What are Investors Looking For?

(The following is an excerpt from our "Japan Real Estate Podcast", in which we interview NTI's sales & marketing manager Priti Donnelly. The original episode can be streamed/downloaded for iphone/ipad/Mac listeners, or here for all other devices)

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ZM – Priti, thank you so much for joining us today, it’s great having you on the show.

PD – Thank you, Ziv, it’s great to be here!

ZM – So, what we normally like to do here on the podcast, before we actually dive into the practical part of the conversation, could you maybe tell us a bit about yourself? Your work experience before, and during your job here at NTI, stuff that interests you, maybe what actually drew you to this particular position?

PD – Sure! Like most of us, I’ve worn many hats, I have a background in commercial and residential mortgages in Canada and the US, I have a degree in English literature, I’ve studied advertising and marketing, as well as negotiation – and I say all that, because when I saw this position, I was just drawn to it, because this gave me an opportunity to tie all my skills together. That’s what I felt. I’ve even worked with the government which, as you know, means understanding contracts, and paperwork – I know that quite well too – so, I just loved how this position tied everything together.

But, there was only one thing – I have never been to Japan. That was the challenge. And I knew very little about the Japanese property market.

ZM – That’s right, you actually had no real exposure to Japan at all, or even any knowledge about the country before taking on this job, did you?

PD – So true! Not much at all. In fact, the idea of investing in a foreign country, to me, seemed risky, and not something I’ve opened my mind too. And I think many foreign investors probably feel the same way. What opened my mind actually was one of your videos on the NTI website – and it was at that point, when I watched it, that I realized – you know what, NTI is not a real estate agency. It’s actually a proxy service and a buyers’ agency. And that was something completely different. It was like, a niche. Not your typical real estate agency, and in that way, I felt, it was like a natural extension of anyone who wants to invest in Japanese real estate – there was the opening.

And there’s no question, we all know that we live in volatile times – the real estate markets around the world couldn’t be more speculative. Yet here, in Japan, here’s a market that focuses on steady cash flow and rental income. And it’s so affordable! Finally, real estate investing doesn’t have to be just for the rich, and doesn’t have to be as speculative as most of us understand it to be.

So this proxy service gives foreign investors that access.

ZM – And, I guess this frame of mind, that’s actually where many of these potential clients who contact you for the very first are in, isn’t it? I mean, there are just so many things that most people who haven’t been exposed to Japan, like yourself, or to Japan’s property market, or any Asian property market, probably wouldn’t know about, or might even have the wrong impression about certain things.

Can you maybe give us a few examples of these common misconceptions that you run across regularly?

PD – Sure, yeah, I do run across misconceptions. I think one of the most common ones is the effect of earthquakes on Japanese homes – plenty of misconceptions there. The fact is, properties built from 1981 and later would fall under the latest earthquake resistant construction methods (for reinforced concrete structures) under the building standards act. I always emphasize, however, that if you buy something built PRIOR to 1981, it wouldn’t blow away or crumble. If an older building has been well maintained, with a strong reserve funds pool utilized for renovations projects and repairs, it’s not necessarily a high-risk project.

So that’s one of the things. Another is that people also think that owning a property overseas would be a headache, and costly, and they’re going to have to do a lot of travel, and bear a lot of travel expenses. Again, not true. And that’s because of this proxy service, and that’s what I love about it – because we make things simple for foreign investors. So first of all, there’s no need to travel for the purchase. And since your wife and business partner, Chikako, is native Japanese, as is most of the staff over there in Japan, we can and do represent clients at meetings. Even though the seller is aware that the buyer is foreign, we send the documents for signing in English to the buyer, and the conduct all the meetings on their behalf, with the sellers and their representatives, in Japanese.  So it’s a turnkey experience for the investor, and there’s no travel required.

And in terms of managing the property, which is what many people ask me about – NTI communicates with the property manager, renovation and repair professionals, building management, tax authorities, insurance companies – as well as paying bills and receiving rental income. So anything and everything that’s associated with properties, we do. We also provide financial management, collecting and holding on to rent payments, remitting funds overseas on request – and should the time come to sell, we assist with that as well. All this, and you never need to travel – truly fantastic!

There’s another misconception as well that I want to talk about, which is the worry that tenants would be a hassle to manage. People think “oh, no, what if I’m far away, and something goes wrong, something happens, they’re having a party, and my property is destroyed”, etc.

What I have learned is that Japanese people are trouble and hassle free, honest, and by nature, do not want to tarnish their reputations, so for this reason, they’d never intentionally damage property. Rarely would there be any tenant headaches. Generally, the only repairs are from wear and tear.

ZM – That’s so true…And aside from that, what actually draws people to have an interest in this market – and when they ARE drawn to it, what are they worried about? And by that I mean not misconceptions, but stuff that they’re wondering about, will that work or not work, what do they expect?

