Japan is one of the largest and most advanced economies in the world. Known for its economic resilience, technological innovation, and manufacturing capabilities, Japan attracts significant amounts of foreign direct investments, with Singapore ranking 2^nd next only to the United States in 2023 by source of Foreign Direct Investment (FDI)¹. The country’s rich cultural heritage, picturesque landscape, hospitable climate, and varying seasons make it a prime destination for travellers and investors alike.

Over the past year, Japan’s residential real estate market has experienced significant uptick in activity, with secondary home sales hitting their highest in a decade². But what is driving this growth and is it sustainable? Furthermore, what are the best places for foreign investors to look at when it comes to real estate in Japan? 

Japan’s Strong Residential Real Estate Market Shows No Sign of Easing

Prices of new condominiums in Tokyo hit a record high of 81 million yen last year, up 29% from 2022³. 2023 was the 3^rd straight year of record prices for a market that has undergone nearly three decades of stagnation since the real estate bubble popped in 1990.

Japan’s residential real estate market expanded by 2.7%, with its residential property price index reaching 134.56 points by December 2023 compared to just 131.03 points the previous year.⁴

Three key factors are driving the steady growth in the country’s residential real estate market

1.Favourable interest rates 

The Bank of Japan (BoJ) has contributed to the strong domestic property market by setting interest rates at 0%. This ultra-low interest rate policy has been in place for more than a decade and is unlikely to change in any meaningful manner in the foreseeable future, as the BoJ has yet to come close to achieving its goals for inflation and economic growth. 

The low rates in Japan are in sharp contrast to rising rates around the world, especially in other Western economies like the US, Australia, and Europe. This has resulted in the Japanese yen falling to its lowest levels against the U.S. dollar in 33 years⁵. Foreign investors are taking advantage of the weak Japanese yen to scoop up real estate in key cities such as Tokyo, Osaka, and Hokkaido.

2.Booming tourism industry. 

Prior to the pandemic, Japan had been taking in about 31.8 million tourists per year.  That figure plummeted to 4.1 million in 2020, and just a few hundred thousand in 2021. By 2023, most of Japan’s tourism industry had recovered with a total visitor count of 25 million, or 79% of pre-pandemic levels.

In the first quarter of 2024, an estimated 8.5 million⁶  tourists visited Japan,  averaging around 2.83 million per month. Japan is on track to  surpass its pre-pandemic tourist arrival record this year by around 2 million. The weak Japanese yen is also a factor driving more tourists to visit the country⁷.

Theme Park operators Disneyland and Universal Studios are both laying down expansion plans for their parks in Tokyo and Osaka in preparation for the growth in tourism. The country’s first casino, situated in Osaka, will be built at a cost of 1.8 trillion yen and expected to open to the public in 2029⁸. 

In the hospitality industry, hotel investments are growing remarkably, with 500 billion yen in total investments placed in 2023. The amount was 240% higher than the previous year, with nearly half (240 billion yen) coming from overseas investors⁹.These investments have the effect of driving up residential Japan property values in nearby areas.

3.Favourable rental yields 

As of the 1st quarter of 2024, the average gross rental yield for apartments in 8 major Japanese cities, including Tokyo, was 4.36%. By comparison, the average gross rental yield in Singapore was 4.63% for the same period. London property yields stood at 4.93% as of March 2024.

While gross yields are relatively lower in Japan, the cost of borrowing money is significantly lower than most comparable markets due to the BoJ’s zero interest rate policy. The rate on a 10-year fixed mortgage in Japan stood at 3.84% as of December 2023. 

That compares with 5.25% in the US and 4.76% in the UK. Japan mortgage rates are comparable to Singapore’s 3.75% mortgage rate. 

Singapore investors could opt for Japan as a viable alternative to their home market when it comes to yields on real estate, as there are no restrictions on foreigners applying for mortgages in Japan. Meanwhile, foreigners with permanent residency are more easily able to secure a mortgage with a Japanese financial institution.

These three factors driving the Japanese real estate market are, for the most part, sustainable. The BoJ is not expected to significantly change its long-standing low-interest- rate policy. With the long-term trend suggesting a weak yen will remain in place, the outlook for foreign appetite for Japanese real estate remains positive.

The Best Cities in Japan for Real Estate

Foreigners looking to own real estate in Japan will do well to concentrate on major cities such as Tokyo, Osaka and Niseko. These areas benefit from unparalleled accessibility, well-developed public infrastructure, and the highest share of tourism in the country.

These factors will allow foreign investors to rent out property more easily than they would occupy themselves. The areas also carry a very low risk of vacancy due to their ideal location, high population density, and proximity to central business districts.

Because of these features, property in these cities tend to be more expensive at the onset. Hence, it generally takes longer to generate a return on investment, particularly after the significant gains witnessed over the past few years since the pandemic.

Outsized potential may be found in tourism hotspots, where increased visitors, tight luxury inventory, and commercial and infrastructure upgrades offer potential for properties to further appreciate. 

New bullet train developments, like the Linear Chuo and 2030 Sapporo lines, will improve connection between large metropolitan areas in Japan , potentially improving overall business productivity. These projects will likely also open new areas for real estate and tourism development. 

With these developments and projects enhancing connectivity within Japan, the benefits to be reaped from residential real estate in the major cities are a beacon for foreign investors interested in diversifying their property portfolio.

^₁https://www.statista.com/statistics/1256928/japan-inward-fdi-flows-by-source/

²https://www.statista.com/statistics/1271433/japan-existing-home-sales-index/

³https://www.japantimes.co.jp/business/2024/01/25/economy/tokyo-apartment-prices-record-high/

⁴https://tradingeconomics.com/japan/housing-index

⁵https://www.tradingview.com/chart/Eg5nfZVN/?symbol=FX%3AUSDJPY

⁶https://www.tourism.jp/en/tourism-database/stats/inbound/

⁷https://skift.com/2024/04/17/weak-yen-drives-japans-record-breaking-tourist-arrivals/

⁸https://www.theguardian.com/world/2023/apr/14/japan-approves-building-of-first-casino

⁹https://www.hotelinvestmenttoday.com/Forecasts/Why-2023-was-a-banner-year-for-Japanese-hotels#:~:text=Japan's hotel investment surged in,the highest proportion since 2007.