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Experts suggest detached houses rather than apartments are a better investment for buyers.

Experts suggest detached houses rather than apartments are a better investment for buyers.

Japan’s shrinking population, soft economy, and growing stockpile of abandoned homes should all amount to a weak property market.

But buoyed by the 2020 Tokyo Olympic and Paralympic Games, as well as a wave of cashed-up Asian buyers, real estate in major cities is slowly starting to shrug off the post-bubble bust of the 1990s.

Describing the surge in Chinese buyers, Zhou Yinan, an Osaka-based agent at Chinese brokerage Sou Fun Holdings, said, “The demand is like water exploding up from a well.”

“The Chinese buyers had mainly been from Taiwan until last year, but that trend has been in reverse since October, as the yen has been weakening against the yuan,” he told Bloomberg News in a July 3 report.

Like the Chinese shoppers flocking to Tokyo’s upscale Ginza district, Chinese property buyers are reportedly coming to Japan for regular three-day property shopping trips, during which they visit cities such as Tokyo and Osaka.

The yen’s decline to 22-year lows against the yuan has boosted their spending power, while there is also confidence that the 2020 Games will drive up prices, as happened previously in Beijing.

While nationwide residential land prices have fallen for seven years straight, prices in the main metropolitan centers of Tokyo, Osaka, and Nagoya posted their second straight annual rise in 2014.

According to the Real Estate Economic Institute Co., Tokyo apartment prices have risen to their highest levels since the early 1990s, having advanced 11 percent over the past two years.

Yet for Asian buyers, Japan remains inexpensive. In 2014, Hong Kong’s median price was HK$4.9 million (US$630,000), more than 160 percent higher than the price of comparable properties in Tokyo and Yokohama.

Yields on Beijing property average just 2 percent, making Japan’s higher yields attractive to Chinese buyers who face restrictions buying second properties in the domestic market.

The average price of a three-bedroom apartment in Tokyo’s 23 wards and surrounding prefectures was ¥53 million (US$440,000) in April, compared with HK$8.4 million (about US$1mn) for a 600-square-foot apartment on Hong Kong Island, or US$554,000 for homes in New York.

For domestic buyers, the home-price-to-income ratio, representing the cost of a home relative to a buyer’s average annual income, increased to more than 10 times last year in Tokyo. But it remains well below its bubble-era peak of 18 times.

“Properties in Tokyo are cheap and the returns are relatively high,” Nomura Research Institute Ltd.’s Tomohiko Taniyama told Bloomberg.

“The quality of buildings is high, while investment opportunities are abundant, unlike Singapore or Hong Kong where the number of available properties is limited. In that sense, Tokyo is one of the best destinations for investment.”

Kenneth F. Arbour, president of Tokyo-based Century21 Sky Realty Inc., says his high-end apartment buyers are mainly Chinese individuals with an eye for quality.

“They buy the cream of the crop in terms of who’s building top quality residential properties in Tokyo, such as those by Mori Building Co., Ltd. And they pay cash,” he says.

“When you’ve got buyers going into a lotto just to buy one of these places, like Mori’s Toranomon Hills, you know it’s a seller’s market. For these types of high-end properties, prices have gone up, not by 10 percent but by even as much as 50 percent.”

However, Arbour says buyers of relatively average priced apartments in central Tokyo (of between around US$500,000 and US$1 million) could still expect yields of up to 4 percent, well above those of major cities elsewhere.

He suggests buyers stay central for capital gain, rather than explore cheaper locations.

“If you’re a first-time buyer, I would really encourage you to stick to Minato-ku—you can’t really go wrong there location-wise,” he says.

Nevertheless, Tokyo-based architect Riccardo Tossani says foreign buyers are now venturing outside the capital’s traditionally favored but expensive “three As” of Aoyama, Azabu, and Akasaka areas.

“Foreign buyers are starting to look at Setagaya-ku, Meguro-ku, areas that are still very central but with tremendous public amenities such as hospitals and daycare centers—it’s worthwhile looking outside the three As,” he says.

Both urban and suburban Japan may see a revival.

Both urban and suburban Japan may see a revival.

Tossani suggests long-term Japan residents focus on detached homes rather than apartments, given the difficulty in remodeling apartments and the traditional reliance on land values.

Unlike in the West, land is typically worth up to two-thirds the value of a house and land package.

“When you’re buying an apartment, you’re only buying a portion of the underlying land, and it typically won’t appreciate fast enough to compensate for the depreciation of the building.

In value per yen, a single family, detached residence is always a better long-term investment than an apartment,” he explains.

Tossani says homebuyers can expect to pay around ¥300,000 for an architect’s “volume study” of a site and basic building schematic plans, which can be used to gain pre-approval for a loan.

After this has been approved, the Japan Institute of Architects has a sliding scale of fees: the larger the house, the lower the overall fee.

While the major centers are enjoying a revival, elsewhere the picture is more sedate. The average price of land for all purposes dropped by 0.3 percent last year, while nationwide housing starts declined 9 percent, partly due to the consumption tax rate hike.

Even in the major metropolitan areas, suburban property prices remain weak outside the “hot” suburbs.

Although last year residential land prices gained, on average, more than 3 percent in the heart of Tokyo, they declined in the suburban city of Ome, reflecting an increasing disparity between urban and non-urban markets.

“Land prices have yet to rebound on a broad front, and the concentration of demand in [big] cities will continue for some time,” Mizuho Securities real estate analyst Takashi Ishizawa told the Nikkei.

Fukuoka-based Ziv Magen, manager, Asia-Pacific of Nippon Tradings International (NTI), acts as a buyer’s agent for foreign investors seeking inexpensive Japanese properties, typically ranging from between only US$30,000 and US$70,000, but with high yields of around 10 percent.

“For yield purposes, we avoid the internationally renowned cities like Tokyo, Osaka, and Niseko in Hokkaido, where prices are too high and yields are depressed.”

Magen says he targets urban areas, where the population is stable or growing, and there is more than a single industry. Fukuoka, Kawasaki, Kobe, Nagoya and Sapporo spring to mind.

Jason Hurst, director of operations at International Solution Group, suggests foreigners can more readily obtain finance for investment properties such as apartment buildings, including 100 percent loans.

According to Chiba resident Philip Brasor, rural areas of Japan have launched campaigns to attract foreign buyers, highlighting their low prices for skiing or other tourist attractions.

For foreign residents or overseas buyers, ultra-low interest rates, attractive rental yields, and the prospect of rising land values ahead of the 2020 Games have suddenly put Japanese property back in the spotlight.

While far from the bubble years when the Imperial Palace was reputedly worth as much as the entire state of California, after a long and bleak period, the sun may finally be rising again for Japanese real estate.