[recruit2]

Tokyo property wrap up

I attended a property seminar in Yurakucho where a group of international banks with a presence in Tokyo were explaining their 'international mortgage products' to a room full of Tokyo based expats and property investors. Both Commonwealth bank and NAB have presences in Tokyo and really presented themselves as familiar carbon copies of the branches you are typically used to dealing with in Australia, further, you are still dealing with Aussie employees so it is quite a convenient service for Aussie expats. There were quite a few Aussies amongst the audience and one lady I was talking to with IPs in Brisbane.

“The most tranquil place in Japan”
I got talking to fellow Aussie, Jon Sparks, ex CEO of about 4 different Japanese companies who has now left the corporate world and built an amazing river side lodge in "the most tranquil place in Japan" (http://www.riversidewa.com/ ). The picturesque location is very unique in that they have a shinkansen station just 1km away, but conveniently concealed behind a beautiful mountain - Jon joked that he could be home with a glass of wine in hand just 70 mins after leaving the seminar - that is the absolute height of Japanese bullet train infrastructure at its best. Beautiful Gunma prefecture is like being a world away from the concrete chaos of Tokyo. It's also probably the only place in Japan where you will notice Kangaroo warning signs along the entrance road to the property! Jon is now launching a series of "Habitat" eco-friendly homes which inherit features from the original riverside design, but taking it further, bringing affordable eco-friendly homes to the main stream.

Common questions and age-old concepts
The night was a great opportunity to ask some of the key people directly several questions I'd had ticking over in the back of my mind re: Japanese property and loans ("Can you borrow at 2% to buy an Australian property and is this common place with investors!?", "Can you access equity from an Australian property to buy a Japanese one?!" etc) and to familiarise myself with the local market conditions further. There was a lot of healthy discussion in the room and also the re-badged, but age old concept of 'land banking' from a Canadian company selling units of cheap land in metro outskirts in the direct path of growth with the promise of selling 6-8 years later at double the price.

A culture of fascinating quirks
The Japanese culture has many interesting quirks which are just fascinating and really influence the way the average person thinks about property over here - totally different to how we Aussies do. Most people live at home with their parents either for life or a very long time. Most people are happy to rent. Many properties remain in the same family for generations and therefore there is a lot less buy/sell activity - the Japanese mortgage market is about a tenth of the size of the Australian mortgage market, despite having the 500% larger population base. Strangely, Japanese banks will also put up major road blocks should you suddenly wish to change your PPoR into an IP - some disallow it altogether, others will increase the interest rate or add excessive fees - a key area where the international banks sought to differentiate themselves.

The Japanese love brand new properties and having the latest - renovation is considered a pesky waste of time and inconvenient. As a result, older properties often depreciate, depreciate and then depreciate some more, until they end up a great opportunity for a simple facelift renovation. Parts and supplies are cheaper than Australia (new air conditioners for example are a couple of hundred bucks).

As an investor, you benefit from the Japanese ingrained ethics two ways - great tenants and fantastic property managers. Tenants are of a very high quality, rents are paid on time, properties aren't maliciously damaged, shoes are taken off at the front door - a nice contrast to the problematic tenants which can be common in regional Australia with the trashed buildings, late rents and vehicles sitting in overgrown grass etc. Japanese property managers are highly trustworthy and will bend over backwards for you with everything from initial negotiation through to high quality repairs etc - properties can be managed remotely from your home country.

Another interesting quirk of the culture is the blanket avoidance of any property that is associated with a death. You will often come across totally vacant blocks of land, covered with weeds and grass, right in the middle of a hugely dense semi-CBD type area - with multi-level apartments surrounding left, right and centre. When I ask why the land is vacant and why no one has built on it, the answer more often than not is "someone once died in that house, so it got demolished and now nobody wants to buy that block". Absolutely fascinating! I know value-hungry Aussie property investors would be able to move past the tragedy of death very quickly when the numbers stack up so well! These type of death foreclosed properties often represent the extreme bargains simply because the Japanese mostly won't touch them. A number of start-ups have emerged in recent years exploiting this cultural phenomenon where local brokers are placing bids for overseas investors.

