The timing of the sale of a single income-producing property (building, condominium, etc.) is an important strategic issue for ultra-high-net-worth investors. I have discussed real estate portfolio strategies with many ultra-high-net-worth investors, and there is no single correct answer to the question, "When should I sell? It is necessary to assess a complex set of factors, including market conditions, interest rate trends, taxation, and overall asset balance. In this article, we discuss the appropriate timing for ultra-high-net-worth individuals to sell based on current income-producing property market trends in Japan and major cities (Tokyo, Osaka, and Yokohama). We will also discuss specific strategies for selling at a high price and the advantages and disadvantages of selling and holding for the long term.
First, let us understand the current market environment. In recent years, the Japanese real estate investment market has seen a strong inflow of investment money on the back of historically low interest rates, and cap rates (expected yields) in major cities have fallen to record lows. Falling cap rates mean that real estate prices are rising and are in a high price range. In fact, the expected cap rate for Class A office buildings (Marunouchi and Otemachi) in central Tokyo is currently flat at about 3.2%, while the cap rate for rental housing (single-family apartments) is also at an all-time low of 3.8% in the Jonan area of Tokyo. In Osaka, yields are also very low, at around 3.4% for large office buildings and 3.8% for rental housing, and around 3.9% for housing in Yokohama. In major cities such as Tokyo, Osaka, and Yokohama, the trend of lower yields = higher prices for income-producing properties has continued over the past several years.
However, a closer look at the market as a whole reveals differences in temperature by asset type. For example, in the office market, while rents in central Tokyo have recovered after Corona and investors have become more willing to invest, yields have recently stabilized at "flat yields," partly due to the Bank of Japan's monetary policy shift (interest rate hike). On the other hand, urban commercial real estate and hotels tend to see yields decline further and prices continue to rise as demand recovers. Residential properties (single-family condominiums, etc.) remain popular investments, and expected yields in major cities have been at or maintained at record lows for over 18 months, and prices continue to rise moderately in conjunction with rising rents even in 2024.
The supply-demand balance must also be kept in mind. Although buyer demand is strong due to the inflow of investment money, each city has its own supply situation. In Yokohama, for example, large-scale office development is underway in Minato Mirai 21 and other areas, and supply is expected to increase, with approximately 31,000 tsubo of new supply expected in 2023. In Osaka City, a record 87,000 tsubo of office space is scheduled to be supplied in 2023, and vacancy rates are expected to rise temporarily and rents are expected to fall moderately in these areas (rents are expected to adjust by about -14% in Yokohama over the next few years, and rents in Osaka will also adjust slightly to the 2019 level). However, rents are expected to decline moderately and remain at the level of the late 2010s, and therefore are not expected to deteriorate significantly in terms of supply and demand. This suggests that demand is firm due to the influx of population and companies moving into urban areas. In fact, Tokyo and Osaka remain attractive investment destinations for both domestic and foreign investors, and Osaka is attracting increasing interest from foreign investors, which, combined with economic expectations from the hosting of the Expo in 2025, is increasing attention.
Taking all of the above into consideration, it can be said that the current market for single-family income-producing properties is more of a "seller's market. Property prices in major areas remain at high levels and demand is strong, creating a favorable environment for sales. This trend is particularly pronounced for properties in prime locations and of high grade, and in fact, the real estate price index (based on J-REIT transactions) continued to rise for offices until the end of 2023 (and will continue to rise for residential properties in 2024). However, from mid-2024 onward, there are signs of a gradual decline in prices in some areas, particularly in offices. This may be due to the changing interest rate environment, which will be discussed later in this report. Ultra-high-net-worth individuals need to plan for the optimal timing of sales while keeping an eye on these market turning points. 2.
The following is a summary of typical factors that should be considered when timing the sale of a single income property. Interest rate trends, tax policy changes, and asset portfolio rebalancing can be the main triggers. Let's take a look at each of these.
