New_Market_Entry_Japan_CFAnalysis

New Market Entry Proposal
Japan
IP Global Ltd
Prepared by: PETER PARK
Student at QUT, Australia
Supervised by: BENJAMIN HALL
Investment Manager (North America & Asia-Pacific)
Date: 28 April 2015

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Executive Summary
The Minto Pyramid Principle, or the SCQA analysis, is used for the value proposition
of this report.1
SITUATION
Macroeconomic atmosphere in Japan positions IP Global favourably as the
Japanese economy attempts to overcome the two-decade long deflationary
recession. Recent economic recovery has been largely driven by a combination of
positive global outlook and government-initiated policies, or the „Abenomics‟.
Expansionary monetary policy and quantitative easing through bond purchase by the
Bank of Japan have helped put pressure on the Japanese Yen and maintain low
interest rates that drew more foreign investments to Japan. Yen has depreciated
significantly against almost all of the major currencies with which IP Global is
concerned.
Property markets in major metropolitan areas, including Tokyo, are also buoyed by
growth prospects in the lead up to the 2020 Tokyo Summer Olympics. Short-term
supply-led demand is expected across all sectors of the Japanese property market
with the exception of the Office Market. The Hotel Market looks the most promising
due to rising demand and supply, as evidenced in IP Global‟s ongoing Akazora
project.
COMPLICATION
At a macroeconomic level, there are two main issues facing the Japanese economy:
Japan‟s ageing population and uncertainties surrounding Abenomics. Retirement
housing is considered to have peaked already and construction costs are rising due
to skilled labour shortage that stems from the ageing population. There is a rising
welfare burden on the Japanese government long term. The flow-on effect of
Abenomics also seems to be lagging partially due to a 2% VAT hike in April, 2014
and this may continue as another 3% VAT hike takes effect in October 2015, taking
the VAT to 10%
At a microeconomic level, Japan has one of the highest income tax marginal rates at
50.84%, which imposes tax burden on residents or non-permanent residents in
Japan. In addition, there are some aspects of the Japanese tax system that are
complicated and ambiguous, accompanied by a lack of available information in
English. There also seems to be a general consensus that it may be difficult for
potential clients, particularly those who are non-residents, to obtain a loan or a
mortgage in Japan. More research is required in that regard.
In terms of the general property market, there is a high concentration of market
activities in Tokyo, particularly in the central five wards, which have shown
decreasing vacancy rates in the Office Market as demand for office space increases
as businesses flourish.
1
Minto Books International.

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However, rising property and land prices in Tokyo, Osaka and Nagoya appear in
contrast to the decreasing trend nationwide where uncertainties surrounding on the
effects of Abenomics on the economy are increasing. This is also reflected in
relatively low GDP growth and inflation rates compared to other developed countries.
QUESTIONS AND ANSWERS
In terms of the overall economy in Japan and its property market, Abenomics is likely
to continue playing a significant role. The „three arrows‟ of the policy, of which two of
them – monetary easing and fiscal stimulus – have already been implemented, will
be crucial as the effect of the first two arrows begins to flow throughout the economy
and the last arrow of structural overhaul is triggered. These include further relaxation
of regulations, lower corporate rate and more of the first two arrows simultaneously,
albeit another VAT hike. Japan‟s open policy toward direct foreign investments would
also likely decrease restrictions further and increase incentives even though these
may not relate directly to the property market.
Despite limited market supply medium term, IP Global is still favourably positioned
as opportunities exist in exploring affordable retirement housing as the affordability
issue currently undermines any demand and supply in the industry. Low house
ownership rates in major metropolitan areas, with Tokyo having the lowest rate in the
country, provide IP Global with more flexibility within the rental market. Low Yen
continues to draw more foreign visitors to Japan and IP Global could take advantage
of growing Tourism Market as evident in the Akazora project.
Whilst there are significant complicity and ambiguity in determining tax liability in
Japan for potential clients who are likely to be foreign investors with non-resident
status, benefits still outweigh costs. Through seeking appropriate accounting advice
within Japan, clients can structure their income stream in such a way so that they
minimise taxation y maximising deduction benefits. Legal interpretation of residency
status of potential clients and entity fiscal transparency is particularly crucial. This
subsequently flows onto the precise estimation of financial costs for the clients as
evidenced in identifying all related costs when purchasing real estate in three
different stages: acquisition, management and disposal. This is demonstrated by a
scenario analysis conducted as the last part of this report.
More research is required in relation to IP Global‟s ability to underwrite projects
within the Japanese legal system.

