When considering real estate investment or home purchase, you may have heard the term "urbanization control area.
Since land in this zone is generally less expensive, many people think, "Isn't this a good investment opportunity?" However, there are many people who think that the land in an urbanization control area is a good investment opportunity. However, there are unique restrictions in an Urbanization Control Area, and you may regret your purchase if you do not fully understand them.
In this article, INA & Associates, Inc. will explain in detail the basic concept of the urbanization control area, its merits, demerits, and future prospects. Please use it as a reference to make appropriate decisions in real estate transactions.
An urbanization control area is one of the zoning districts designated in accordance with Article 7, Paragraph 3 of the City Planning Law. It is legally defined as "an area where urbanization should be controlled," and is established to prevent disorderly urbanization and to promote systematic urbanization.
This zone is positioned as a counterpart to the urbanization zone. Urbanization zones are "priority and planned urbanization zones," whereas the urbanization control zones function as zones where active development is discouraged.
Understanding the difference between an urbanization zone and an urbanization control area is extremely important for real estate investment. The following table summarizes the key differences.
| Item | Urbanization Area | Urbanization control area |
|---|---|---|
| Basic Policy | Promote urbanization | Urbanization control |
| Building Restrictions | Restrictions according to zoning | Prohibit building in principle |
| Zoning | Designation of 13 types of zoning | No designation in principle |
| City planning tax | Taxable | Exempt from taxation |
| Infrastructure development | Priority maintenance | Improvement later |
| Development Permit | Required above a certain size | Required in principle regardless of size |
Urbanization control zones account for approximately 10.3% of national land, and are mainly responsible for preserving the natural environment, such as farmland and forests. These zones are designated after thorough consultation with the relevant departments in charge from the viewpoint of sound harmony with agriculture, forestry, and fisheries.
In principle, development is prohibited in the urbanization control area. Development activities are defined as changes in the shape of a parcel of land, mainly for the purpose of constructing a building or a Class 1 Specified Structure.
This restriction makes it extremely difficult to construct a new building or to expand an existing building. However, development may be permitted in the following exceptional cases
When carrying out development activities in an urbanization control area, it is necessary to undergo strict screening based on Article 34 of the City Planning Law. This article sets forth the criteria for exceptionally permitting development activities that are not likely to promote urbanization and that are deemed difficult or extremely inappropriate to be carried out within the urbanization zone.
Specific permission criteria include the following
In addition to the usual building permit, a building permit from the prefectural governor is required for new construction or expansion/renovation of buildings in the urbanization control area. This dual permit system ensures that building activities are strictly controlled.
A building permit is required when the floor area of the extension, alteration, or relocation portion exceeds 10 square meters. In addition, as a general rule, changes in the use of buildings other than those for agriculture, forestry, and fishing, or those necessary for the public interest, are not permitted.
The greatest advantage of the urbanization control area is the low land price. Because development is restricted, it is possible to acquire land at a much lower price than in an urbanization control area.
This price differential can be attractive from the standpoint of investment efficiency. In particular, investors who expect deregulation or rezoning in the future may look to this area as an investment target for potential price gains.
Urbanization control zones offer the following tax benefits
Reduction of property tax: The taxable assessed value is set lower, thus reducing the property tax burden.
Exemption from city planning tax: City planning tax, which is levied in urbanization zones, is not levied in urbanization control zones. This tax benefit significantly reduces land holding costs.
The table below provides a comparison of tax burdens.
| Tax Category | Urbanization Area | Urbanization control area |
|---|---|---|
| Property Tax | Assessed value x 1.4 | Assessed value x 1.4% (lower assessed value) |
| City planning tax | Assessed value x 0.3 | Exemption from tax |
| Total tax rate | Maximum 1.7 | Maximum 1.4 |
Urbanization control zones provide a tranquil living environment blessed with natural surroundings. Because building density is kept low, the following environmental advantages are provided
These environmental advantages are a major attraction for those seeking a lifestyle away from the hustle and bustle of urban areas.