Interest Rate Trends and Market Cycles: Real estate market conditions are closely linked to interest rates. To date, Japan has had ultra-low interest rates, which have supported lower real estate yields (and higher prices). However, with the Bank of Japan's decision to lift negative interest rates and eliminate YCC in 2024, interest rates may enter an upward phase in the future. If interest rates rise, there will be upward pressure on investors' cap rates, and real estate prices will turn downward. In other words, it is extremely important to be able to sell at the current high price level before interest rates rise. To give a concrete example, if the expected yield on a property with annual rental income of 10 million yen increases from 4% to 5%, the theoretical price will fall from 250 million yen to 200 million yen, a 20% drop. Even if not as extreme as this, it is inevitable that a gradual downward pressure will be exerted on the sale price during a period of rising interest rates. Therefore, if you read that interest rates will rise in the future, one theory is to sell before that happens. In addition to interest rate trends, you should also consider economic cycles and real estate market cycles. Since real estate prices fluctuate over the long term, you can view large price increases over the past several years as an opportunity to lock in profits. It is important not to miss the timing, especially if there are signs that inflation or land price appreciation rates have peaked out.
Tax milestones: Taxes on gains on the sale of real estate and other tax changes will also affect timing decisions. First of all, the transfer income tax rate on gains from the sale of real estate is only about 20% for individuals who sell after holding the property for five years or longer, while the rate for those who sell within five years is about 39%. This "5-year rule" makes a huge difference, so it is advantageous to hold the property for at least 5 years (strictly speaking, 5 years as of January 1 of the current year) before selling it if the property has just been purchased. Many ultra-high-net-worth individuals hold their assets in the name of a corporation, but if the property is held in the name of an individual, it is important to first keep this tax rate milestone in mind.
In addition, it is also necessary to keep abreast of recent tax system changes. The government announces taxation systems related to real estate (e.g., revisions to property tax assessments, inheritance tax and gift tax, etc.). For example, if there is a plan to change the basic inheritance tax exemption or valuation method, it may be advantageous or disadvantageous to sell the property before one's death. (*Check with your tax specialist for specific revisions.) (*Check with your tax advisor for specific revisions.) These changes in the taxation system may accelerate or delay the "right time" to sell. For example, if there is a prospect that gains on real estate sales will be taxed more heavily in the next few years, it may be a good idea to sell before that happens.
Rebalancing the asset portfolio: For the ultra-high-net-worth individuals, real estate is only one part of their portfolio, and the balance with other assets (stocks, business investments, artwork, etc.) and their financial needs are directly related to their decision to sell. For example, if real estate as a percentage of total assets becomes too high, some properties may be sold and reallocated to cash or other asset classes. If the real estate ratio swells during a strong market, it may be a good time to reallocate assets. Conversely, if there are other attractive investment or expansion opportunities that need to be funded, selling real estate may be an option. Changes in life stages should also be considered. For example, many people review their real estate holdings at milestones such as "a child becomes independent," "a business is taken over," or "a large piece of real estate is inherited from a parent. In fact, there are many cases where people consider selling the property they inherited from their parents when it is becoming a burden to manage. In the case of ultra-high net worth individuals, they will make a comprehensive decision on "when and what to sell and what to leave to the next generation" with an asset succession plan (estate plan) for themselves and their families in mind. In the process, you will determine whether or not the assets should be sold now.
Considering all of the above factors together, the answer to the question, "When should I sell?" The answer to this question depends on the individual situation and market conditions. However, what can be said in common is that, basically, it is desirable to consider selling as early as possible during a period of rising interest rates, as the risk of a fall in price increases as yields rise, and on the other hand, timing that is disadvantageous for tax purposes should be avoided as much as possible. Above all, as the saying goes, "the time to sell is when you can sell," not "the time to sell when you want to sell. The current situation of strong buyer demand and high price levels will not last forever, so we strongly recommend that you systematically draw up an exit strategy based on the factors mentioned above. 3.
When deciding to sell, how to sell at a high price and smoothly is also an important point for ultra-high-net-worth investors. A different approach from a regular real estate transaction may be effective. Here are three strategies that I have found effective in helping ultra-high-net-worth clients sell their properties.
