KATAKURA PROPERTY

The Yen Foreign Exchange Rate

To compare the value of two currencies it is important to correct for inflation. After all a US dollar now can buy significantly less than a decade ago. The following chart shows the exchange rate corrected by inflation as reported in the CPI.

Looking at this chart the yen currently looks reasonably priced as it is around it’s long term mean. According to the Big Mac Index by the Economist the yen is also close to fair value [1]. However according to an article by David Weinstein the methodology to calculate the CPI in Japan differs from the US and results in an overstatement of inflation by 0.8% compared to the US. This would mean that the yen is still significantly undervalued. Having said this, the Japanese yen made a remarakable revaluation in 1985, going from more than 200JPY per dollar upto 150JPY in less than one year so the yen could still be 15-20% overvalued in case the statistics goes back 10 more years in this graph.

The Buying Process

Finding Property

Bidding

A discount of 5 to 10% of the asking price is normal for investment properties. Initially make a low bid without asking for details about the property Do not bid too low: it offends the seller and you will not be considered anymore afterward. If the seller is interested, ask for more documentation and raise the bid. Be patient and respectful: most sellers are in their 70s and they are selling due to their advanced age, not because there is anything wrong with the property.

When a bid is accepted the seller’s broker will prepare the contract. The buyer has a few days to study the details after which the contract is signed and a 10% deposit is paid to the seller. The money does not go into escrow therefore check if the owner has excessive mortgage obligations or other debts related to the property. If that’s the case request the selling broker to hold the deposit until closing

 

The Contract

You can sign the contract either with a registered seal (hanko) or your signature. You will need proof of residency. The scrivener will confirm your identity and intentions

Settlement

At the closing day everyone will come together. The transfer of the title deed and the payments will be made simultaneously. Large payments are normally done by domestic bank transfer, smaller ones by registered check and sometimes even in cash.

Property Management

Finding Renters

When a broker finds a renter there are normally three months fees involved. The owner pays one month to his property manager and the agent who finds a listing and the renter pays one month to his agent. Many property managers do not want to share commissions and as a result they do not share the listing with other brokers and advertise only in their shop and website. As still most renters in Japan find properties through the offices of their local broker this will make it much harder to find tenants quickly.  We will work with local brokers. We allow them to advertise the property and receive one month broker fee from the renter. And as it is still common to receive one month key money for small apartments there is generally little cost to the property owner in finding a new tenant as this key money pays for our 1 month agent’s fee.

Small apartments are normally rented out within a month or two

Repairs and Renovations

Maintenance of the building is done by the union of owners.

When a renter moves out some cosmetic work might be required. Occasionally an air conditioner or a water heater will need replacement.

Major renovations do not earn themselves back

Collecting Rent

A guarantor can be called upon if the renter does not pay.

Renters seldom behind their rent.

Legal procedures are expensive and slow.

A polite phone call is usually enough.

Property Valuation

There are actually four types of government land prices. The surveys are based on assessments by real estate appraisers, who, taking into account profitability and transactions in neighboring areas, determine values for 1 sq. meter plots. The assessments assume that the land is utilized as efficiently as possible. There are also two other types of official land prices, used for tax and valuation purposes, as well as the actual asking and transaction prices. Here is a quick rundown:

1. The kouji-chika (appraised land value) is published annually by the Ministry of Land, Infrastructure and Transportation on April 1, gives prices for around 30,000 points nationwide, focusing on urban areas. There is a map available with these values here.
2. The kijun-chika (average residential and commercial land price) is published annually by each prefecture on July 1 for around 25,000 points nationwide, based on local land appraisers’ reports. This measure also covers non-urban areas such as forest and agricultural land. Map
3. The rosenka (prices of land fronting major roads) is published by the National Tax Administration Agency and is comprised of two different measures: the koteishisanzei (fixed asset tax) rosenka and the souzokuzei (inheritance tax) rosenka. The souzokuzei rosenka is the most widely used value for roughly estimating land values in relative locations. The rosenka is published each October.
4. The koteishisanzei-hyokagaku (assessed value of fixed assets) is computed by the Home Affairs Ministry every three years for all taxable properties, and forms the basis for property tax (Fixed Asset Tax and Urban Planning Tax) calculations. The value is not commonly disclosed except to the taxpayer in question.
5. The actual transaction price of real estate, or jisei-kakaku. This is the market price, and can be vastly different from the official prices of land. These prices are not published and are only made available to appraisers on individual basis by means of voluntary inquiry forms sent to the transaction participants.
6. The advertised prices of properties for sale. Properties for sale are published by many websites including AtHome and Yahoo Real Estate.  The difference between the transaction price and the lowest advertised price for a property is relatively constant at about 5%. As a result the best way to value an apartment in Tokyo is to use these advertised prices.

