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Buying property in Japan can be daunting yet profitable

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Whereas headlines in the UK highlight the difficulty borrowers are having qualifying for loans, Japanese banks are struggling to find sufficient numbers of potential borrowers, or at least those who fit their criteria.

According to the UK’s Council of Mortgage Lenders, the average loan-to-value ratio is currently 80%. This figure has increased over the last 12 months, with many people attributing the strength of the London property market to demand from overseas buyers.

In contrast, residential property in Japan is largely driven by internal demand, although there is now considerable interest from overseas investors.

Some Tokyo investors are eyeing potential opportunities in preparation for the 2020 Olympic and Paralympic Games. The market seems to place a premium on property with views, or in the vicinity, of famous landmarks.

Discerning investors who find good locations with improved infrastructure will no doubt be rewarded.

Among the benefits of property investment in Japan are greater choice and quality than the rental market. Mortgage repayment costs are also usually 5%–6% less than rental rates. This allows the borrower to steadily reduce their mortgage and build up equity.

Many potential investors are concerned about the consumption tax increase implemented at the end of March, but the fixed asset tax ("koteishisanzei") levied on property is distinct from consumption tax.

Fees for legal registration are set to rise, but consumption tax is not expected to have a significant effect on prices, even if investor sentiment may suffer.

Most Japanese investors prefer to minimise lending and pay back loans early. According to an official at Mizuho Bank, 80% of Japanese applicants select variable interest rate loans. Current rates are 0.775% variable and 1.45% for 10 years fixed.

My assessment is that it is reasonable to take an aggressive approach to the loan size, but to be conservative with the interest rate. This could mean taking a 100% loan, even capitalising loan costs, but fixing the interest rate for at least 10 years or the full mortgage term, which frees up capital for other investments.

Buy-to-let mortgages exist in Japan, but are less widely used than in the UK, where private investment in a second property is common. Reflecting the greater risk of mortgage delinquency, there is a mortgage premium for Japanese investment property with variable rates at 2%–4%.

It is fair to say that lenders are nervous about providing loans to foreign nationals, which makes it essential to take great care with the loan application.

An important factor in borrowing is residential status, or the willingness of a Japanese spouse to act as guarantor ("rentai hoshonin"). This is because repossessions are easier if the mortgagee has resident status in Japan.

A permanent resident’s visa increases lending options. The most attractive rates are offered by high-street banks such as MUFG, Mizuho, SMBC and Shinsei.

Flat 35 products are very reasonable long-term fixed-rate loans subsidised by the government. These mortgages can only be used for property that satisfies certain criteria, such as energy efficiency, durability and earthquake-resistant construction.

Sample rates for these loans are 2.01%–2.09%, fixed for 35 years, and are offered by lenders such as Resona and SBI Mortgages. Rates are similar to regular long-term rates, once arrangement fees and life insurance premiums are added.

Group credit insurance, ie life insurance, is included in the interest rate for most mortgages, but not for Flat 35 loans.

This is a valuable benefit that, in other countries, represents an additional personal expense. In Japan the cost is built into the interest rate. This means the loan will be paid off and the unencumbered asset passed to the spouse should the applicant pass away within the loan term.

Lending options for non-permanent residents also exist, but rates are typically higher or require a larger down payment.

Borrowers must usually make a minimum down payment of 10%–20% of the purchase price. Real estate fees add up to 7% of purchase value, so this can translate into a total outlay of 27% of the purchase price.

Some people may argue that a traditional portfolio lending approach has allowed Japan to avoid the problems associated with lax regulation and mortgage innovations, such as mortgage-backed securities.

On the other hand, lending innovation and differentiated products would boost lending and cash flow from non-resident foreign investors.

A Singapore-based investor recently elected to fully fund his purchase of real estate in Daikanyama due to “a lack of attractive funding opportunities”, saying that, “Despite what the Abe administration is trying to achieve, it’s still oddly inconvenient to invest in Japan”.

Anecdotally, banks have been cautioned only to lend to customers when the reason for lending can be clearly demonstrated. The interpretation of this guidance has made investments by non-resident foreigners more difficult.

Lenders such as Orix Trust, NAB Asia and the Bank of China offer loans to non-residents, although restrictions or lower lending ratios apply.

Understanding the requirements, underwriting processes and lending criteria of banks, as well as the reasons for rejections, can be frustrating. This is particularly so when rejections are communicated as "sogoteki na handan," which can be translated as a general assessment or, perhaps more accurately, as a decision without explanation.

The experience, knowledge and ability to interpret cultural passwords, as well as a long list of contacts at financial institutions, are invaluable advantages a mortgage advisor can bring to the table.

Even if the application process is arduous, those who get approved for a mortgage can benefit from low fixed interest rates, marginal fees for non-scheduled prepayments and affordable life insurance included in the interest rate, as well as other banking benefits.

A recent client described closing on a 30-year loan with a 15-year locked rate of 1.65% for a second property. “For Westerners, that’s pretty much free money”, he said.

© Japan Today

©2019 GPlusMedia Inc.

