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Japan’s Real-Estate Investment Market – Part 2 – Tenants & Tenancies

Click here for part 1

Alright, so we’ve covered the basics – Japan’s got beautiful cash-flow, zilch to negative capital gain (recently that trend has changed, but no one knows how long this will continue), and the icing on the cake – the best and safest business and tenancy environment one could possibly hope for as a foreign investor or business person.

So, the question begs to be asked –why isn’t everybody and their dog shopping here???

Well, the “big boys”, as mentioned in our previous instalment, already are. As for the masses, the answer most likely lies in the “otherness” of Japan.

The ethnocentric tendencies of the Japanese are well documented – they rarely speak English, almost never enough to conduct business in, and are extremely foreigner shy. Strangely enough, this works both ways. In much the same fashion that the Japanese are ignorant about foreigners, the average foreigner finds the Japanese alien – or worse, classifies them as “Asians” – a horrid mistake, since they’re probably as alien to the majority of their neighbours as they are to the average Westerner.

The fact that in their case, this “otherness” translates to something very akin to chivalrous & child-like innocence, easily escapes the wandering eye, and it takes actual experience to realize that, in Japan, you almost never need to look to the law to protect you – you can actually depend on most individuals and entities you come in contact with to treat you fairly and expect the same in return, even in times of crisis and conflict. Keep this in mind as you examine these seemingly unpleasant–

COMMON TENANCY PRACTICES

Securities – bonds or deposits, as means of ensuring tenant co-operation, do exist, but aren’t mandatory. Sometimes you’ll have them, sometimes you won’t– it depends on the existing property manager’s policy and experience, and it’s usually best to follow their lead on this.

Meaning, if your PM doesn’t charge the tenants bonds in advance, because they found that in this particular area they’re hard to get, or that insisting on them doesn’t work– take their word on it – don’t insist – they know what they’re doing. To secure yourself, you CAN insist that the tenant take out rent insurance, which will essentially cover up to three months of delinquent rents. The rent insurance company will also run a check on the tenant before they approve them for this service, which is an extra layer of security.

If you purchase a pre-tenanted property, you may find that the tenant only has personal guarantors as security – (friends, family members, or employers who sign and promise to cover damages), and sometimes (in case of welfare or pension receiving tenants for instance) – the government may be the guarantor.

While the lack of security deposits and traditional credit checks is guaranteed to send the average foreign landlord running for their lives, images of drug labs, explosions, fires and general mayhem in mind– in Japan it has very little, if any effect, on decision-making. The average out of pocket expense one could face in case of a mid-term (5-8 years) tenant vacating the property after a decade or two (meaning, the price of a complete rehab including fixtures, wallpaper, floorings, deep clean, etc) is normally around $2-3,000 for most typical cash-flow investments (smaller, older studio apartments) – hardly a case of total-loss, even if the entire unit cost $20-30,000 (which is not un-common).

And the main thing is – Japanese tenants would never intentionally damage a property they live in. So while in other countries you’d be praying to god the security deposit, legal compensation and insurance policy put together will be legally and financially compelling enough to cover “this” (whatever “this” may be) –in Japan, “this” simply doesn’t happen. There are no warzones. No deadbeats. No habitual offenders. Or at least, very few of them.

No inspections or photographs – entry to a property is illegal while it is tenanted. No periodical inspections. No pre-purchase inspections. No pre-lease renewal inspections. Nothing. And so, property managers and even owners of properties very rarely enter a tenanted property, simply because Japanese law does not allow it, unless the tenant permits – and the average Japanese property manager or property owner wouldn’t dream to ask tenants for permission of entry, because “it’s simply not done”. So, in effect – if you’re purchasing a tenanted property, you’ll, in the vast majority of cases, be purchasing sight unseen. The best you could hope for is a “seller’s responsibility” clause covering any unknown issues, which may or may not be put into the contract – otherwise you’ll just have to rely on the property manager’s word, which relies on the tenant’s word, which relies on whatever condition report they filed or didn’t file as things broke down, (or didn’t), during their tenancy.

Scary, right?

Not really. Not if you consider the fact that Japanese folk like things to work exactly as they’ve been working thus far – or better. Japan is as far from “DIY” as it gets – insurance agents, for example, visit your home to collect signatures for the slightest of clauses added to your car vehicle insurance policy – something as tiny, say, as adding an extra driver for $12 a year or so – because they’re expected to. The idea of a client going to a website and downloading a form, then printing it, filling it in, signing it and posting it back to the insurance company, is simply unthinkable (this may be changing, but is still far from the norm). If you can’t get it/pay it/drop it off at the nearest 7-11, somebody comes to your house to do it for you.

And so, in practice, the chances of a tenant trying to fix a leak by themselves, taping over an exposed wire or even trying to deal with a noisy neighbour by knocking on their door, is pretty darn slim. You can count on the fact that, if the tenant hasn’t complained during their tenancy, there’s probably nothing wrong with the property aside from normal wear and tear, in the vast majority of cases.

So yes, you can and should buy “sight unseen” – if you want a tenanted property, there’s just no other way.

Leases are signed for 1-2 years – meaning you can’t raise the rent or kick out the tenant (without reasonable and legal cause) for that duration. The tenants, on the other hand, can move out at a month’s notice, with a 1-2 months rent penalty at most.

You really shouldn’t be raising the rent at the end of the lease period – since Japan’s inflation rate (or, one should say, deflation rate) has been negative or, at the very least, close to zero for most of the past twenty five years or so, and since prices have declined or, at least not risen much as a result– you shouldn’t be raising the rent at your properties either. Ever. If you do, rest assured, your tenant will move out. This may be something you would consider if you’re darn sure you can get more out of the next tenant, based on comparable averages in the area, but under no other circumstances.

Government supported tenants – in Japan, all this usually means is sick, elderly or disabled folk – these guys are as harmless as any other tenant, and while most of them won’t have personal guarantors, their income will be guaranteed by the government or various NPOs. Furthermore, some property managers solve this problem by signing the lease on the tenant’s behalf, in front of the owner – so that you’re actually renting the place out to the property manager. This makes it easy for them to “make the problem go away” in case those tenants end up not paying, damaging properties, etc (which, again, they very rarely do). Don’t forget, Japan has the world’s most rapidly ageing population, which means a huge number of your potential tenants are single or widowed pensioners, living on their own.

Most Japanese landlords shun the government supported tenants, so they’re very grateful to finally get a place – and the best part is, the government will often guarantee their rent via direct welfare payment transfers to the landlord, or at the very least by conditioning their welfare payments on them continuing to make their regular rent payments.

What’s important to recognize here is the inconceivable fact that – in spite of all this unusual and, often seemingly anti-landlord oriented legislation and practices – you’re actually dealing with the best tenants you could possibly dream of. Which means that all of the above, in reality, has virtually no effect on the profitability and hassle involved in these investments.

This is part 2 of Ziv’s series on Japan’s real estate investment market. If you haven’t yet, please check out part 1 for more great investment information.


Ziv Nakajima-Magen is manager of Asia-Pacific at Nippon Tradings International (NTI), which specializes in assisting investors in capitalizing on Japan’s vast property market. He can be contacted at: info@nippontradings.com