Comparing Japanese and Chinese Real Estate Markets: Key Differences and Trends

Recently, we have been receiving an increasing number of questions from clients who are considering a global asset portfolio about the differences between the Japanese and Chinese real estate markets. In particular, as the Chinese real estate market is currently undergoing a major adjustment phase, many are interested in how these trends will affect the Japanese market.

In this article, as a real estate expert, I will explain the fundamental differences between the two countries' markets, the investment environment, and even the recent high-profile Chinese real estate bubble and its impact on Japan. We hope this article will be a useful source of information for those considering real estate investment or interested in international economic trends.

Basic Differences between the Japanese and Chinese Real Estate Markets

Although geographically close, the real estate markets in Japan and China are very different in nature. The most fundamental difference lies in land ownership, but they also contrast in several other ways, including market structure and investment focus. Understanding these differences is essential to an accurate understanding of the markets in both countries.

Fundamental Differences in Land Ownership: Perpetual or Use Rights

The biggest difference is the right to land. In Japan, individuals and corporations can hold perpetual title to land and buildings. This means that once acquired, they own the asset in perpetuity and are free to buy, sell, inherit, or lease it. This strong ownership is the foundation of the value of real estate as an asset.

In China, on the other hand, land in urban areas is state-owned, and individuals and companies can only directly own buildings and the right to use the land for a certain period of time (70 years for residential use, 40 years for commercial use, etc.). The law is not yet fully developed regarding the treatment of land after the expiration of the term, and there is uncertainty about the future. This "perpetual ownership" is one of the main reasons why foreign investors, especially wealthy Chinese, are strongly attracted to Japanese real estate.

Comparison of Market Structure and Investment Objectives

In addition to differences in ownership, market transparency and investors' main objectives also differ. Below we compare the main characteristics of both markets.

Thus, while the Japanese real estate market is a mature market that emphasizes stable income gains and long-term asset preservation, the Chinese real estate market has developed against the backdrop of rapid economic growth as a market with a strong speculative flavor that targets short-term capital gains. This structural difference can be said to underlie the current adjustment phase in the Chinese real estate market.

Structural Issues Facing China's Real Estate Market

In recent years, China's real estate market has been facing a serious recession. The real estate industry, once a driver of economic growth, is now attracting worldwide attention as a risk factor for the Chinese economy as a whole. At the heart of this problem lies a growth model that relies on overinvestment and debt.

Debt problems of major developers and the risk of a bubble bursting

Since 2021, a series of debt defaults (defaults ) by leading major Chinese real estate developers such asChina Hengda Group andBi-Gui-Yuan have surfaced. These companies have been furiously pursuing large-scale real estate development by raising huge amounts of funds through bank loans, bond issues, and high-yield financial instruments known as "financial products.

However, their cash flow rapidly deteriorated when the Chinese government tightened lending regulations to curb the real estate bubble. A number of uncompleted properties have been popping up all over the country with construction halted midway, and this has even led to social turmoil as individuals who have purchased properties have been refusing to repay their loans. This series of developments is more than just a corporate management problem; it has impressed upon the world the real risk of the collapse of China's real estate bubble.

Disparity between Local Cities and Metropolitan Areas

However, China's real estate problems are not uniform across the country. Particularly serious are small and medium-sized cities in rural areas, where development has far exceeded demand. In these cities, apartment complexes have become ghost towns, and real estate prices have fallen dramatically.

On the other hand, in some metropolitan areas such as Beijing and Shanghai, housing demand remains strong, and the extent of price declines has been kept relatively small. Nevertheless, the uncertainty about the overall market outlook has led to widespread reluctance to buy, and the situation remains unpredictable even in the major metropolitan areas. This regional disparity is another complex aspect of the adjustment phase in the Chinese real estate market.

Impact of China's Real Estate Problems on the Japanese Market

The turmoil in China's economy is not a fire on the other side of the river. As the world's second-largest economy, developments in China affect Japan, our largest trading partner, in multiple ways. This section discusses the indirect impact on the overall economy and the direct impact on the Japanese real estate market.

Indirect Impact on the Economy as a Whole

Of greatest concern is the impact on Japan's export industries. A slowdown in the Chinese economy would reduce demand for key Japanese exports such as automobiles, electronic components, and machine tools. For some companies, the slump in the Chinese market has already begun to hamper their business performance. A prolonged economic slowdown in China could be a cooling factor for the Japanese economy as a whole.

Direct Impact on the Japanese Real Estate Market: Changing Trends of Chinese Investors

In recent years, Chinese investors have been increasing their presence in the Japanese real estate market, especially in the market for luxury condominiums in central Tokyo. Therefore, how the Chinese real estate issue will affect their investment behavior is of utmost concern to market participants.

Continued Investment Inflows Due to the Weak Yen Effect

With the current historic depreciation of the yen, Japanese real estate appears very undervalued from the perspective of Chinese investors with yuan. For example, when 1 yuan = 20 yen and 1 yuan = 30 yen, the same 100 million yen property can effectively be purchased for two-thirds the price. Because of this undervaluation, Japanese real estate investment by wealthy individuals who wish to move their assets from China to safer overseas locations continues to be at a high level. In particular, properties in central Tokyo, where the political and economic climate is stable and asset values are unlikely to decline, are concentrated in popularity.

Risk of Outflow of Funds and Decline in Demand

However, optimism is not warranted. If the economic turmoil in China becomes more severe and the Chinese government tightens regulations to prevent assets from flowing out of the country, the situation could change drastically. In addition, wealthy individuals whose business operations in their home countries have become cash-strapped may begin to sell their Japanese real estate holdings to repatriate their funds.

