Real Estate in Japan – Cashflow, Honesty & Honor

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I’ve been intimately involved with Japan, its business environment, culture and etiquette for the past decade or so. I’ve lived there, on and off, for up to a year at a time. I speak the language partially (just a bit, to be honest, and a highly “domesticated” bit at that), and have, in recent years, even had some limited success at reading and writing it (I learn alongside my 3 year old son – he’s doing far better).

I work for a Japanese company. I’ve purchased properties for my own investment interest and personal use, as well as on behalf of quite a few clients. I’ve guided and assisted, along with my Japanese partners and team members, investors, entrepreneurs, business-folk and even farmers in establishing, maintaining and nurturing their Japanese business relationships.

Hell, I’ve even organized and held a garage sale in Tokyo once! (funny story, that, but I digress)

All of the above isn’t meant to show off – merely to drive home the message that, all this fair bit of hands-on involvement would, in most places around the world, reasonably lead one to say that “I know Japan”. Well, do I?

No – I don’t. Not even close to it.

And not just because I’m thick as a brick (well, it might also be that), but because there’s simply so much more to learn. Japanese culture, like many of its Asian counterparts, is ancient, complex and has nuances upon nuances upon nuances, with some extra nuances neatly tucked away at the bottom of things – so that just when you think you’ve actually uncovered said bottom, another nuance smiles at you shyly (and politely!) from under the previous ones.

And in Japan’s case, those nuances invariably have something to do with “honour”, “respect”, “face”, “reputation” and all the rest of them ancient, chivalrous words – words that one would normally expect to read about only in Arthurian legends of knights and maidens, or maybe in the accounts of Buddha’s path to enlightenment and all-encompassing love – and certainly not in the context of business, investments and real-estate. Well, fear not, Mother Theresa, your legacy is safe and sound in the land of the rising sun.

Want an example? Something close to home, perhaps? Check this out –

Japanese realtor’s “code of honour” (yes, it does exist, although they’d never dream to call it that), dictates that, once a seller has accepted an offer, regardless of whether they’ve signed anything, received a deposit, or even if the realtor hasn’t yet picked up the phone to report to the potential buyer that their offer has been accepted – from that moment on, NO OTHER REALTOR WILL SUBMIT FUTHER OFFERS TO THIS SELLER. And not just equal or lower offers, too – they’ll decline, without batting an eyelid and without even letting their client know about it, higher offers as well. Even if the next offer is set at double the asking price (meaning double the realtor’s commission as well) – the seller will never hear about it. The prospective client will be politely declined, and informed that “a previous offer has been accepted”. End of story.

And this is not just from the realtor who forwarded the offer – not just from that realtor’s agency – NO OTHER REALTOR IN JAPAN will forward offers on said property, if they’re aware of a previous offer having been accepted. That property simply ceases to exist in their mind (at least until several months have passed, and it goes back on the market, for whatever reason). There’s no law, regulation or legal reason that would enforce this code. There’s no way for anyone to prove that it’s even been broken. And still they won’t do it. Why? Well, because “it’s not the Japanese way”. A deal is a deal. An agreement is an agreement. One’s word is set in stone.

Strange? Not really. After all, this is the country that disqualified a winning Sumo wrestler from his title, because he – get this – raised his hands in triumph, western boxing style, after having won the match. (From memory, a grunt and a nod is the most they’re allowed to express at that point). It’s just the way they are, the Japanese. They’re insanely polite, honest to a fault, and for the Japanese born and bred person, there’s just no other way to live and operate in the world – they’ve been taught since birth that society as a whole, and their respective units of work teams, cities, neighbourhoods or families are always above and beyond the individual. There’s no “me” – it’s always “us”.

Of course, this is a generalization. Rotten apples do exist, and in particular, head honchos of government, corporations and institutes can still be as corrupt as one gets – even more so, since the masses would ordinarily never assume or dare to suspect them of being such – but the absolute vast majority of people “on the street”, consumers, shop clerks, small business operators and staff, are all but guaranteed to be as honest, helpful and eager to please as one can possibly imagine (and then some). While this seemingly makes cheating so much easier (because nobody would ever suspect it), it just doesn’t happen.

