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The real estate market in Japan is likely to be permanently influenced by the scarcity of land. Traditionally, Japan has had many small landholders who keep their land within the same family for generations. It has also been the norm for both households and small businesses to maintain the same location for life. Historically, Japanese landowners prefer keeping their property to selling it for money. A little over half of all land transactions in Tokyo between 1991-96 involved land parcels less than about 1000 square feet (100 square meters). Acquiring a lot of significant size can commonly take up to 10 to 15 years.1 Another difficulty facing developers seeking to establish a project site is that special care must often be taken to accommodate existing landowners' business and residential space needs within the new development. This, however, can also be seen as a positive model for a more community-based private development.2
A great deal of business press information is available about the continuing woes of both the Japanese economy and the real estate market. Prices for both commercial and residential land have been dropping for several years. Foreign investors are quite active in Japan, sensing the opportunity for high profits - a sign also of how much the market has fallen. Most foreign investors have been getting into the real estate market by purchasing bad loans that are backed by real estate collateral. There is a great deal of such loans in the Japanese banking system that having been and continue to cripple many banks. In 1998, Japanese banks were offering discounts of up to 80-90% in order to clear some of these loans off of their books. In that year, Goldman Sachs purchased bad loans with an original value of US$12.5 billion from Bank of TokyoMitsubishi at an undisclosed but likely high discount, and in doing acquired the collateral of 10 Tokyo commercial and residential properties as well as some vacant lots.3
In fact, in fiscal year 1999, largely American foreign investment accounted for the purchase of US$1.25 billion in Japanese real estate and a further US$3.5-5.0 billion in property-related bad loans. It must be remembered, however, that this is still a very small degree of investment given the overall prices of Japanese real estate even with deflation. Also, less than 10 class-A commercial buildings go on sale in Tokyo per year. Japanese property companies have managed to largely get by through selling their properties overseas.4 What Japanese properties have come onto the market have usually been class-B and -C properties, and often outside of the central business districts. And through this whole deflationary recession, occupancy rates in the Tokyo office market, for example, have remained a high 95%.5 U.S. investors had hoped for a great sell-off of real assets in Japan as had occurred in the U.S. through the Resolution Trust Corporation in the early 1990s. Japan has not pursued this course. Perhaps not only because of a strong nationalistic attachment to the land, but also because Japan has 25% of its national wealth invested in land. And although the future of the Japanese economy and the real estate market remain uncertain, despite a small upturn in 1999, the prime office buildings that had been coming onto the market were already being valued at strong, bullish prices in early 1999.6
One major development in the Japanese real estate market is a shift toward taller buildings. This is an understandable development in a country in which 70% of the land is mountainous. Yet, even though the population density of Japanese cities is very high, residential buildings in cramped Tokyo average only 2-3 stories on average. The increased willingness of corporations to divest their wealth from land has begun to make the development of taller condominium buildings more viable. That said, there is a lot of room for further development in this area, since condominiums only represent 7% of residential housing nationally, and 10% in Tokyo.7
A quick look at the real estate market in Tokyo will help emphasize that the size of individual Japanese metropolitan markets is much greater than in many other developed countries. The greater Tokyo metropolitan area is usually understood to mean the area comprising the four prefectures that are within commuting distance of Tokyo's central business district (CBD). These four prefectures (governmental units similar to large counties or states/provinces) are Tokyo, Saitama, Chiba, and Kanagawa. Together, they comprise a total land area of 5,210 square miles (13,500 square kilometers) housing roughly 13 million households and some 32 million people.
In the residential real estate market of the Tokyo area, there is about a 50-50 split between rented units and owner-occupied units. In 1998, even with the weakness of the market, the average sale price of a new detached single family home was US$475,000, and the average sale price of a new condominium was US$355,000. The volume of residential sales has been weak, although there was a slight 1999 upturn. The level of vacancies in the residential rental market has been consistent at 8-10% for over 15 years. However, rents in the residential market have fallen almost by more than 50% since 1990, from US$4.32 per square foot to US$1.94 per square foot.8 And in Tokyo's office market, oversupply is believed to be nearing absorption. Total volume of the office market is over 300 million square feet (30+ million square meters). Even at the market's worst, vacancy rates never fell below 10%, while current vacancies are estimated at 5% or below. Despite the fall in prices and the continuing uncertainty, the Japanese property market remains high-priced, high density and low vacancy.
