment for Foreigners – Part 2 4

From the initial needs

Japan RE Property Investment for Foreigners – Part 2 5

2) Reinforced concrete buildings have

3) Natural disasters are included in

4) Individual unit owners in co-owned

Japan RE Property Investment for Foreigners – Part 2 6

From a more local perspective, a singular

To take one location as an example –

Japan RE Property Investment for Foreigners – Part 2 7

Japan RE Property Investment for Foreigners – Part 2 8

`Qaz cases modern legislation does not allow for re-

Regardless, however, and as previously

Japan RE Property Investment for Foreigners – Part 2 9

Japan RE Property Investment for Foreigners – Part 2 10

Additionally, although legislation has been

Japan RE Property Investment for Foreigners – Part 2 11

Japan RE Property Investment for Foreigners – Part 2 12

Japan RE Property Investment for Foreigners – Part 2 13

Japan RE Property Investment for Foreigners – Part 2 14

Japan RE Property Investment for Foreigners – Part 2 17

Not All Transportation is Created Equal!

While there are more than a few cities in Japan,

Japan RE Property Investment for Foreigners – Part 2 18

Case Study: When you Get it Wrong

Japan RE Property Investment for Foreigners – Part 2 19

Japan RE Property Investment for Foreigners – Part 2 20

Japan RE Property Investment for Foreigners – Part 2 21

How to Profit from These Trends?

• While ownership of a shopping center or mall can be an attractive

• The huge boom in internet shopping, and its expansion to the

Japan RE Property Investment for Foreigners – Part 2 22

Japan RE Property Investment for Foreigners – Part 2 23

Japan RE Property Investment for Foreigners – Part 2 24

• The tiny unit size means typical tenants would be

• The building’s reserve funds pool, used for

• Building located a 15 minute walk from the

Japan RE Property Investment for Foreigners – Part 2 25

Considering the above, slight disadvantages - all of which were

Without a doubt, had we not acted upon this listing almost

Japan RE Property Investment for Foreigners – Part 2 26

• Exceptional yield for central Kyoto – similar to the

• Tiny unit (1 room, 15.25 sqm + small balcony) – makes

• East facing balcony – plenty of sunlight – attractive

• Current tenant – single male in his mid-sixties, retired

• Location is super-central, within 9 minutes walking

Japan RE Property Investment for Foreigners – Part 2 27

• As per the Kawasaki deal - the tiny unit size

• Here as well, the building’s reserve funds pool

• Tenant is aged, which naturally may mean

Japan RE Property Investment for Foreigners – Part 2 28

Japan RE Property Investment for Foreigners – Part 2 29

Japan RE Property Investment for Foreigners – Part 2 30

• Location – in the heart of Fukuoka’s central

• Dual-purpose unit – current tenant is a Chinese

• Exceptional yield for this location – 8.4% net pre-