"Only when the tide goes out do you discover who’s been swimming naked."
Interestingly, the CBA will allow you to access equity in an existing Australian property and set you up a Japanese mortgage at circa 2% even if you aren't a permanent Japanese resident - Aussie citizenship is sufficient. All of the international banks will also offer you a circa 2% Japanese mortgage for property outside of Japan, e.g. Australia. So why isn't everybody doing it? Of course, the reality is that if the Yen to the currency the property was purchased in move against you, you can end up high and dry very quickly. Horror stories were openly offered from the various general managers of customers that had leveraged up in this way and lost the lot overnight when the FX took a dive and the bank came knocking for multiples of their normal monthly repayments - "Only when the tide goes out do you
discover who’s been swimming naked." - Warren Buffett.

The Japanese ski fields boom (Little Australia)
During recent years, CBA lent significant funds specifically in the Niseko and Hakuba regions (Little Australia), mostly to Aussies during the Japanese ski field boom - I know some Aussies who personally invested in these areas and opened up ski equipment shops and are doing well. But more recently (post GFC), CBA Tokyo branch received a directive from the Sydney head office to put a stop on that as they felt they had too much risk exposure to that single area. As a result, CBA will no longer lend for investment in the Japanese ski fields.

A time to be gloomy or greedy?
The vibe surrounding the Japanese economy at the moment is generally gloomy due to the shrinking population. Tokyo, Yokohama and Kawasaki (situated in mid way between the former two) are the only areas which are still growing in population, in the face of the rest of the country shrinking. Tokyo property investors have to take a yield/cash flow focused approach with the expectation of either negative, zero/flat, or only very marginal positive capital growth if you're lucky. Over the past 5-10 years values have either remained flat or gone backwards. Some would say that while everyone is panicking amongst all the gloom it may well the perfect time to buy into the depressed market as it may just have bottomed out. But the fact remains that the population is diminishing and quite quickly. http://www.metro.tok...lan_data_19.pdf tells the Tokyo story, with figures for the rest of the country more severe. Unless the Government literally open up the immigration floodgates, these numbers are going to be hard to turn around. Further, you have the imminent risk of the long overdue Kanto earthquake striking - earthquake insurance for buildings in Tokyo isn't an option for good reason if you are in the position of the insurance companies. So the overall picture is one of risk without incentive.

This leads to stronger than normal rental yields being commonplace. Most apartments are immediately CF+ and substantially so - 14% yields are not difficult to find on older, depreciated properties. Further, with the astonishing circa 2% interest rates it can look attractive, but plan for zero capital growth.

One approach aimed at circumventing these investment challenges that some investors are taking, is buying older properties (usually 1 bedroom/studios) for between about $50k-$90k where the building has already fully depreciated and the cost is essentially the underlying land value. So if/when the Kanto earthquake strikes and the building collapses (worst case) you are still left with the land value, which you may optimistically be able to sell to a developer at a profit. If the quake never comes, you benefit by collecting the ongoing positive cash flow.

While a lot of Aussies would do back-flips over the thought of 2% interest loans and 14% yields, the reality is that there is still not really enough incentive for the level of risk. You run the risk over time of a combined slow down where both property values and vacancy rates simultaneously deteriorate due to the diminishing population.

The densest city in the world is alive and well
Some have labelled Tokyo as a city waiting to die, but Tokyo is far from dead - they are mid-way through the construction of the 620m Tokyo Sky Tree tower which is just a phenomenal structure. The capabilities of the Japanese work force are staggering and they remain some of the hardest and most diligent workers in the world – they definitely won’t go down without a fight.

For me, the decision is not to purchase property in Tokyo itself specifically for investment purposes. If you are Tokyo based however, with circa 2% interest rates and depressed entry prices, it is definitely an attractive option to buy your own Japanese home. With the higher potential for further growth in regional Australian areas - Australia is a more attractive place to invest in property. But like anything, it will come down to individual negotiations and the particular deal you are able to put together.

[Icarus]

Only just came across this post; very interesting read! Thanks Recruit2. I'd never really taken the time to check out what was going on outside my backyard; really gives you an interesting perspective.

How long have you lived in Japan? A couple of mates taught over there for a couple of years and loved it. They were in Osaka I think.

Thanks again and catch you soon.