International investors that look into Japanese Real Estate when hunting for yield soon become aware that despite looking much like real estate in other countries, there are many aspects to the asset class which are entirely unique. That said, I want to take a look at one of the commonly overlooked aspects of Japanese real estate income that causes investors’ comparisons to real estate assets in other countries to be ineffective.
As you know, an investment into Japanese real estate is a yield play. You acquire an asset for a cost of X and every month you will receive a % of X back as income. If you sell the asset, your money comes back, and you stop receiving the income.
Let’s say that I have the opportunity to invest in a residential apartment building somewhere in America that costs me 1,000,000 USD and produces a net annual yield of 6%.
My other option is to purchase a Japanese residential apartment building, costing 108,583,000 JPY (which, according to Google, is 1,000,000 USD based on today’s FX rate…). This building produces a net yield of 5%. 1% lower than its American counterpart.
At this point you may feel inclined to pass on the Japanese real estate and invest in the US instead, but you have failed to inflation adjust and may not be getting the full picture.
Over the past 10 years (2009-2019) the average annual rate of inflation on USD has been 1.55%.
Over the past 10 years (2009-2019) the average annual rate of inflation on JPY has been 0.34%
We can account for this in two ways:
1) gross up the JPY return to enable direct comparison with the USD yield as follows:
USD inflation – JPY inflation = 1.21%
Japanese real estate yield + 1.21% = 6.21%
2) inflation adjust, or net out both yields for inflation as follows:
USD 6% yield – 1.55% = 4.45% p.a.
JPY 5% yield – 0.34% = 4.66% p.a.
Unfortunately looking at inflation adjusted yield alone does not give us enough information to make a decision on which to buy. There are many other things to consider, not limited to:
– the absence of capital gains on Japanese real estate
– the cost of finance/capital
– currency stability
– occupancy rates
– the holding period for the real estate asset
– short-term vs. long-term inflation expectations
– tax deductions
That withstanding, making a direct yield comparison between Japanese real estate and real estate in another country is an ineffective metric for measuring suitability, and very often Japanese real estate is more competitive than first meets the eye.
Editors Note: Martin King is a UK-born, long-term Japan resident, Financial Adviser who works with investors from all over the world to help protect and grow their wealth.