Off-Market Transactions(Private Sales): In many cases, ultra-high-net-worth properties can benefit from "off-market transactions," in which a seller is sought behind the scenes without publicly announcing the property to the market. The first advantage of selling privately is to ensure privacy. If a property is put on the open market, the fact of sale will inevitably be known to the public and the contents of the property will be exposed to an unspecified number of people, but this can be avoided with off-market transactions. In fact, it is not uncommon for sellers to not wish to disclose their property information for reasons such as "I don't want my neighbors to pry into my financial situation" or "I don't want my property value to be public knowledge. The ultra-wealthy are more prudent in this regard. Off-market information is provided only to a limited number of trusted potential buyers, allowing you to concentrate on serious negotiations with interested parties. This eliminates the need to advertise widely and respond to numerous inquiries, and also has the advantage of making it easier to manage information. In addition, in the case of rare and excellent properties, the fact that they do not appear on the market can create a sense of "specialness," and as a result, you may be able to get better terms. In my experience, there was a case in which a transaction was concluded directly between two asset owners who have a close family relationship, and a smooth settlement was achieved at a price higher than that announced to the general public. Of course, from the buyer's point of view, there is a disadvantage of limited options, but as long as you find the right person who really needs the property, you can achieve a sense of trust and a quick closing due to the private nature of the transaction. The key to a successful off-market transaction is to have a trusted intermediary/advisor match the property with a network of high net worth individuals.
Utilizing the networks of high net worth individuals(HNWIs): As mentioned above, "personal connections" play an important role in the buying and selling of ultra-high net worth properties. Since the price range is far beyond that of the general market, there are only a limited number of buyers who are truly willing to consider the property. This is where networking among high-net-worth individuals comes into play. By exploring purchasing needs behind the scenes through trusted fellow investors, private bankers, and family offices, you may be able to get an offer with unexpectedly favorable terms. Also, if you have personal connections with real estate developers or institutional investors, you should take full advantage of them. For example, there are always investors who have offers to buy a quality income-producing building in XX area. If you can match** such potential demand, you may be able to decide where to sell the property before it is officially put on the market. The key to utilizing a network of high-net-worth individuals is to maintain trust and confidentiality with the person who will be the bearer of information. You should entrust your intention and terms of sale to a professional (e.g., an executive at a real estate brokerage firm or a wealth manager at a financial institution) whom you trust not only in business, but also in character, and ask only the right people to contact you. In this way, the risk of rumors that may adversely affect the market is minimized. There is a closed world that only the ultra-wealthy have access to, and making the most of it is a shortcut to a high sale price.
Corporate and institutional investors: When it comes to large properties in the ultra-high-net-worth class, potential buyers include not only individual investors but also corporate entities such as real estate companies and REITs. In fact, J-REITs, private funds, and real estate divisions of business corporations can be strong buyers for projects of several billion yen or more in size. Therefore, a strategy to design a sales scheme for corporations from the beginning is also effective. Specifically, there is a method of selling the property in the form of a stock transfer of the entire SPC (Special Purpose Company) that owns the property. In this way, the buyer may be able to reduce the burden of real estate acquisition tax and registration and license tax, and there is room to add the tax cost to the price. In addition, corporations place a high priority on due diligence, so it is also important to prepare income/expense data and regulatory checks on the property in advance to facilitate evaluation by professionals. Fortunately, the Japanese REIT market has a strong appetite for property acquisitions. For example, the amount of property acquisitions by J-REITs in Osaka in 2023 remains high at 130.8 billion yen (+1% year-on-year). Among them, several acquisitions were confirmed, including a large office building in central Osaka and a logistics facility in the suburbs, indicating that institutional investors are actively moving in this area. In Kanagawa Prefecture (mainly in the Yokohama area), acquisitions amounted to 96.8 billion yen, with large buildings and logistics facilities also being traded. Thus, demand from corporate investors is solid, and they should be kept in mind when selling their own buildings or single condominiums. Specific tactics include asking a reliable major brokerage firm to search the list of domestic and foreign institutional investors, or approaching a REIT management company on a non-disclosure agreement. In many cases, corporate buyers are able to offer higher prices than individuals. In particular, since foreign money is also targeting Japanese real estate these days, it may be necessary to prepare documents in English and present them to foreign funds. In short, approaching a party that has the strength to buy is the shortcut to a successful and steady sale at a high price.
The three points mentioned above, utilizing off-market transactions, making full use of wealthy individuals' networks, and taking a strategic approach to corporate buyers, all have one thing in common: "how many quality potential buyers can be secured underwater***. In the sale of ultra-high-net-worth properties, not only general advertising strategies, but also such closed-market activities greatly affect profits. Please work closely with a trusted real estate advisor to put together the optimal sales scheme.