The kijun chika and kouji chika are commonly used by economists to determine trends in land values, while real estate practitioners use rosenka more often. Japanese appraisers use all the above indicators in their reports. Unfortunately none of these valuations are particularly useful to calculate the actual market value of a property. Professor Nishimura’s academic paper Distortion in Land Price Information describes these serious problems in the governmental information system. Due to a lack of reliable government statistics and transaction data the best way to value property in Tokyo is using #6 “The advertised prices of properties for sale”.

Taxes

Possession Tax

Paid once a year.

Normally about 0.3% to 0.5% of the market value each year, (peaks as high as 1.2%)

Computed as a percentage of the assessed land and building values.

Assessed values can differ wildly from the real market value.

More information can be found on this page of the Ministry of Land, Infrastructure, Transport and Tourism.

Acquisition Tax

This tax is due a few months after buying the property. Normally around 0.5 to 1.0% of the purchase price, it can peak as high as 2%. It is based on the assessed value and the calculation for residential property is as follows:

Acquisition Tax = Assessed Land Value x Share of the Land x 1.5% + Assessed Apartment Value x 3%

The assessed land and building value are published annually and available from the property records that are obtainable from the tax office. Here are examples of these property records.

The assessed land value and the share of the land are circled in red The apartment value is circled in red

There is a discount for newly built properties. More information can be found on this page of the Ministry of Land, Infrastructure, Transport and Tourism.

Stamp Duty

On any real estate contract both the buyer and the seller need to put a stamp. The stamps can be bought at the post office and the value is dependent on the transaction price. Mortgage contracts need a stamp too and the tax rates for this are slightly different.

Transaction Amount	Property Purchase	Mortgage
10,000 or less	nil	nil
10,001 – 100,000	200	200
100,001 – 500,000	400	400
500,001 – 1,000,000	1,000	1,000
1,000,001 – 5,000,000	2,000	2,000
5,000,001 – 10,000,000	10,000	10,000
10,000,001 – 50,000,000	15,000	20,000
50,000,001 – 100,000,000	45,000	60,000
100,000,001 – 500,000,000	80,000	100,000
500,000,001 – 1,000,000,000	180,000	200,000
1,000,000,001 – 5,000,000,000	360,000	400,000
more than 5,000,000,000	540,000	600,000
if no amount is stated	200	200

Income Tax

Rental income is part of your income and taxed as such. Maintenance, repair, management and financing costs can be deducted. Depreciation can be deducted too. If you are not resident in Japan the total income in Japan will be low and so you will fall in a low tax bracket. Also no local tax will have to be paid.

The first 380,000 yen is the total income not taxed. After that the national tax rates are as follows:

Tax Base (Yen)	Tax
1 – 1,950,000	5%
1,950,001 – 3,300,000	10% of base exceeding 1,950,000
3,300,001 – 6,950,000	20% of base exceeding 3,300,000
6,950,001 – 9,000,000	23% of base exceeding 6,950,000
9,000,001 – 18,000,000	33% of base exceeding 9,000,000
18,000,001 and over	40% of base exceeding 18,000,000

When filing personal income tax you are required to fill out two forms for the real estate income:

The income tax form The depreciation calculation form

Translation of the income tax form (part 1) Translation of the income tax form (part 2)

Translation of the depreciation calculation form (part 1) Translation of the depreciation calculation form (part 2)

Capital Gains

On short term holdings (less than 5 years) the tax rate on capital gains is quite high at 39% (30% national + 9% local tax)

But there are ways to reduce it to 15% or less.

If the dwelling is used as a primary residence the first 30 million yen of capital gains is tax free. (a couple owning a house jointly gets 60 million tax free)

If you own a property more than 6 years the tax rate goes down to 20%, (15% if you are not a resident in Japan)

Financing

For investment properties there is currently no reasonable financing. For primary residence it is only attractive for Japanese citizens or permanent residents.

