Recently, the soaring prices of condominiums in central Tokyo have been frequently reported in the media and have become a matter of concern for many people.
It is no doubt that the strong purchasing appetite of foreign investors, especially against the backdrop of the weak yen, has had a major impact on this market trend. However, no bubble lasts forever, and an adjustment phase, or "exit" will eventually come. The key to success in real estate investment is how to identify this exit and take action at the optimum time.
In this article, INA & Associates, Inc., as a real estate expert, analyzes the current situation of the central Tokyo condominium market and explains five important signs that overseas investors may be turning to "sell.
He will also detail his expertise on how to identify the specific timing for selling in order to protect and maximize your assets once you have identified the signs. We hope that this presentation will help real estate investors build an exit strategy based on sound and calm judgment.
The Current State of the Urban Condominium Market: Data Shows "Abnormally High Prices
It is clear from various data that the current downtown condominium market is booming to an unprecedented degree. Looking at the real estate price index published by the Ministry of Land, Infrastructure, Transport and Tourism, the rise in condominium prices is particularly striking. Over the past 10 years or so, the price of condominiums in central Tokyo has doubled, far exceeding the pace of increase for detached houses and residential land. This is due to low interest rates resulting from monetary easing and, above all, the presence of foreign investors.
In particular, the rapid depreciation of the yen since 2022 has made Japanese real estate extremely undervalued for foreign investors. For example, a property that cost 100 million yen at 115 yen to the dollar will cost approximately 770,000 dollars at 150 yen to the dollar, meaning that it can be purchased at a price more than 20% lower in dollar terms. This "bargain sale" situation has accelerated investment in ultra-high-priced properties in central Tokyo, or so-called "hundred-million-unit apartments.
According to a survey by the Real Estate Economic Institute, the average price of newly built condominiums for sale in Tokyo's 23 wards in fiscal 2024 was 116.32 million yen, topping the 100 million yen mark for the second consecutive year. The presence of foreign investors has reached a level in this price formation that cannot be ignored, and it has been pointed out that many properties, such as tower condominiums in the bay area, are owned by foreign investors.
However, this frenzy will not last forever. The market will reach a major turning point when they pull their money out of the Japanese real estate market. We need to watch carefully for signs of a "sell".
Five signs of a "sell" by foreign investors
There are several common economic and market triggers that can cause foreign investors to lock in profits, or sell. Here are five signs to watch for in particular.
| Signs | Specific Indicators | Explanation |
|---|---|---|
| 1. Shift to a stronger yen trend | Exchange rate (against the U.S. dollar, etc.) | Since a weakening yen was the primary incentive for "buyers," a shift to a stronger yen is a powerful incentive for "sellers. The value of assets seen in dollar terms will rise, and the ability to enjoy both foreign exchange gains and higher real estate prices will accelerate profit-taking. |
| 2. Rising interest rates in Japan | Long-term interest rates (10-year JGB yield) | Rising interest rates due to the Bank of Japan's change in monetary policy will diminish the appeal of real estate investment. Rising loan rates will reduce domestic demand and cause outflows of funds to the J-REIT market and other markets, putting downward pressure on real estate prices. |
| 3. Decline in rental yields | Surface and real yields | If rent increases fail to keep pace with soaring real estate prices and yields decline, the property will become less attractive to investors seeking income gains. In particular, rents in Japan remain low by global standards, and when the gap between rents and prices reaches its limit, investment funds will turn to markets with higher yields. |
| 4. Tighter taxation and regulatory changes in home countries | Taxation and real estate-related laws and regulations in each country | For example, policy changes in the home country, such as the Chinese government tightening taxation on profits earned from overseas investments or tightening restrictions on taking funds out of the country, can rapidly cool investor sentiment and be a direct cause of fund withdrawals. |
| 5. Decline in market liquidity | Number of transactions and closing rates | As the overall number of transactions in the real estate market declines and the closing rate begins to fall, investors will begin to be wary of the risk of not being able to sell when they want to sell. A chain reaction of attempts to sell before liquidity declines may occur, and selling may lead to selling. |
These signs may appear in isolation, or they may be intertwined to indicate a turning point in the market. It is important to always keep a close eye on macroeconomic trends and micro data of the real estate market to detect signs of change as soon as possible.
How to Determine the Optimal Timing of Sale: The Art of the Exit Strategy
Having captured the aforementioned signs, when exactly should you decide to sell? This is one of the most important decisions for every real estate investor. While the optimal timing will vary depending on individual investment objectives and property conditions, there are some universal points that will guide the decision.
The first is to take full advantage of tax benefits. Taxes on gains from the sale of real estate owned by individuals (transfer income) vary greatly depending on the period of ownership.
- Short-term transfer income: When real estate is sold with an ownership period of 5 years or less. The tax rate is 39.63% (30.63% for income tax and 9% for inhabitant tax).
- Long-term transfer income: The case where real estate with an ownership period of more than five years is sold. The tax rate is 20.315% (15.315% for income tax and 5% for inhabitant tax).
The difference in tax rates is so stark that shifting the timing of the sale by just one day can significantly change the amount of profit that remains in your possession. In principle, the basic exit strategy is to wait until the ownership period exceeds five years and the long-term transfer income tax rate is applied.