Weird, right? It’s gets weirder. We’ll go into more detail about this particular environment next week, but keep this in mind as we carry on, because this aspect of things will surface again and again, even when examining something as cold and detached as –

Japan Property Market | Ginza, Tokyo“The Numbers”

Japan, as a rule and since their latest bubble burst in the early nineties, is NOT a capital gain environment. Prices have been steadily declining at a slow pace over the last dozen or so years, with the median price now down to app. half of what it was at its last peak. The first two quarters of the year have actually seen the first signs of would-be recovery, enough so for a large and impressive cadre of the world’s biggest players to jump on the Japanese Real-Estate bandwagon (names such as Goldman Sachs, TPG, Fortress Holdings, and Deutsche Bank Group are just a few of those) – but as we’re not in the business of speculation or crystal-balling here, we’ll stick to the facts so far – and the fact is, Japan has negative capital growth (more like a plateau, really, but the super-metropolitan and the super-rural tend to throw things out of perspective, and Japan has a nice collection of both).

So why is it so attractive? Why do so many of these far-from-amateurish conglomerates pounce at the slightest sign of improvement and potential promise of (slow and steady) capital gain?

Well, it’s all about the cash-flow, baby. Cha-ching, ba-bling and all that. There is, arguably, no other place in the world that can offer Japan’s level of cash-flow dividends at the same level of (virtually non-existent) management risk and hassle.

Japanese society is, as a rule, highly ethnocentric – they rarely speak English, shun foreigners out of plain shyness and self-consciousness (although they’re very curious about them) – and what this means in practice that deal-mining is not only possible, but is extremely safe and lucrative. In very real practice, you could find (with a bit of informed DD research) investment opportunities costing as little as $20K (complete purchase costs included), yielding anywhere from 9-15% pre-tax return – and while in most places in the world you’d either be buying in an outright “warzone” to secure these kind of theoretical returns, or worse yet, the whole country might be as speculative, un-manageable and outright dangerous to the foreign investors– in Japan it simply means you’re purchasing in the “countryside”, where the English-speaking foreigner has not yet ventured.

As a result, prices are very, very low in those areas – although rents and vacancies aren’t nearly as low as prices would have you think, and this parity of countryside cost VS return is exactly where you can make them big buckaroos. A typical “countryside” area in Japan merely means that it’s far from Tokyo, Kyoto or Osaka, and probably not very well known to foreigners. Fukuoka city, for example, where most of our clients have been purchasing in the last year, is home to app. 1.5 million, so roughly the size of Vegas. Not bad for a “lil ol’ country town”, right? And while this doesn’t mean they’ll do business with you (ethnocentric, remember?), once you find those who will, you’re pretty much set for life.

Add to this attractive and dependable cash-flow the above-mentioned business and social environment – which in practice dictates that a Japanese tenant would never, ever, under any circumstance harm of damage a home intentionally, would never dream of missing the rent unless something really really bad happened – throw into the mix some more curious but fairly common tidbits, like the fact that some property managers will pay a late tenant’s rent to the owner, in place of the tenant, FROM THE PM’S FUNDS , for several months, while they work to recover it – (yes, you read it right) –  the rationale being that, since they recommended the tenant, they take it as their personal responsibility to the owner, who’s entrusted their prized property to their care  – and you’ll begin to see why Japan is such a landlord’s paradise. This in spite of the fact that the law is actually very tenant oriented – but more about that next week.

* Income tax is a comfy 5% until you hit something like $23K p/a (I’m saving you the translations to JPY, since it’s far easier to deal with smaller numbers), then goes to 10% per yen thereafter – fully deductable against depreciation and expense/loss – losses can be carried three years forwards.

* Property tax is fairly high – 1.5% of the estimated value of the property p/a – but can be reduced to 0.25-0.5% if you stick to properties under 200sqm (which is the norm anyway in most cities).

* CG Tax (just in case all those predictions turn out to be correct) is currently halved to 10%, scheduled to return to 20% in 2014 (but that hike has already been postponed a few times, so don’t bank on it rising just yet).

