The Land Without Appreciation: Investing in Japan

[Shane Pearlman]

"In most countries, houses get more valuable over time. In Japan, a new buyer will often bulldoze the home. ... There is virtually no market for pre-owned homes in Japan, and 60 percent of all homes were built after 1980."

I just finished re-listening to a phenomenal podcast about the consumer real estate market in japan: http://freakonomics.com/2014/02/27/why-are-japanes... They explore a wide variety of reasons behind the apparent lack of appreciation of a single family homes value over time. Now, as far as I can tell, that doesn't mean that LAND doesn't gain value, just that the building hasn't.

What I find myself wondering is if this is true for multi-family rentals or commercial / retail or if those markets operate on an entirely different set of economic drivers closer to what I am familiar with? Do rentals appreciate in Japan?

-S

[Priti Donnelly]

Interesting post, Shane. I agree with Townsend in the Podcast. Since materials have improved, it seems logical to expect the value of houses and buildings to increase. Yet, value depreciates each year (with a tax depreciation term of  25 years for houses and 47 years for reinforced concrete buildings). Interestingly enough, the market value of a freehold apartment never depreciates to zero, however. It holds its land value, even though the land portion is tiny by comparison.

So, the question remains, why do buildings and houses drop in value? From my understanding, at the start of the lost decades, the Japanese were badly burned by property losses and passed their skepticism to their children. To this day, the Japanese don’t tend to buy enough properties for value to increase. Land remains the only asset that gains value. Even the last few buoyant years haven't changed things.

That being said, when it comes to a purchase, the best option would be attractive locations. In the right location, owners of entire blocks can enjoy both - less depreciation of structures and highest appreciation of land. However, they will have to settle for lower cash flow.

Ultimately what this means is that in Japan, a cash flow investment becomes a much better option over capital gain. Thanks for posting!