Furthermore, if the deterioration of the Chinese economy as a whole extends to the middle class, there is a risk that those who have purchased Japanese real estate in the past will lose their appetite for purchasing real estate in Japan. In some areas that have been supported by inflows of foreign investment, especially from China, the possibility cannot be ruled out that a drop in demand could trigger a price adjustment.

Why Japanese Real Estate is Attractive to Foreign Investors

While the turmoil in the Chinese market highlights, the inherent attractiveness of the Japanese real estate market is also being reevaluated. Why does Japanese real estate remain an attractive investment destination for foreign investors, especially wealthy Chinese, in the midst of an increasingly uncertain global situation? The reasons can be summarized in the following four points.

1. Absolute value of permanent ownership

As mentioned above, permanent ownership of land, which is not available in China, has irreplaceable value for wealthy individuals who want to ensure that their assets are passed on to the next generation. This is the most important foundation for long-term asset preservation.

2. Political and Economic Stability and Transparency of the Legal System

Japan has a stable political and economic situation, and the legal system is operated fairly and transparently. The rules for real estate transactions are clear, and property rights are firmly protected by law. The fact that there are few restrictions on real estate acquisitions by foreigners is another major factor that encourages foreign investment in Japanese real estate. Predictability and reliability are extremely important factors when investing your valuable assets.

3. Undervalued compared to major cities

Although real estate prices in Tokyo are said to be soaring, the price level remains low compared to Hong Kong, London, and New York, and is close to Shanghai in some areas, and in some cases rather higher than Beijing. In addition to this price differential, the current historic depreciation of the yen makes Japanese real estate even more attractive to foreign investors.

4. Stable and High Rental Yields

A comparison of rental yields between Japan and China shows a clear difference. In China's major cities, rents have not kept pace with soaring real estate prices, with rental yields hovering just below 2%. On the other hand, in Japan's major metropolitan areas, stable yields of around 4% can be expected on average, which is very attractive to investors who value income gains. This stable profitability enhances the reputation of Japanese real estate as a solid investment target that does not depend on speculative price gains (capital gains).

Conclusion: Assess the changing market and protect your assets wisely.

In this article, we have discussed the differences between the Japanese and Chinese real estate markets from various perspectives, from the fundamental differences in land ownership to the market structure and the impact of the current real estate problems in China on Japan.

The main points can be summarized as follows

Differences in ownership: While Japan has "perpetual ownership," China has "land use rights," which makes the biggest difference in the stability of asset values.

Nature of the market: Japan is a mature market that emphasizes stable rental income, while China is a speculative market that targets price gains, and these structural differences have led to the current adjustment phase.

Impact of the Chinese market on Japan: In the short term, the inflow of funds from wealthy individuals may continue due to the weak yen, but in the medium to long term, there is a risk of declining demand due to the deterioration of the Chinese economy, and trends must be closely monitored.

Attractiveness of Japan: In the unstable global economy, the intrinsic value of Japanese real estate, such as "strong ownership," "market stability and transparency," "undervalued" and "high yields," is attracting renewed attention as a safe asset escape.

In conclusion, the turmoil in the Chinese real estate market presents both short-term risks and opportunities for the Japanese real estate market. In the long run, however, the solid fundamentals of Japanese real estate will continue to support its value.

In this complex market environment, professional knowledge and up-to-date information are essential to develop an optimal real estate investment strategy. Please feel free to contact us if you have any questions about real estate, whether you are looking to convert assets from overseas real estate or to make a new investment in Japan.

Frequently Asked Questions (Q&A)

Q1:Can Chinese nationals freely purchase real estate in Japan?

A1: Yes, they can. Under Japanese law, there are basically no restrictions on real estate acquisition based on nationality. Foreign nationals are free to acquire and register ownership of land and buildings in the same manner as Japanese nationals. However, it is necessary to keep in mind that each financial institution has its own screening criteria when it comes to obtaining loans.

Q2:Is the collapse of China's real estate bubble similar to the collapse of Japan's bubble in the 1990s?

A2:There are both similarities and differences. The similarities are that monetary tightening triggered the collapse and that real estate prices were far removed from the realities of the economy. However, the difference is that in Japan, prices collapsed uniformly across the country, whereas in China, there are large regional differences, such as the conspicuous slump in regional cities. In addition, the fact that land is state-owned and the degree of government intervention in the market is very different from the Japanese case, so the process may not necessarily follow the same path.

Q3:What should foreign investors pay special attention to when investing in Japanese real estate?

A3:There are three main areas: taxes, management, and currency risk. It is necessary to understand Japan's unique tax system, which includes real estate acquisition tax, fixed asset tax, income tax (on rental income), and transfer tax (on gains on sales). It is also important to select a reliable management company to whom you can entrust the daily management of the property and handling of tenants. Furthermore, since the assets are denominated in yen, you should keep in mind that fluctuations in the exchange rate against the local currency will directly affect the value of the assets and your income.

Q4:Why are there differences in rental yields between China and Japan?

A4:The main reason is the difference in the balance between real estate prices and rents. In China, real estate prices have risen much faster than the pace of rent increases over the past several decades. Many investors purchased properties expecting price gains rather than rental income, creating a situation of "high prices but low rents," resulting in low yields. In Japan, on the other hand, prices are relatively stable and in balance with rent levels, making it easier to secure stable yields.

Q5:Do you think Chinese investors will increase their investment in Japanese real estate in the future?

A5:In the short term, against the backdrop of the weak yen and economic and political uncertainty in China, investment by wealthy individuals for the purpose of asset diversification (flight to safe assets) is likely to continue or increase, especially in metropolitan areas such as Tokyo. However, if negative factors such as tighter capital controls by the Chinese government and further deterioration in the overall Chinese economy become apparent, there is a good chance that this momentum will slow down. We will need to closely monitor the policies and economic conditions in both countries.