Banks

Mizuho, MUFG, Resona, Sumitomi

If you have permanent residency or are a Japanese citizen these Japanese banks will lend over 90% for a primary residency at very favorable rates. Also it might be possible to get an 80% loan for a second home for very competitive interest rates. This may be an investment property. To apply for a loan with any of these major banks just walk into your branch. Some companies have referral programs, so inform with your HR department before applying.
Shinsei Bank

In some cases Shinsei bank might issue a mortgage to a non-permanent resident if they are married to a Japanese. For primary residence their interest rates and Loan-To-Value is competitive with the major Japanese banks
HSBC

HSBC never really issued mortgages as all applications we heard of were declined. Now they have made this policy formal by not accepting any new applications anymore. This will save everybody time and effort. Interest Rates
Suruga Bank

Suruga Bank will lend on investment properties to permanent residents. The interest rate in that case is 4.6% floating. For an appointment contact Mr Itou at the MidTown branch. Phone number: 03 5411 2361 Email: iin2155@surugabank.co.jp
National Australia Bank

NAB lends to non-permanent residents. The minimum loan amount is 35 million yen. For primary residence their LTV is up to 80%, much lower than the 90%+ offered by Japanese banks. Their interest rate of Libor + 2% is about double what Japanese banks charge. For investment properties they offer maximum 70%, but due to very low valuations in effect this comes out to about 60%. Given the minimum loan size this means a property needs to be at least 60 million yen. High yielding investment properties in general are much cheaper than that. Also the maximum loan length is shortened for older properties. The best investment apartments are around 30 years old. For these properties NAB will offer a loan for no more than 5 years. The yield on buyer smaller and older investment properties unleveraged is higher than buyer a conforming property leveraged, making the current NAB loan product unsuitable for investment properties.
Commonwealth Bank Of Australian

CBA stopped lending in October 2010
Lloyds TSB International Mortgages

Lloyds lends on properties in many countries, but not on properties located in Japan.
Bank of Taiwan

BoT lends primarily to Taiwanese citizens. Their interest rate is around 2.8 to 3.5% with a LTV of up to 70% for primary residence. For investment properties the maximum loan length is 10 years, although it will likely be shorter for older properties. As a result their loan product does not seem suitable.

Transaction Costs

Purchase Fees

Broker Fee

The standard broker is 3.15% of the transaction price plus JPY 63,000. Both the buyer and the seller pay this amount. Normally the buyer and seller have each their own broker. One broker is allowed to represent both parties, in which case he receives the broker fee twice. It is not common for brokers to give a discount on their fees.

Stamp Duty

On the sales contract each party is obliged to put a stamp. The amount is dependent on the transaction price and normally varies from 10,000 up to 80,000 yen. The stamps can be bought at any post office.

Judicial Scrivener Fee

In Japan the title transfer is arranged by a judicial scrivener. Included in his invoice will be the registration tax. The total costs can vary wildly depending on the type of property, the assessed value and if a mortgage needs to be registered as well. Also much like lawyers, some scrivener’s are much more expensive than others. As a rough estimate assume that the total cost for this item is about 60,000 yen plus 1.5% of the purchase price. And in case of a financed purchase add another 0.4% of the mortgage amount. Here are some links (1 and 2) to the registration tax the scrivener will include in his invoice.

Other Closing Costs

Other income and expenses that show up on the final closing cost calculation are:

Acquisition Tax

Technically this is not a closing cost as it is due a few months after buying the property. Normally around around 0.5 to 1.0% of the purchase price, it can peak as high as 2%.

Annual Possession Tax

The annual possession tax has to be paid by the owner of the property as of January 1. When you buy a property halfway during the year, it is customary to reimburse the seller for part of the year’s tax.

Monthly Maintenance

The monthly maintenance is normally paid at the beginning of the month. If you buy the property halfway during the month it is customary to reimburse the seller part of the maintenance fee. For transactions done close to the end of the month it is also normal to pay the next month’s maintenance to the seller as it can take a couple of days to notify the building management of the change in ownership.

Rent and Rental Deposit

In case the apartment is renter occupied the seller will transfer the deposit to the buyer. And like with the monthly maintenance fee, the seller will pay the part of the month’s rent starting at the purchase date.