Finally, let's review the advantages and disadvantages of selling now versuscontinuing to hold the property for the long term to help you make a decision. For ultra-high-net-worth individuals, the decision of whether to sell or hold a single income property is not just a profit calculation, but also an important decision related to inheritance and tax strategies. We will compare the main points about each option.
Profit at a record high price: As mentioned above, the current market is in a high price range due to a decline in yields. In many cases, especially for blue-chip properties in central Tokyo, there may have been sufficient unrealized gains to date. The ability to realize capital gains and lock in profits by selling is the biggest advantage. Rather than risking a price decline in the future due to rising interest rates or economic recession, you can hedge your risk by cashing out now. In fact, many investors have sold during the recent price rally and secured large profits.
Liquidity and reinvestment flexibility: Selling and cashing out your assets allows you to quickly seize other investment opportunities. Since ultra-high-net-worth individuals have a need to avoid lost opportunities, such as promising business investments or international diversification, freeing up funds that were locked up in real estate has the advantage of increasing the overall mobility of the portfolio. For example, if there is a recent attractive correction in the stock market or other asset classes, the cash on hand will allow you to move boldly, and if you need a large amount of money due to unforeseen circumstances, you will be able to respond quickly.
Avoid management burden and additional investment risk: As long as you continue to own a property, you will have management responsibilities and maintenance costs. It is fine when the building is young, but eventually you will have to make large scale repairs, replace tenants, and incur a large amount of expenses and labor. For example, it is said that RC condominiums require tens of millions of yen in repairs every 15 years. If the property is sold, the buyer can take over such future cost burdens. In addition, as the building ages, the risk of falling rents and vacancies increases, and the loan evaluation from financial institutions also declines (e.g., loan terms are shortened if the building is older than 17 years). It makes sense to sell the property before the risks of building age-related deterioration are in full swing in order to keep the asset value high. In many cases, especially in the case of elderly owners, it may be simpler to pass on the property management to the next generation in cash or other forms of payment rather than leaving it to them. In this sense, selling the property can be a choice that eliminates future hassles and makes you feel lighter.
Clarification of Tax and Inheritance Policy: By converting assets to cash, tax treatment is cleared up once and for all. Once the transfer tax is paid on the gain from the sale, there are no further tax consequences (e.g., property tax, income tax, etc.) related to the property. In particular, it is important to be able to sort out complicated depreciation calculations and profit-and-loss calculations for multiple properties. In terms of inheritance measures, while real estate has the advantage of special exceptions for valuation reductions (e.g., reductions in the valuation of land with attached rental properties), it also has the disadvantage of being difficult to divide and to secure funds for tax payments. Since cash is easier to divide and use for tax payment, it may be effective for inheritance planning to sell the property before death to simplify the assets (*See also "Advantages of Holding" below for more information on inheritance). Thus, it is important not to overlook the fact that once sold, it provides an opportunity to reconsider tax and succession strategies.
While these are the main advantages of selling, there are, of course, disadvantages and things to lose. For example, if you sell the property, you no longer receive rental income from it. You also give up the possibility of a further increase in value in the future. You will also have to pay taxes on the gain and incur selling costs (brokerage fees, etc.). Even so, the decision will be made as to whether the benefits to be gained are significant in light of the current high price environment.
Maintain stable income gains: If you continue to hold a single income property, you will receive continuous rental income (income gain). Even if ultra-high-net-worth individuals do not need monthly cash flow for the time being, it can function as a stable asset in the long term. Unlike stock dividends, real estate income is not easily affected by economic fluctuations, and especially prime properties in prime locations are solid sources of income with low vacancy risk. If you sell your property, you give up this stable income, so if you believe that it is safer to hold your assets in real estate than in cash, there is merit in continuing to hold onto your property. Especially during times of inflation, real estate, as a real asset, can serve as an inflation hedge. Rents can be negotiated to increase as prices rise, and if the replacement cost of the building also rises, the value of the asset is less likely to diminish. The possibility of preserving the real value of the property is a major attraction of long-term holdings compared to holding cash.