* Foreign investors are exempt from local prefecture and municipality taxes, being non-residents.

Sounds too good to be true, and far too easy? Don’t worry – next week we’ll cover accessibility to the foreign investor (legal, yes. Easy, hell no), touch a bit upon residential law, (which absolutely and beyond doubt favours tenants over landlords), as well as a few more of the major differences between Japan and other countries – of which there are quite a few.

Questions?

(The majority of the information presented above has been gathered from and by NTI’s staff and principals, and is the result of  a ten-year relationship and experience in and with Japan, its business environment, and its people. Nippon Tradings International is a registered Japanese Buyers’ and Proxy agency, whose Asia-Pacific operations are headed by the author of this article)

(Picture 1 – Japanese Temple Lantern, Fukuoka, by Ziv Magen | Picture 2 – Tokyo’s Ginza ward at night, by Ziv Magen)

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About Author

Ziv Magen (G+) is an Australian, and has been living alternately in Japan and Australia for the past decade. "Born and bred" an IT project manager, he has made the transition to full-time real-estate investing several years ago, and subsequently opened a buyers' and proxy agency - assisting others in remotely capitalising on Asia's booming property market.

10 Comments

  1. Crap on a cracker, Ziv. :) In many ways your description of the culture is reminiscent of pre-1960 America. Gotta think you’re a popular guy with investors willing to go foreign with their investment capital. Great stuff, Ziv. You’re pure gold.

  2. Your article is fantastic! What a great lesson to learn through the Japanese culture within Real Estate! I enjoyed the Japanese code of honor that you have stated, and wish we could use more tactics like those in our business over here. These are some great tips that I will definitely keep in mind as I continue in my own Real Estate business! Thank you Ziv!

    • Thanks, Ryan, glad you found value in it.

      It’d be great to borrow from this philosophy in the west – that’s what alot of us are trying to do these days. I think the hard part is, you have to bring your children up from birth to detest greed, and put whatever other value your society chooses instead, far above it – then repeat for several hundred generations, till it sticks (at least for the masses) – Asia has a few years on the west at practicing this, so those values stick better, in my opinion. In the long run, we’ll merge into the better versions of both Asian and Western philosophies, I hope.

      In Japan’s case, where capitalism is very young (and almost imposed, post WWII), it took a very pleasant form, in my view – very different from its western counterpart (except for the “power corrupts” axiom, as mentioned in the article- that still holds true everywhere :))

  3. Ziv, I believe everything you are saying about Japan. It is the only country I have ever been to outside the US, and I fell in love with those people. They have such strong character. If you ask for directions, they will not just give directions… They make sure you get where you are going. They all mind their own business and are very polite! We can learn from them for sure.

  4. Cheers, Jason, great to hear. I’m also a firm believer in Japanese personal business philosophies- that’s one of the main reasons I chose it as my prime place of business. :) there are great real estate deals and profits to be made everywhere in the world, but no where else provides that level of security, honesty and simplicity in business (person to person wise, they still have a wicked old-fashioned hard-headedness thats very difficult to deal with- more on that next week).

  5. Christopher Harvey on

    Ziv, what a good read! I can absolutely confirm your assessment of Japanese culture in reference to real estate. I currently live in Okinawa Japan, and I’ve been here for approximately 18 months. I absolutely love it here. I to0 have been looking into purchasing real estate here on Okinawa, but since my Japanese language skills are still evolving, and the fact that most Americans rent property here, I have had a hard time finding good information on the rules for foreigners purchasing homes to then rent for cash flow. Could you possibly give me a brief explanation of the process you went through to purchase your properties? Any help would be greatly appreciated. Thank you.

    • With pleasure, Christopher, glad you concur – those procedures are exactly what next weeks article will be about. Bear with me, the drill downs are coming, promise ;)

  6. Hi Ziv Magen. My name is Simon from Johannesburg South Africa from a company called SGN Ultimate Capital Investment. We are a small company who wants to acquire some properties in Japan and want some advice and relationship with a partner in that part of the world. What must we do to secure that relationship. Thanks Simon

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