Additional Costs

Furthermore you might want to budget for the following costs:

Mortgage Origination Fees

Mortgage origination fees vary wildly from bank to bank. Many Japanese banks also require that the buyer pays a 2% mortgage insurance fee on the loan amount. In return the interest rate is lowered by 0.2% for 10 years. In general this fee turns out to be optional and it might be partially refunded if the property is sold within 10 years.

Remittance Fees

Transferring funds to Japan is expensive. If you transfer foreign currency to a bank in Japan they will convert it to yen at a unfavorable rate causing losses of about 1 to 3% of the transferred amount. When transferring yen the remittance fee our bank (MUFJ) charges is as follows:

Transfer amount	Remittance Fee
1 – 5,000,000	4,000
5,000,001 and over	1,500 + 0.05% of transfer amount

This means for example transferring 20 million yen will cost 14,000 yen. I am looking around to find a bank that charges more reasonable fees.

Fire Insurance

Fire insurance is relatively cheap. Human Corparation Ltd, an agent for ACE Insurance can arrange fire insurance for 2,000 to 4,000 yen per year. Their phone number is 03 5775 6203 (Japanese Only). When getting a mortgage some banks require that the buyer take out fire insurance over the full length of the mortgage term in advance.

 

Seller’s Costs

Broker Fee

The seller also pays a broker fee. It is the same amount as the buyer at 3.15% of the transaction price plus JPY 63,000.

Stamp Duty

The seller has to pay the same stamp duty as the buyer.

Scrivener Fee

In case a seller has a mortgage registered on the property, the scrivener will need to clear the title. There is a small charge for this, normally around 20,000 yen.

Bank Fees

Some banks have a penalty for prepayment. Also it is possible that a bank will refund some of the mortgage insurance that was paid when the property was bought.

 

Examples

A small investment apartment in the North of Tokyo

Purchase price: JPY 3.85 million

Transaction Date: April 19, 2010

Total closing costs: 252,035 (6.5%)

Paid by buyer: 362,435 (9.4%)

• Broker Fee: 182,700
• Scrivener Fee: 82,065
• Stamp Duty: 2,000
• Annual Possession Tax: 16,762 (257 / 365 x 23,806)
• Maintenance Fee: 19,908 (12 days in April + May = 42/30 x 14,220)
• Acquisition Tax: 59,000 (Land 24,900 + Building 34,100)

Received from seller: 110,400 (2.9%)

• Deposit 46,000
• Rent: 64,400 (12 days in April + May = 42/30 x 46,000)

A small investment apartment in the Center of Tokyo

Purchase price: JPY 9 million

Transaction Date: February 9, 2011

Total closing costs: 413,664 (4.60%)

Paid by buyer: 628,950 (6.99%)

• Broker Fee: 346,500
• Scrivener Fee: 222,750
• Stamp Duty: 10,000
• Annual Possession Tax: 40,679 (326 / 365 x 45,545)
• Maintenance Fee: 9,021 (20/28 x 12,630)
• Acquisition Tax: 206,100 (Land 163,100 + Building 43,000)

Received from seller: 215,286 (2.39%)

• Deposit 156,000
• Rent: 59,286 (20/28 x 83,000)

A small house in the center

Purchase price: JPY 50.5 million

Transaction Date: May 10, 2010

Total closing costs: 3,253,058 (6.4%)

• Broker Fee: 1,488,375
• Scrivener Fee: 722,050
• Stamp Duty: 45,000
• Annual Possession Tax: 92,403 (145 / 365 x 153,305)
• Acquisition Tax: 569,600 (Land 393,100 + Building 176,500)
• Bank Fees: 335,630

A large investment apartment in the center

Purchase price: JPY 73 million

Transaction Date: September 3, 2010

Total closing costs: 2,937,434 (4.0%)

Paid by buyer: 5,100,767 (7.0%)

• Broker Fee: 2,329,503
• Scrivener Fee: 1,156,930
• Stamp Duty: 45,000
• Annual Possession Tax: 114,837 (120 / 365 x 336,573)
• Maintenance Fee: 96,967 (28 days in September = 28/30 x 103,893)
• Acquisition Tax: 981,900 (Land 532,900 + Building 449,000)
• Bank Fees: 375,630

Received from seller: 2,163,333 (3.0%)

• Deposit 1,650,000
• Rent: 513,333 (28 days in September = 28 / 30 x 550,000)

Reasons to invest in residential property in Tokyo

This article is about investing in residential property in Tokyo with a focus on small units.