Expectation of further price appreciation: The real estate market moves up and down cyclically. Although prices are high now, there is no guarantee that they will rise even higher in the future. For example, some say that Tokyo and Osaka, for example, are undervalued even by global standards, and there is a scenario in which large-scale redevelopment and international events (such as the Osaka World Expo) will provide a tailwind that will further boost valuations in the future. In fact, as mentioned earlier, some commercial facilities and hotels continue to yield lower yields, and in some cases, valuations have exceeded pre-Corona levels. In addition, prime properties tend not to collapse in value even when interest rates rise. If the location and grade of the property are good, there will always be demand from investors, and data shows that even if yields rise slightly, the extent of price declines will be limited. Therefore, if you have reason to believe that the property will appreciate even more in the future, it is reasonable to hold on to it instead of forcibly selling it now. Real estate is said to be a long-term investment. It is possible to realize its true value by not being influenced by short-term market noise and holding on to the property until the next upswing.
Tax benefits such as depreciation: The tax benefits of continued ownership should not be overlooked. Depreciation is charged annually on buildings based on their legal useful lives, but the younger the building is, the greater the depreciation expense, including equipment, and the advantage is that it can be charged to expenses (tax savings) even though cash on hand does not go out. For example, there are cases where depreciation expenses are 7 million yen per year for the first 10 years after purchase, but decrease to 3.5 million yen from the 11th year. In other words, holding the property while depreciation is still available has the advantage of reducing the annual taxable income. If the property is sold, the depreciation is no longer available, so if there is no other major tax-saving measure, continuing to hold the property may reduce the total tax burden. Since the effect of real estate income reduction is especially large for higher income earners, it is worthwhile to continue to hold the property for as long as the depreciation benefit is still available. Furthermore , if you continue to hold the property without selling it, you will pass it on to the next generation as an inheritance asset in the future, and you can expect a certain amount of tax savings in this case as well. In many cases, the assessed value of real estate for inheritance tax purposes is lower than that of cash (in general, 70-80% of the market value, based on roadside land prices and assessed value of fixed assets), and if the property is leased, a reduction in the assessed value of the rental house is also applied. In other words, owning real estate may reduce the assessed value for inheritance tax purposes. For the ultra-wealthy, inheritance tax is a heavy tax that can reach a maximum of 55%, but the tax-saving effect of reduced assessed value cannot be ignored. Therefore, from the viewpoint of "leaving assets to the next generation with minimal diminishing value," the strategy of continuing to hold real estate instead of unnecessarily converting it into cash can be effective.
These are the main advantages of long-term holdings. However, there are risks and disadvantages associated with continued ownership. The biggest risk is market fluctuation. If yields rise due to higher interest rates, the asset value may decrease, as mentioned above, and if rental demand declines, vacancies may increase and income may decrease. In addition, repair costs associated with the age of the building and the dead-cross phenomenon (a state in which profits increase and the tax burden increases due to a decrease in expenses on the books) after depreciation runs out cannot be avoided. For example, when the depreciation of equipment ends, the annual expense of several million yen will disappear and the same amount will be added to income. At this point, it can be said that selling the property should be considered. Furthermore, from the perspective of inheritance, it should be noted that leaving real estate behind poses issues such as the difficulty of dividing the property and securing funds to pay taxes. Since the actual market value of the asset is high even if the assessed value is suppressed, there are often cases where heirs are eventually forced to sell the property in a hurry in order to pay a large inheritance tax. When this happens, they cannot freely choose the timing, and there is a risk that they will be forced to sell under unfavorable conditions. Thus, it is important to make a comprehensive decision in light of your own asset strategy, taking into account that there are costs and risks involved in continuing to hold the property.
Conclusion
We have reviewed the current market trends, specific strategies, and comparisons with long-term holdings with regard to the timing of the sale of single-family income properties. In conclusion, for ultra-high-net-worth investors, "when to sell" varies widely and depends on the market cycle and your own situation. The common thread, however, is that the optimal opportunity to sell will not last forever. The real estate market is a living organism and changes from moment to moment depending on interest rates, policies, and the economic environment. Therefore, it is essential to keep the points mentioned in this article in mind and always watch the market while developing a plan. For the ultra-high-net-worth individuals, the sale of a single property is not just a transaction, but part of their overall asset strategy. In order to make this strategy a success, I would like you to make a logical and calm decision with the advice of trusted professionals. As your good partner, I will sincerely support you to maximize the value of your property at the best time and in the best way. Please take a hint from this discussion and consider the best option in your situation.