Second, analyze the market environment dispassionately. In addition to the five signs mentioned above, comprehensively analyze market data such as the rate of real estate price appreciation, the number of inventories, and the number of new units supplied, and aim for a timing when the market has reached its peak or is beginning to show signs of peaking out. However, if you are too fixated on "selling at the highest price," you may end up missing the best time to sell. A "limit price" approach is also effective, where you calmly decide to sell when you have reached the target profit amount you have set for yourself.
Third, consider the individual characteristics of the property. For example, if a property is scheduled to undergo major repairs soon, it may be advantageous to sell before such repairs are completed, as the buyer will be responsible for raising the repair reserve fund and collecting a one-time fee. You may also decide to wait a little longer to sell if there are positive factors that will increase the property's value in the future, such as redevelopment plans in the vicinity or the opening of a new station. An accurate understanding of your property's potential and risks is essential in determining the best timing.
Future Market Forecast: The Polarizing Urban Condominium Market
Based on our analysis to date, we predict that the market for condominiums in central Tokyo will polarize into two types: ultra-high-priced properties and family-type properties for those with actual demand.
The market for ultra-high-value properties worth several hundred million yen has been largely supported by the inflow of funds from overseas investors, and is the segment most vulnerable to the impact of their withdrawal. It is undeniable that external factors such as fluctuations in exchange rates and interest rates may cause price adjustments in the tens of millions of yen range in a short period of time. Owners of properties in this price range should pay particular attention to signs of trends by foreign investors.
On the other hand, family-type properties targeting so-called real demand in the tens to low 100 million yen range are expected to be supported by firm demand. Factors such as the increase in purchasing power due to the increase in dual-income households, the trend of returning to urban centers, and supply constraints due to soaring construction and labor costs are expected to support prices. However, this does not mean that prices will continue to rise unconditionally. Once interest rates enter a full-fledged upward phase, it is inevitable that this segment will also come under price adjustment pressure due to the increased burden of mortgage repayment.
In terms of area, the situation has been one of uniform appreciation, and selection may be on the rise. More emphasis will be placed on fundamentals such as transportation accessibility, living environment, and future prospects, and prices are expected to decline in less attractive areas and properties.
Conclusion
In this article, we have explained the current status of the urban condominium bubble and the trends of foreign investors that will affect the future of the bubble. The main points are summarized below.
- The price of condominiums in central Tokyo has doubled in the past 10 years, and the inflow of funds from overseas investors in particular is driving the market.
- There are five signs of "selling" by foreign investors: "appreciation of the yen," "rising interest rates," "declining yields," "tighter taxation in the home country," and "declining market liquidity.
- The optimal timing for selling must be determined based on a comprehensive assessment of the "use of long-term transfer income," analysis of the market environment, and the individual characteristics of the property.
- The market is likely to become more polarized between ultra-high-value properties and properties for actual demand.
In real estate investment, a long-term strategy that considers not only the entry (purchase) but also the exit (sale) is essential. It is precisely during times of market frenzy that you are required to calmly reconsider your investment strategy based on objective data. We would be more than happy if the perspectives presented in this article could help you build your assets.
The shortcut to success is to entrust the sale or purchase of real estate or the reorganization of assets to professionals with specialized knowledge and a wealth of experience. At INA & Associates, we offer optimal solutions tailored to each individual client's situation. Please do not hesitate to contact us.
Frequently Asked Questions
Q1. Why have foreign investors been buying so much Japanese real estate?
A1. The main reasons include: (1) the undervaluation of prices due to the long-term depreciation of the yen, (2) globally low interest rates, (3) stability of political and social conditions, and (4) high quality real estate and management systems. The combined effect of these factors has made Japanese real estate an attractive investment destination.
Q2. Will the bubble in downtown condominiums burst as it did in the 1990s?
A2. The situation is different from the bubble of the 1990s. At that time, based on the myth of land, speculative transactions were the mainstay, ignoring profitability. Therefore, it is difficult to imagine an all-out collapse as was the case then, but as mentioned above, there is still a risk of a major price adjustment, especially in the ultra-high value property market where foreign investors have a large influence.
Q3. Specifically, when should I consider selling?
A3. Although it is difficult to say in general, one guideline for real estate owned by individuals is when the period of ownership exceeds five years and "long-term transfer income," which is subject to a favorable tax rate, is applied. After that, it is advisable to begin specific considerations when the market turnover signs described in this article begin to become visible. We recommend that you consult with a specialist regarding your individual situation.
Q4. Do real estate prices always fall when the yen appreciates?
A4. A strong yen makes Japanese real estate prices more expensive for foreign investors, which reduces their willingness to buy and puts downward pressure on prices. On the other hand, for domestic investors, it may be a good opportunity to buy as there will be less competition from overseas. Overall, however, a strong yen tends to have a negative effect on real estate prices.
Q5. Is it more advantageous to hold property for a long period of time and continue to earn rental income, or to aim for gains on the sale of property in the short term?
A5. This depends on the investor's objectives and risk tolerance. If you value stable income gains, holding for the long term is the way to go. If you want to ride the waves of the market and maximize capital gains, selling in the short term (but with a tax disadvantage) is the way to go. The important thing is to clarify your investment style and develop an exit strategy that matches your investment style before purchasing.
