Why rental yields in Tokyo are falling

The average price of a brand new apartment in Tokyo’s 23 wards was approximately 908,000 Yen/sqm at the end of 2014, up 19.7% from early 2012. Meanwhile, the average rent of an apartment had only increased by 5.4% over the same period.

Home loan tax deductions, historically low interest rates and an anticipation of continued price growth have helped to boost the property market on the sale side. Renters, however, have had far fewer incentives. In 2014, real wages shrunk 2.5% from the previous year. Unless incomes start to rise, it is difficult to forecast sustainable growth in residential rents.

There have been a small number of exceptions, including the most prime locations in central Tokyo as well as the bayside area in Tokyo Bay. Rents in Toyosu, an area which is near the future Athlete’s Village for the 2020 Summer Olympics, are showing signs of upward movement. The rental market in central Tokyo, which caters to high-wealth tenants and expats, is also more likely to see an increase in rents.

In December 2014, the average monthly rent on an apartment less than 5 years old in Tokyo’s 23 wards was 4,122 Yen/sqm, up 16.5% from January 2012. Rents in Osaka and Nagoya, however, have remained relatively flat with only some small exceptions.

Tokyo Osaka Nagoya Apartment Rent

Apartments bought up by domestic investors

Lately there have been numerous cases of wealthy domestic investors buying apartments solely as a method of reducing their inheritance taxes. From January 1, 2015, inheritance tax deductions were decreased while the maximum tax rate was increased.

Wealthy Japanese turned their attention to relatively new apartments in high-rise buildings as the taxable value of these apartments can be up to 80% below the actual market value, providing a significant reduction in the tax on their estate.

Declining yields

With increasing prices and a relatively flat rental market, returns for investors are shrinking.

The average yield on an apartment in Tokyo’s 23 wards in 2000 was around the 5% range, but has recently fallen to around 4%. In the prime locations of Aoyama and Akasaka, it is not uncommon to see gross yields under 4%, and in the 2% range in luxury high-rises.

With falling yields and potential rent rises limited to a small number of properties, new investors need to have a realistic and careful attitude towards the market.

Source: Toyo Keizai, March 3, 2015.