PD – Well, everyone I meet, whether they’re new to investing or seasoned, and understand Japanese real estate or not – they’re all looking for the same thing. The best possible deal with the lowest possible risk. And in this cash flow market, low risk means steady occupancy and cash flow. They want to see the steady rental income. Yields range from 6% to 12% net pre-tax, depending on the location – try getting that anywhere else – I mean, that’s high.

So, say ,6% metropolitan VS 12% in the countryside. And property features such as the size of the property would make a difference, how close it is to public transportation, schools, hospitals, things like that. Once a person expresses interest in Japanese properties, I like to get a good understanding of their criteria, and then I send the relevant listings. Just those properties that they would be most interested in.

This is a huge market, the second largest real estate market in the world. So what I do is filter it down to the best suited properties, so that they can get the offer in as quickly as possible. Because, in this market, what people don’t realize, is that properties close within days. They don’t sit around for months like they will in the US, Canada and other parts of the world.

ZM – Right. And this is stuff we’ve talked about here in the podcast in the past, and we’re probably going to keep coming back to again and again…could you maybe tell us a bit about who your typical client, or potential client, is? Profile? The kind of people that regularly contact you – are they always from the same countries, similar socio-economic profiles, ages? Any common denominators at all?

PD – I’ve talked to people all over the world. I think it’s mainly people who are interested in real estate and understand it. So you’re looking at Australia, Canada, US, UK, Singapore, which are all on top of our list for popularity – but really all over. This market definitely appeals to the financially savvy investor, who is looking to develop a portfolio and who is very much at ease with international markets.

But at the same time, and this is another thing I really like – it also appeals to the new investor. Someone who’s always felt “Oh, I can’t invest in real estate, I just can’t afford it”. Japan’s property market gives them the opportunity because of the affordable prices in Japan. So for as little as 25-30,000 dollars, they’d be able to invest and take advantage of the high yield of properties.

ZM – And that’s 25-30 including all purchase costs, right?

PD – Yes. Including all purchase costs. Pretty unbelievable, right?

ZM – Yeah! So new investors who just maybe couldn’t afford, or were a bit weary of investing a lot of money in other places AND more seasoned investors, who just want to hedge their portfolio and get more exposure to different markets in other countries. Would that be about right?

PD – Yeah, that’s about right. And I think that the fear is mainly, people are worried about stepping out of their back yard, that is, if they’re from the United States, they just want to invest in the US, because everything else is scary or risky, and having a proxy service like we do gives everybody that opportunity to invest in Japan, because it’s literally like having their own arm in another country. So again, whether you’re savvy or new to the market, we’re here to do that and for anybody that is simply interested that isn’t able to travel, or just doesn’t speak the language.

ZM – I guess when you’re doing due diligence in your own back yard, as opposed to a remote location, the main difference is that, when you’re doing it back home, you mainly need to do your due diligence on the property, drive by, look at the inside, the outside, maybe a building inspection – whereas, when you’re investing remotely, and you can’t do all of that, due diligence really turns into researching the right kind of company and team that’s going to represent you on the ground – and then THEY do the actual due diligence for you, don’t they?

PD – Exactly.

ZM – Could you maybe give us an example of one potential client, someone who actually turned into an active client, so no names or personal details of course, but maybe just a general profile of the person or persons, what they ended up buying, the process, and how their investments are doing these days?

PD – Sure. Let me first explain how most clients familiarize themselves with the properties and become active clients. Most clients start by asking to receive our featured property listings and the monthly Japanese business and property news digests. And with this information, they’re able to compare prices, locations, yield, income and features, etc. Then, when they have a better idea of what they want, they contact me regarding a particular property that they might have seen on our featured list that may be available, or they’ll just send me their particular criteria, such as the budget they have in mind, the locations they’re interested, or any other criteria. Now, in this market, offers are made on properties within days, as I mentioned earlier, of hitting the market – so you have to be quick.

And so, going forward to the type of clients we have, I want to give you one example. So this client is from Canada – I won’t give you his name – but like most foreigners, he couldn’t speak Japanese to conduct the real estate transaction on his own. Now, his budget to start was about 30,000 US dollars – this was his first property and he didn’t want to take too much of a risk, which is perfectly understandable. So we recommended properties in metropolitan areas, close to transit, where occupancy is high, built in or after 1981 – and he was willing to accept the lower yields for lower risk, of about 6% net pre-tax, VS what he could have otherwise get, say 8-11% - and it was a very smooth purchase. And that’s what he was doing, he was testing the waters, to see how it goes. And it was very smooth and he felt very comfortable, so he stuck with it, and went on to start and build his portfolio – he increased his budget to 65,000 US dollars, and this time he was willing to take on a bit more of a risk, which meant more suburban properties, where you may not be so sure of how quickly a property will be rented out if it indeed does become vacant. So far we’ve had no occupancy challenges, and he’s a very happy client, and continuing to grow his portfolio.