• High Rents / Low Interest Rates

• Strong Rule of Law

No restrictions on foreign ownership

Ownership rights firmly protected

• Law is Pro-Landlord

Little protection for the renter at the end of the lease period

Key money, cleaning fees, renewal fees

• Strong Currency

A common misconception is that the yen is strong and possibly over-valued. Due to persistent deflation the yen can buy more and so long-term currency comparisons should be corrected for inflation. 

The US, UK and Europe are printing excessive amounts of money which increases the long-term risk of inflation that would lead to devaluation of their currencies.

Also Japan has a trade surplus, low individual debt levels and the government debt is entirely domestically financed

• Demographics

People are moving to Tokyo

Family size decreasing

• Good Timing

Prices went up in 2006 and 2007. During the financial crisis in 2008 prices declined. Prices finally stabilized in the summer of 2009 and have been very slowly increasing since. Still the market is down 80-85% since 1990.

What to Buy

Prefer old apartments

The advantages of older apartments are:

• Higher rental yield
• Lower depreciation
• No earthquake risk as all the value is in the land

Depreciation is brutal. After 30-35 years a building is worthless. There is very little for sale between 1984 and 1995.

Rents for older apartments are also lower.

But rents drop only about 30%, while prices drop 60%. So rental yields for older places are higher

The earthquake standards were upgraded in 1981, so if there is a chance that you will live there yourself avoid buildings that are much older.

Small apartments have higher yield

Look outside the Center

Rental yields are significantly higher outside the center. But avoid going outside the 23 wards of Tokyo. Not only is the population in the countryside rapidly declining, but also local real estate agents tend to have a near-monopoly in the smaller towns. As a result there is not a lot of transparency and it is hard to find out what a good price is. Also you would have to rely on that same broker to find renters. That put you at a disadvantage if that broker or his friends own property in the town as well. In Tokyo there are many brokers and the competition will ensure a decent level of service.

Prefer apartments with an existing renter

A property with a renter is called ‘Owner Change’ in Japan.

The advantages of buying a property with a renter are:

• No need to search for a renter. You start collecting rent from the day you get the keys.
• They are cheaper. For small studio apartments the price difference is very small, but for a 3LDK the difference can be as much as 25%.

Many buyers are looking for a residence for themselves and thus are not interested in a rented apartment.

Japanese banks are reluctant to finance investment apartments, which means there is significantly less money chasing rented apartments.

• You receive the deposit from the seller.
• You can not see inside.

But sometimes there are pictures available and sellers are generally honest about the condition.

Ordinary apartments are easy to rent out and to sell

Ordinary apartments are easier to rent out or sell than unique apartments. It is a common misconception that an especially beautiful, centrally located and new apartment is easy to rent out. In general such apartments are significantly more expensive and as such there are only few people that can afford such a place. It is much better to invest in ordinary apartments, such as apartments in large buildings with many similar units. As there is a big market for such units there are always people offering and looking for such units. This means it is easy to establish the market price at which such an apartment attracts a renter or a buyer quickly. Some areas might not have many very large buildings, but always prefer to invest in what is common for the area.

Pitfalls

When buying a property watch out for the following issues:

Land Issues

• Poor Road Access

The larger the road the more valuable the land is. Also the length of the frontage with the road has a large impact. If the frontage is less than 2 meters normally you are not allowed to rebuild the property and the land is essentially only worth something for the neighbors. If they are not buying it, you certainly shouldn’t.

• Setback

Most small roads in Tokyo are being widened. If land lies on such a road it might be necessary to give up a piece of the land for this purpose. Normally this happens when applying for a new building permit, but occasionally small slices of land are used for road widening without tearing down a building. As the land is made smaller an existing building suddenly might now be larger than officially allowed according to the zoning regulation. This can lead to confusion during the purchase and mortgage application as the seller needs to proof that the building originally was built according to the zoning laws. Not everybody has the appropriate documentation.

• Rezoning

Sometimes land has been rezoned, often reducing the floorspace that can be built. As a result existing buildings afterward are technically illegal and an owner will need to proof that the original building permit was legal.