14 Comments
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A well written article by "TC", some of the banks mentioned in the article will offer slightly higher interest rates on second and third property investments and will insist that higher deposits be paid. However returns of 9% to 12% can be had using older properties and shorter term loans. Keep an eye on the other Japanese cities beyond the forever in the headlines Tokyo! Kyoto, Osaka, Kobe all offer good investment opps.

2 ( +2 / -0 )

Many options are available to foreign permanent and non-permanent resident to buy property in Japan. In fact you don't need permanent resident status to buy or even obtain a loan although it helps. As long as you come up with the funds there is nothing preventing you from buying property even on a short-term visitor's visa. Just be sure to get the right loan and shop around for the best terms.

0 ( +1 / -1 )

"Many options are available to foreign permanent and non-permanent resident to buy property in Japan. In fact you don't need permanent resident status to buy or even obtain a loan although it helps" -

Novenachama, I just made an account just to say that is completely untrue ! When dealing with Japanese banks to buy property, the first question always asked is "Do you have permanent residence ".

We have just bought a house after living here for 18 years on a spousal visa. I have a well paying job which I have been in for 12 years and saved more than enough for the deposit - I wasnt going to be stupid with a loan eg: saved 15 million for a house and land which came to 32 million. I have other savings to but permanent residence is needed ! Have no debts etc......

My wife ended up getting the loan due to her being Japanese (we work for the same company - big electronics company). Reason that Ive never applied for permanent residence is why should I ??? Even now, there is not much difference between spousal visa and PR (just the fact that you need one to get a house loan)

4 ( +4 / -0 )

lonelygaijin2001 - In other words if you want to obtain a loan you need to have permanent resident but if a foreigner can procure their own financing without getting a loan then is it possible to buy property? Please clarify. Thank you kindly.

1 ( +1 / -0 )

A person with PR can get a 100% housing loan, if you are only on a visa you can get a 80% loan and need to provide the other 20%.

At least that was the rules when I got my housing loan 8yrs ago.

3 ( +3 / -0 )

Japan, please avoid allowing "innovation" that opens up property to foreign speculators. These spivs are really ruining London for Londoners, along with our own home-grown spiv "buy-to-let" investors, that have screwed up the housing market.

4 ( +5 / -1 )

Japan, please avoid allowing "innovation" that opens up property to foreign speculators. These spivs are really ruining London for Londoners, along with our own home-grown spiv "buy-to-let" investors, that have screwed up the housing market.

Exactly. Foreigners should only be allowed to own real estate that they actually live in themselves. Otherwise common people won't be able to afford living in the city of their work place anymore.

1 ( +4 / -3 )

Yes, you do need PR status to secure a housing loan today, though it may have been more flexible in years past.

1 ( +1 / -0 )

Yep you pretty much need PR unless you have almost enough $$$ to simply buy a place, that's why I did PR thing years back, it wasn't too bad but wasn't much fun either

1 ( +1 / -0 )

You don't always need a PR, I got a loan from Mizuho in my name 1 year ago and also got approval from SMBC and BOTM (for slightly less amounts than Miz). I am married to a Japanese lady and haven't even changed to a spousal visa yet, the banks asked if I had intentions to go PR, I said yes (which eventually I will), put down 25% deposit and that was that. It was pretty straight forward actually but I think my real estate agent (Japanese) helped a lot behind the scenes. It can be done but it really helps to have a specific property in mind when seeking approval and a good estate agent (which cost me about 1 million JPY fee upon completion but she was excellent). Citibank might still offer loans to non-Japanese but at a slightly higher repayment rate I think. If you can do it, it's well worth it as you can get a whole lot more living space for quite a lot less money than renting per month.

0 ( +1 / -1 )

This is a repeat of the same article last year , and I will repeat the same reply I gave last year. Both my wife and I are foreigners. We wanted to purchase a house and had 50 % deposit. I have been Steadily employed at the same government agency for seven years and my wife is employed. NO banks would offer us a loan as we do not have permanent residence . This was the only reason we were turned down. In the end we had to finance using our bank in the UK, so answering the other question , if you have the finances sorted , anybody can purchase property in Japan.

1 ( +1 / -0 )

So, do you know if your properties are appreciating in value? My understanding of the Japanese real estate market is that generally this has not been the case, even with some very reasonably priced land around, however it is now starting to show some life. Do you guys expect this to be an investment that builds equity?

0 ( +0 / -0 )

Tokyo is crazy cheap when compared to Singapore, HK, NY or London. Although prices are slowly starting to move.

In March, according to Japan Property Central, in central Tokyo’s six wards (Chiyoda, Chuo, Minato, Shinjuku, Bunkyo and Shibuya), the average apartment asking price was 57,220,000 Yen, up 0.7% from February and up 11.1% from last year. - See more at: http://japanpropertycentral.com/2014/04/secondhand-apartment-prices-in-march-tokyo-kantei/#more-22736

And most foreign brokerage houses expect 15-20% average annual gains for the next several years.

0 ( +0 / -0 )

I did not have PR when I bought a property in Tokyo.

0 ( +0 / -0 )

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