Ups and downs on Japan’s property ladder

Foreigners in a market gone from boom to bust and back (a bit)

by Edan Corkill

Foreigners and the Japanese property market — the two sound like unlikely bedfellows, but in recent years their “liaisons” have been the focus of much media attention — and not all of it positive.

First it was investments by foreigners driving up land prices; now they’re supposed to be driving them down.

Of course, most of these investments are by foreign-owned or foreign-run corporations, as opposed to your run-of-the-mill individual gaijin. However, the number of foreign residents buying properties in Japan is certainly on the rise, and, like their corporate cousins, these buyers are bringing to the Japanese property market a set of presumptions and expectations that are often very different from the homegrown variety. That can play in their favor, but it can also lead to costly mistakes.

So, before we start construction on the Timeout guide to property-buying in Japan, let’s survey the landscape a little, examining in particular the sometimes troubled but nonetheless ever-closer relationship that’s developed between foreigners and the local property market.

This week the news of Nomura Holdings’ purchase of Lehman Brothers’ Asia-Pacific brought into relief an interesting reversal of fortunes. The U.S. property-price boom over the last decade in many ways echoed Japan’s asset-price bubble a quarter of a century ago. As in the United States, it was rising property values — and sinking morals, on the part of lenders — that encouraged Japanese consumers to borrow who never should have.

Many lost their savings, but perhaps more significantly, one or maybe two generations became convinced in light of this that property should not be considered as a form of investment.

Two official surveys of land values are made each year in Japan. One is by the Land, Infrastructure, Transport and Tourism Ministry (MLIT) and is calculated on Jan. 1; the other is by prefectural governments and takes place on July 1.

In each survey, average land prices plummeted for 16 consecutive years from 1992 till last year. To give one relatively standard example of the decline, even as late as the period of 1998-2006, the average price of land in the Tokyo dormitory town of Toride in Ibaraki Prefecture almost halved to ¥66,600 per square meter.

A parallel MLIT survey conducted each year since ’93 shows that as average land prices declined, so too did owners’ expectations.

According to the survey, in ’93 some 62 percent of Japanese clung to the idea that “compared with cash savings or shares, property is a profitable form of investment.” That percentage decreased consistently right through till ’03, when it hit 33 percent. Even today, fewer than 40 percent of Japanese believe property is a profitable investment.

Much is made of the fact that Japanese apartments and houses are not built to last. As Masao Ogino, president of foreigner- friendly real-estate agency Ichii in Tokyo’s central Shinjuku district explained, “what is fundamentally different about the Japanese housing market compared with other markets around the world is that the average life span of houses here is very short, so the prices of properties come down enormously.”

The knee-jerk reaction is to lay the blame for this at the door of home-builders. But the MLIT survey suggests the causes are much more ingrained. Why would builders make residences that retain their value if no one thinks of them as investments in the first place?

Up until the turn of the century, participation by foreigners in the local property market could largely be summed up as: “Either you’re already in, or you stay out.” Lucky or smart or just particularly long-term residents who had managed to buy before the bubble economy sent prices through the roof either hung onto, or cashed in on, their investments, while those who had missed the boat generally opted to stay out. And when prices started free-falling, foreigners — both individuals and corporations — were as loath to buy as locals.

Then came ’01, and the introduction of Real Estate Investment Trusts. Put simply, REITs, as they are known, are corporations investing in property that enjoy reduced rates of taxation in exchange for a promise to distribute a large portion of their profits to their investors.

REITs provided foreigners with a way to invest in Japanese property without actually buying it. And, as the Japanese economy was simultaneously showing signs of a turnaround — occasioning suspicions that property values had bottomed out — investment started pouring in, totaling ¥7.2 trillion in 2007. Foreign investors played a large part in that growth, holding 29 percent of REITs’ holdings at the end of last year.

This influx of investment led to an increase in mostly inner-city land prices — enough, finally, to halt the 16-year-long decline of the national average. In March ’07, when the MLIT introduced its annual appraisal of land prices for that year, the national average had increased 0.1 percent for residential properties and 2.3 percent for commercial properties.

Of course, few REITs were interested in properties in places like Toride — where prices continued to fall — but the growth in Japan’s three main urban centers of Tokyo, Osaka and Nagoya was sufficient to lift the national average.

The historic turnaround was marked with unusually emotive language in MLIT’s White Paper for that year. “Large changes can be seen in our country’s property-market trends,” it begins, before naming a revival of the economy and the establishment of the REIT market as responsible for the rise.