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The Japanese government has traditionally and continues to take a strongly interventionist approach to the national economy. Government intervention in the Japanese real estate market has at times positively affected the market, and sometimes negatively affected it. The 1990s have been very turbulent for both Japan's political institutions and for its economy, with the real property market perhaps the most significantly affected economic sector. A clear political direction has not yet emerged.
During the so-called bubble economy of the eighties and very early nineties in Japan, property values rose to such an extent that the attributable value of the 284-acre (1.1 square kilometer) Imperial Palace in Tokyo would have been greater than all the property in California. When the bubble economy collapsed in early 1991, the Japanese government instituted tighter regulations on land trades and reassessed the whole land taxation system (for sales, distribution, and ownership) in order to discourage land speculation. The land price measures taken by the government, instead of being a healthy counterbalance to speculation, are seen by some as having seriously hurt the real estate market and the entire economy. Deflation remains a problem in the Japanese real estate market, and some industry spokespeople blame these 1991 governmental measures to a large extent9
On the other hand, in 1998 the Japanese government passed a Special Purposes Companies law, the SPC law that permits the securitization of specialized assets by means of the issuance of securities. This is an essential step toward the creation of a market for mortgage-backed securities in Japan. Total national savings in Japan is in the trillions of dollars and the introduction of REITs and CMBS into Japan therefore has the potential to bring an enormous amount of financing into the real estate sector, which continues to be crippled by bad debt.10
Governmental housing policy has also been credited for a 1999 recovery in the real estate market, through tax breaks and other financial incentives. And, as discussed above, the Japanese real estate market still commands prices and high occupancy rates that would be the envy of many other countries.
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Real estate salespeople in Japan are required by law to have a license in order to conduct a real estate transaction. Licensing is made mandatory by the Ministry of Construction and each Prefecture (which are similar to a state or province).
Licensing requirements for an individual salesperson are as follows: at least a high school education, two years business experience, and successful passing of a national examination. Then it is necessary to register as a licensed salesperson with the prefecture government. Initial industry training is usually acquired through on the job training by an established real estate practitioner. Continued training on a periodic basis is required to maintain the license.
Licensing requirements for a real estate sales business office are: the office must have a clearly established location, money must be deposited with a public deposit office as a surety upon the establishment of the business, and one out of five employees must be licensed practitioners.
Real estate salespeople are paid by commission. Commissions on both commercial and residential sales are 3% and are paid by both the buyer and the seller. The Ministry for Construction regulates sales commission rates.
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Information on the ownership of real property in Japan can be found at the area land registry. In 1999, the Japanese government passed a bill that will allow Internet access to real property registers beginning in April 2000.11 There isn't in fact a legal requirement to register property transfers in Japan. However, most Japanese do have their ownership recorded at the land registry in order to protect their property rights. Registration requires the presentation of a document called a Kenrisho that contains the name of the owner, the identification number and location of the property, and any particular rights or encumbrances specific to the property.12
Leasehold and tenants' rights
Japan has traditionally had very strong legal protections for leasehold tenants. Basically, leases were indefinitely renewable. Tenants did not have to vacate a property at the end of a lease even when that was the strong wish of the landlord. Two laws enacted in 1921, the Ground Lease Act and the Building Lease Act, gave tenants the legal right to automatic renewal of leases. For a lease not to be renewed, the landlord had to demonstrate cause for eviction, and in practice this was very difficult.
Legal changes to leasehold conditions were enacted in 1992. Before describing these changes, it should be noted that the old leasehold conditions with automatic renewal still apply to all leases signed before July 1992. However, since that date, it has been possible to write lease contracts without options to renew. One of the primary reasons for this legal change was to encourage owners of scarce metropolitan lands to bring their lands into use in the residential sector. Landowners have long been reluctant to lease land for residential use, as the strong tenant protections would essentially transfer to the leasing tenant control over the future use of the land.