Building Issues

• Post Construction Inspection Certificate

This certificate proofs that a building was legal according to the zoning laws when it was built. Often for older buildings the sellers do not have this document, but we can often find it at the local government office. Normally this document is needed when applying for a mortgage.

• Union Fund

Also called sinking fund, this money is held by the union of owners in reserve for any future maintenance. It is important that a building is reasonably capitalized to pay for the necessary upkeep and refurbishment. The biggest expense often is the elevator so prefer buildings without an elevator or where the elevator is relatively new.

• Maintenance Costs

The building maintenance costs are used for the regular monthly expenses such as cleaning and utilities for the common spaces. The monthly amount payable varies wildly among buildings. If a building owns parking spaces extra income can be had from renting these out and in such cases the maintenance fee might be lower.

• Artificially Inflated Rents

Occasionally you might find an apartment with a very high rental yield. Always compare if the current rent is close to the market rent. Rents have dropped significantly over the years and so a long-term renter might be overpaying. If such a renter leaves the new owner might have to drop the rent drastically to attract a new renter.

• Cemeteries, red light districts and suicides

A property next to a cemetery is much cheaper as the Japanese are not comfortable in such places. Also if a suicide has happened in the apartment most Japanese would not want to live there. There are no clear rules about informing prospective buyers or tenants about such conditions, but commonly any suicides in the last 2 years or by a previous tenant are mentioned. Often on inquiry with the doorman or maintenance people you can find out events that happened even decades ago. It can be advantageous to purchase such units and rent them out to foreigners who are normally much less worried about these things. Unfortunately such conditions are not properly advertised.

Contract Issues

The way business is done in Japan is different from many other countries. Even though rule of law is very strong in Japan it is unusual to go to court. This process is expensive and quite time consuming. Culturally the Japanese prefer to resolve their conflicts through direct mediation to avoid nasty confrontations. And so you should see a contract in Japan as a declaration of intention and disclosure document.There is no need to get overly suspicious about the details and instead be extra careful that you manage the expectations the other party might have. In Japan business is done based on trust on so leading someone to believe that you will do something will lead to an obligation even though it might not be in writing.

Leaseholds

A leasehold is a building that has been constructed on land that belongs to someone else. It is possible to buy such a structure and take over the lease of the land. In Japan often the owner of the land is a temple or shrine. Each leasehold is different and leases are commonly for periods between 20 and 50 years and are automatically renewed. The monthly charges are low and often comparable with the real estate tax on land. The renewal fees are hefty though, often up to 5 to 10% of the value of the property. Also many lease contracts have other restrictions. For example the owner of the land has to agree with any construction and could require a substantial gift before giving approval. Also a percentage of the proceeds of a sale might be required to transfer the lease to a new building owner.

The biggest obstacle to purchasing a leasehold is that banks are reluctant to lend against it as there is no collateral. And as each lease contract is different and confidential it is impossible to compare prices for leaseholds. Even though leaseholds are 20 to 40% cheaper it is therefore best to stay away from these types of property. The only reason to buy a leasehold would be that you have the cash and you really would like to live for a long time in a particular neighborhood.

Foreclosures

The reasons I strongly discourage anyone from buying a foreclosure in Japan are as follows:

• Bankruptcy is a big shame in Japan, so the family normally helps out and foreclosures are very rare. In Japan most financial problems get solved behind closed doors.
• The foreclosures that do get executed in general are caused by a combination of addiction (gambling, alcohol), mental disease (Alzheimer) and mafia involvement (Yakuza). Often the family has long ago disowned the seller.
• The foreclosure process is very long (over 2 years) in which time often the yakuza has moved into the property. This means that when you buy a property from the court there is a big chance that it has an unlawful (and possibly violent) tenant. It is also possible that the original owner is still there with nowhere else to go.
• As many foreigners do not understand the distinction between foreclosures in Japan and their own country they tend to have an interest in the limited amount of foreclosures in Japan. This results in bid prices that are higher than market value (the so-called winner’s curse).
• Only foreclosures in the countryside can be interesting, but realize that most villagers will look at a buyer of a foreclosure as a vulture. It requires significant commitment to the local community to make a successful purchase. One guy who pulled this off is Beau Retallick. He brought bungy jumping to Japan and after a lot of research through a foreclosure bought a hotel in Minakami called Yubiso Sansou