From July of that year, all major MLIT reports on land values began carrying the caveat: “With regard to future prospects for land prices, consideration should be made of trends in the economy and interest rates, supply and demand balance, and the tendencies of investors in Japan and abroad.” It was a paternalistic warning of the dangers of jumping into a market now partly, at least, at the mercy of non-Japanese.

This year’s White Paper, published in June, for the first time includes half a chapter devoted to the property investment market, with half of that aimed at explicating the thoughts, motives and likely actions of foreign investors.

Of course, that White Paper was prepared before the so-called global credit crunch really bit, and any shine the property market had gained for individual investors has no doubt now been thoroughly erased. The very latest land prices — collated by the prefectures two weeks ago — show that the downward march had resumed to the tune of a 0.8 percent dip in commercial land prices and a 1.2 percent dip in residential land prices.

The chairperson of the National Federation of Real Estate Transaction Associations, Hiroshi Ito, voiced MLIT and media sentiment most succinctly, saying the downturn was due to “a reduction in the amount of investment in Japanese property by foreign investment funds due to uncertain financial conditions caused by the subprime problem.” He also named stricter building regulations and a perceived downturn in the economy as factors.

Sure enough, MLIT figures suggest that foreign investment in Japanese REITs has leveled off over the last year, but a MLIT survey this January of non-Japanese investors in the Japanese property market showed that 68 percent still believed the local market was “bullish” or “somewhat bullish.”

Even in these dark days, they seem to say, profitable investment is possible in Japan.

And if so, it’s foreign buyers who are leading the way — especially in the area of ski resorts. In the same most recent land-price survey, there was one standout statistic: The place that posted the greatest increase in land values was a town called Kutchan. The town occupies one side of the Mount Annupuri-Niseko, a ski area now famously popular with property-buying Australians, and more recently Asians too.

According to the survey, a sample property in Kutchan saw an annual increase in value of 40.9 percent to July 1. This rise is almost entirely due to money flowing in from non-Japanese investors and buyers. According to statistics provided by the town, the number of approvals of new building applications increased in Kutchan from 95 in 2005 to 121 in just the first five months of this financial year. In 2005 only 11 applications were by foreigners; this year there have already been 70 by foreigners.

Town officials are careful to point out that their criteria for judging whether someone is a foreigner rests solely on their judgment about whether the name on the form is “foreign” or not.

That fact illustrates an important point. While documentation of the investment activities of foreign-owned corporations abounds, neither the MLIT nor local governments have any data, nor any means of collecting data, on exactly how many non-Japanese individuals are buying properties.

Nevertheless, several indicators suggest that more foreign individuals are buying property.

Foreign banks, such as Australia’s Commonwealth Bank, are starting to offer mortgage services in Japan. “We found that there was a fair number of foreigners wanting to buy properties in Japan who couldn’t, or found it too difficult because of language issues, life-insurance issues, residency issues,” said Richard Harris, the bank’s general manager in Japan. Since launching these services in May, they have received 350 inquiries.

Meanwhile, both the Foreign Resident’s Advisory Center within the Tokyo Metropolitan Government and the Kanagawa Housing Support Center reported increases in the number of inquiries about house-buying over the last few years, although neither had concrete figures. Isao Nagasawa, the head of the Kanagawa facility, said most home-buying inquiries came from Brazilians and South Americans who were the grown children of first-generation migrants.

Among those members of the English-speaking foreign community who are buying properties these days, many are British, American and Australian. Typically, they have been here for eight to 20 years, meaning they have sat out the economic downturn, but also watched from afar the property booms in their home countries.

Four such home-buyers have provided The Japan Times with accounts of their experiences. Their stories — selections of which appear below — suggest that chief among their reasons for buying were Japan’s still low interest rates, concerns that rent money was wasted money and, somewhat surprisingly, pet ownership.

While aware that properties tend to decrease in value here, most seemed to be holding onto the idea that either sound construction practices (a structurally sound log house in Saitama, for example) or careful selection of the location (near Yokohama, for example, with good transit options) might see them turn a profit if they decide to sell.

Most buyers said they had mentally made the commitment to live in Japan forever, and it was that fact that was most applauded by estate agent Ogino.

“I think the break-even point (for buying property) would be 30 years. If the owner lives in the property for 30 years or more, it would be financially worth buying it,” he said.

That, and the establishment of new corporate investment options such as REITs, suggests that the unlikely marriage between foreigners and the Japanese property market is set to continue for many years to come.

Additional reporting by Tomoko Otake