Another discouragement existed in the non-legal but traditional form of rent control in the form of consistently small rent increases being the marketplace custom and expectation.
The 1992 Land and House Lease Law contains revisions that establish a fixed-term land lease right, or te/ki-shakucken. Through it, a lessor and lessee can now have a contractual agreement that guarantees the land will return to the lessor at the end of the term of the lease. The law created two types of leaseholds that can be used for both single- and multi-family use. First there is a general land lease, called ipa teiki-/ken. Then there is a special land lease with an end of lease building purchase requirement, called tate non jyototsuk/-toku.
The fixed-term lease allows landlords to retain the right of reversion, to qualify for several tax breaks, and to control and collect lease rents and security deposits. For residential lessors, it provides access to land for homebuilding without the immediate high price of purchase, essentially creating a broader market of lower cost homes. To an outsider, leased residential land would seem an excellent match for the Japanese market, where land prices are still very high, and where the typical home must be rebuilt after 20-30 years.13
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There have been media reports over the last two years of right-wing groups harassing foreign firms that have been being buying non-performing loans to acquire real estate. The U.S. Department of State has not found the reports substantive, or any other reason to believe that this is actually an area of concern.14
Japanese law assures both foreign and domestic private investors the right to establish and own businesses and to pursue all forms of profitable enterprise. There are no restrictions or conditions specifically placed on foreigners purchasing real property in Japan. A foreign investor may hold property in his or her own name, in joint ventures, in a limited partnership, or through a limited liability corporation. Foreign investors do not need permission or approval from any government agency to buy, sell, or invest in real property, or to act as an intermediary in a real estate transaction.
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National Federation of Real Estate Transaction Associations
Chiyoda-ku, Tokyo, 101
The Real Estate Companies Association in Japan
Kasumigaseki Building, 23rd Floor
2-5 Kasumigaseki 3-chome
Chiyoda-ku, Tokyo, 100-6007
The Association of Real Estate Agents of Japan (FRK)
Chiyoda-ku, Tokyo, 100-6031
All Japan Real Estate Association (AJREA/Zen Nichi)
3-30, Kioichi, Chiyoda-ku
1 - Magnier, Mark, "For sale: Japan property, cheap," Los Angeles Times, Business section, Part C, p. 1, August 8, 1999.
2 - Froland, Terry, and Starry, Claire, "Japan's privatization of urban redevelopment," Urban Land, pp. 11-13, April 1989.
3 - Amaha, Eriko, "We need you," Far Eastern Economic Review, vol. 161, no. 11, pp. 44-5, March 12, 1998.
4 - See endnote 1.
5 - "U.S. investors frustrated by Japanese markets," Real Estate Finance and Investment, vol. 5, no. 16, p. 6, April 19, 1999.
6 - "Weak real estate market attracting overseas buyers," The Nikkei Weekly, p. 1, March 29, 1999.
7 - Fukada, Hajime, "Japanese real estate industry update," APREC Singapore '99, Technical Paper, September 20, 1999.
8 - Nomura Research Institute, "Tokyo Metropolitan Area," chapter 13 in ULI Market Profiles 1999: Pacific Rim, Urban Land Institute, Washington, DC, 1999.
9 - Kawabara, Masafumi, "Real estate market and forecast in Japan," Global Real Estate Forecast Sessions, NAR 1999 Annual Convention.
10 - See endnote 5.
11 - "Bill on Internet access to real estate registers adopted," Jiji Press Ticker Service, March 2, 1999.
12 - "Japan," country report in Youngman, Joan M., and Malme, Jane H., An International Survey of Taxes on Land and Buildings, Boston, 1994.
13 - "Japan's changing ways: New residential land leaseholds, retail lease rental methods," East Asian Executive Reports, vol. 19, no. 7, pp. 8, 15+, July 15, 1997.
14 - U.S. Department of State, Country Commercial Guides, Fiscal Year 1999: Japan.