The biggest disadvantage of the urbanization control area is the strict building restrictions. These restrictions greatly limit the potential use of the property and cause the following problems
Difficulty in rebuilding: Even if an existing building has deteriorated, it is necessary to obtain permission from the prefectural governor to rebuild. Permission criteria are strict and may not be granted depending on the size and use of the building.
Restrictions on additions: In principle, additions due to changes in family structure or business expansion are also restricted, and building permits are required for additions or renovations exceeding 10 square meters, complicating the process.
Restrictions on change of use: There are also strict restrictions on change of use of buildings, making it difficult to change the use of buildings to anything other than those used for agriculture, forestry, and fishing, or those needed for the public good.
Because urban development is restricted in the Urbanization Control Area, infrastructure development tends to be delayed . Specifically, the following problems may occur
Inadequate water and sew age systems: Water and sewage systems are inadequate in some areas, requiring reliance on wells and septic tanks.
Limited gas supply: City gas is often out of service, requiring reliance on propane gas.
Delays in road maintenance: Road paving and widening tends to be delayed, and accessibility may be problematic.
Limited telecommunications infrastructure: High-speed telecommunications infrastructure, such as fiber optics, may be slow to develop, which may limit the Internet environment.
Inaccessibility of public transportation: Access to public transportation such as buses and railroads is limited and reliance on private vehicles is high.
Real estate in an urbanization control area may be undervalued by financial institutions, making it difficult to obtain financing.
Low collateral value: Building restrictions limit the potential for future use of the property, resulting in low collateral value.
Stricter financing conditions: Some financial institutions may restrict financing for properties in urbanization control zones.
Restrictions on sales: Even if a sale is considered in the future, the number of buyers may be limited, which may affect the sale price and timeframe.
As Japan enters a society with a declining population, urbanization control zones are expected to be particularly affected.
Accelerated outflow of population: While the population is increasingly concentrated in more convenient urbanized areas, the outflow of population from urbanization control areas may be accelerated.
Decline of local communities: Declining population will make it difficult to maintain local communities and may lead to the withdrawal of commercial facilities and public services.
Growing problem of vacant housing: With restrictions on the rental use of existing housing, the increase in vacant housing is becoming a serious social problem.
The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has been promoting the intensification of urban functions under its Location Optimization Plan. The plan aims to create compact cities by establishing residential zones and urban function zones.
Many of the urbanization control areas are likely to be placed outside of the residential guidance zones, and the following effects are expected.
Lower priority for public investment: Priority in the construction and maintenance of public facilities may decline.
Polarization of property values: While property values within the residential zones will be maintained or increased, there is a risk that property values outside the zones will decline significantly.
Land prices in the urbanization control area are expected to continue to decline over the long term due to the following factors
Continued decline in demand: Demand for land in the urbanization control area is expected to continue to decline due to population decline and concentration in urban areas.
Value constraints due to development restrictions: Building restrictions limit the potential use of land, making it less attractive as an investment.
Reduced infrastructure investment: Public investment will take a back seat in prioritizing public investments and will not improve convenience.
The following table summarizes future risk factors.
| Risk Factors | Impact | Time of Occurrence | Likelihood of countermeasures |
|---|---|---|---|
| Population decline | High | Already in progress | Limited |
| Location optimization plan | High | Full-scale implementation after 2025 | Possibility of plan revision |
| Aging infrastructure | Medium | 2030s and beyond | Increase in maintenance costs |
| Increase in vacant houses | High | Already in progress | Improvement of utilization system |
When considering real estate in an Urbanization Control Area, it is important to conduct a detailed investigation of the following points.
Confirmation of building feasibility: It is necessary to consult with administrative agencies in advance regarding specific building plans and whether or not the property falls under any of the items of Article 34 of the City Planning Act.
Grasping the state of infrastructure: The state of water, sewage, gas, electricity, telecommunications, and other infrastructure should be confirmed in detail, and plans for future development should also be investigated.
Anticipate changes in the surrounding environment: It is important to confirm the upper-level plans such as the site optimization plan and the urban planning master plan, and to understand the future direction of land use.