ZM – And when we say suburbs, this could be less central suburbs of big metropolitan centers, or it could be maybe a smaller of middle sized town – but I think you always only recommend locations – unless someone has a specific request – that have a stable or increasing population, places that are not one-horse towns with a single industry – so even if it’s suburban, or smaller townships, it’s always at least stable and reliable. So maybe capital growth won’t occur as fast or as often, but it’s usually going to have at least the typical rental cash flow that we’re looking for, wouldn’t it?

PD – Right. We’re not doing anything that’s super high risk. So we are staying within areas where you’ll get 8-11% yield, which is still very high – but without that extreme risk of being far from public transportation, or properties that might be on the 4th or 5th floor without an elevator – things that would really deter people from wanting to rent. We don’t typically get involved with these types of properties. We do stay within, generally, areas and features that are marketable.

ZM – Ok, good stuff. And, maybe before we wrap up – where do you see interest from potential investors focusing these days? What types of investments are drawing more attention, what types of challenges are they looking at when they enter the market these days? Are things changing, improving, or getting worse as far as challenges go?

PD – Well, smaller apartments were always the asset class of choice, I would say. So small apartments, 25, 30, 35,000 investments – but there’s a growing interest in apartment buildings. Earning income from several properties instead of just one unit. And in this regard you’re looking at about 175,000 US dollars to a million, but the yield is excellent – you’re looking at about 5-11% net pre-tax, and the stability is there. The other thing also is that in Japan, the trend these days is the shared economy. So, because of that, people are purchasing older properties, demolishing them, and then re-building in a couple of different ways. So shared houses, and also shared offices. This is the latest trend.

Also, in Japan, as most people know, there’s an issue with the ageing population, so there are just not enough retirement homes – and that’s another blooming market. There need to be more of those, and that’s coming up pretty quickly. You’re not going to find any shortage of demand from Japan’s elderly, that’s for sure.

The other thing I wanted to mention is that we do have clients – most of our clients ARE cash investors – but they DO ask us about mortgages loans – unfortunately, financing is still a work in progress. It’s still a challenge for foreigners trying to get loans in Japan. So, at this time, I might have to say there’s still work to be done. But when we do see more of that, I’m sure that’s going to be a big hit. But right now, unfortunately, that’s not really available for non-resident foreigners

ZM – Yeah, that’s a bit of a pain, and we’ve spoken about this a few times here in the past. So just a reminder, folks – if you’ve got any funds saved, and you’re wondering what to invest them in, and you’re NOT interested in hands-on property ownership for any reason – Priti and the rest of us here at NTI, we’ve got loads of reliable investors, most of whom already HAVE purchased properties in Japan, in cash, and they’d be more than happy to expand their portfolios if they’ve got a bit of financing available for this purpose. So you stand to make really comfortable interest returns on any of these loans, which of course would be secured against any actual high yielding property assets – so, please don’t hesitate to contact us if you want to be a part of this program.

Edit – this interview was recorded in late 2018 – fortunately, at this time, there are actually a few lenders who CAN assist non-resident foreigners, although terms for their loans vary and can be quite stringent in most cases - listen to a podcast episode detailing current loans availability here (iOS users can tune in here).

Priti, I also wanted to add, when you were talking about buildings there – the reason that people often go for buildings, which tend to generate slightly lower return in comparison with the cheaper and older individual units, is for two main reasons – one is that you own the entire land parcel, so if the property gains in value, obviously anything that’s got more land attached to it stands to gain a lot more – and the other thing is that you’ve got a lot more flexibility – so if and when the time comes to tear the building down, or if you’d like to somehow increase the return from it, you can rent it out for short term stays, you can tear it down and turn it into a parking lot, you can build a small residential or commercial block in place of an older house, and all of those factors can have a really big impact on your return.

Those are all things that you CAN’T do with individual units, particularly ones that are in a co-owned building – on the other hand, the individual units obviously have less of a uncertainty factor to them – you pay your monthly building fees, and those cover all of structural issues, renovations and repairs that need to be done (in most cases).

So, fantastic info there, Priti, thank you so much for your time – it was great having you with us today.

PD – Thanks, Ziv, it was a pleasure. And I just want to give a huge shout-out to all the people that I’ve been speaking with, who are hopefully listening to this podcast – I’ve been in touch with many of you, and it’s been a pleasure working with you all.

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Are you interested in Japan's real-estate property market? Maybe you have been watching developments in this arena for some time, but aren't sure how to make your first move? Perhaps you're concerned about language and cultural barriers? We here at Nippon Tradings International are always happy to talk shop, and will gladly answer all questions, free of any charge or commitment. We can also provide you with affordable, accessible one-stop-shop services for all your Japan real-estate property investment needs. Contact us today to learn more!