Real estate transactions in the urbanization control area involve complex legal procedures, so it is essential to cooperate with the following specialists
Real estate appraisers: It is important to seek their expert opinion on the appropriate valuation of the property and the prediction of future value fluctuations.
Urban planning consultants: Expert advice should be sought on the possibility of obtaining development permits and the details of the procedure.
Tax Consultant: It is important to accurately understand the tax advantages and disadvantages and to verify the overall return on investment.
When investing in an urbanized area, it is important to take the following risk management measures
Diversify investments: Instead of concentrating investments only in the urbanization control area, it is important to consider diversifying investments with properties in the urbanization control area.
Clarify exit strategies: It is necessary to consider exit strategies in advance, assuming multiple scenarios for future sale and utilization of the property.
Periodic Review: It is important to periodically review the investment strategy in response to changes in the legal system and social conditions.
Agricultural land in the Urbanization Control Area may be used to a certain extent by going through the procedures for conversion to agricultural land.
The following permission categories are available for agricultural land conversion.
| Permission Category | Possibility of conversion | Main conditions |
|---|---|---|
| Type 1 Agricultural Land | Not permitted in principle | Only in exceptional cases such as agricultural facilities |
| Type 2 Agricultural Land | Permitted with conditions | When there is no alternative land, etc. |
| Type 3 Agricultural Land | Permitted in principle | Agricultural land adjacent to urban areas |
Existing buildings may be used in the following ways, although there are some restrictions on change of use.
Use as rental housing: While the handling of rental use of existing housing differs from municipality to municipality, it may be possible under certain conditions.
Conversion to agricultural facilities: It tends to be relatively easy to obtain permission for conversion to facilities for processing and selling agricultural products.
Conversion to a public benefit facility: Conversion to a facility that serves the public interest in the community may be supported by the local government.
Urbanization control zones have advantages such as low land prices, reduced tax burden, and a favorable living environment, but they also have serious disadvantages such as building restrictions, delayed infrastructure development, and uncertainty about the future.
In particular, the progression of a declining population and the promotion of location-optimization plans make it highly likely that real estate values in the urbanization control area will decline over the long term.
When considering real estate investment or home purchase, it is important to fully understand these advantages and disadvantages, and to make a careful decision while receiving expert advice.
INA&Associates K.K. provides optimal solutions for various real estate investment projects, including those in urbanization control areas, according to your investment goals and risk tolerance. If you have any questions regarding real estate in the Urbanization Control Area, please do not hesitate to contact us.
We will use our professional knowledge and extensive experience to provide you with the best real estate investment strategy to help you build long-term assets and realize a prosperous lifestyle.
A1: In principle, construction of housing is restricted in the urbanization control area. However, there are cases where construction is possible in areas that fall under the items of Article 34 of the City Planning Law, or in areas designated by local government ordinances. We recommend that you consult with the administrative agency in advance regarding specific building feasibility.
A2: While investing in real estate in an urbanization control area has the advantage of low prices, there are also disadvantages such as building restrictions and the risk of a future decline in value. It is important to fully understand these risks and carefully consider them with the advice of experts when making an investment decision.
A3: Annexation from an urbanization control area to an urbanization area may be considered during an urban planning review. However, there are strict requirements for incorporation, and in general, planned urbanization projects such as land readjustment projects are a prerequisite. Please check with your local government's urban planning department regarding the possibility of incorporation.
A4: In an urbanization control area, the assessed value for property tax purposes tends to be lower than in an urbanization area. In addition, since urban planning tax is exempted, the tax burden is greatly reduced. We recommend that you consult a tax accountant or other specialist for specific tax amounts, as they vary depending on the location and size of the property.
A5: When selling real estate in an urbanization control area, building restrictions may limit the number of buyers. In addition, since it is difficult to obtain financing from financial institutions, the market is generally centered on cash buyers. When considering the sale of a property, it is important to consult with a real estate professional to establish appropriate pricing and sales strategies.