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Contents
Executive Summary.............................................................................................................................2
1. Economic Analysis: World ..........................................................................................................7
2. Economic Analysis: Japan..........................................................................................................7
2.1. Gross Domestic Products ...................................................................................................7
2.2. Unemployment Rates ..........................................................................................................7
2.3. Interest Rates........................................................................................................................8
2.4. Inflation Rates.......................................................................................................................9
2.5. Population Growth................................................................................................................9
2.6. Exchange Rates .................................................................................................................10
2.7. Share Market Index............................................................................................................12
2.8. Business Confidence.........................................................................................................12
2.9. Japanese Government‟s Initiative: “Abenomics”...........................................................13
2.10. Conclusion.......................................................................................................................13
3. Property Market Analysis ..........................................................................................................14
3.1. Historical Analysis ..............................................................................................................14
3.2. Foreign Investment ............................................................................................................14
3.2.1. Restrictions for Foreign Buyers................................................................................14
3.2.2. Mortgages for Foreign Buyers..................................................................................14
3.2.3. Incentives for Foreign Buyers...................................................................................15
3.3. Outlook.................................................................................................................................16
3.3.1. Office Market...........................................................................................................16
3.3.2. Residential market..................................................................................................17
3.3.3. Hotel market............................................................................................................19
4. Legal Analysis.............................................................................................................................20
4.1. Tax Implications on Real Estate Income ........................................................................20
4.1.1. Calculating Real Estate Income in Japan...............................................................20

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4.1.2. Liability to Japanese tax............................................................................................20
4.1.2.1. Scope of Real Estate Income...........................................................................21
4.1.2.2. Real Estate Income and Individual Tax Residence ......................................21
4.1.2.3. Real Estate Income and Business Income.....................................................22
4.1.2.4. Real Estate Income from Trusts and Partnerships .......................................23
4.1.2.5. Real Estate Income and Capital Gains...........................................................25
5. Strategic Analysis.......................................................................................................................26
5.1. SWOT Analysis...................................................................................................................26
5.2. PESTLE Analysis ...............................................................................................................26
5.2.1. Political.........................................................................................................................27
5.2.2. Economic.....................................................................................................................27
5.2.3. Social............................................................................................................................27
5.2.4. Legal.............................................................................................................................27
6. Financial Analysis.......................................................................................................................29
6.1. Acquisition ...........................................................................................................................29
6.1.1. Letting Costs ...............................................................................................................29
6.1.2. Stamp Duty (National Tax)........................................................................................29
6.1.3. Registration and Licence Tax (National Tax).........................................................29
6.1.4. Real Property Acquisition Tax (Local Tax).............................................................30
6.1.5. Legal Fees...................................................................................................................30
6.1.6. Real Estate Agent Fee ..............................................................................................30
6.1.7. Costs to Obtaining a Loan ........................................................................................30
6.2. Management .......................................................................................................................31
6.2.1. Depreciation Costs.....................................................................................................31
6.2.2. Income Tax..................................................................................................................32
6.2.2.1. Individual Income Tax........................................................................................32
6.2.2.2. Corporate Income Tax.......................................................................................34

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6.2.3. Fixed Asset Tax (Local Tax).....................................................................................34
6.2.4. City Planning Tax (Local Tax) ..................................................................................34
6.2.5. Property Management Costs....................................................................................34
6.2.6. Carpark Fees ..............................................................................................................35
6.2.7. Utilities..........................................................................................................................35
6.3. Disposal ...............................................................................................................................35
6.3.1. Capital Gains Tax.......................................................................................................35
6.3.2. Legal Fees...................................................................................................................35
7. Scenario Analysis.......................................................................................................................36
8. Recommendation .......................................................................................................................37

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1. Economic Analysis: World
According to the OECD reports, the global economy has been steadily but slowly
improving in the last few years led by recovery in the USA and less uncertainties in
the Euro zone.2
Emerging markets continued to grow at a level higher than
developed countries though this was subsided. Most of the Euro zone countries
posted negative or at-par growth which evened the OECD average GDP growth of
1.3% - 1.5% in the last three years. Other major economic indicators reflected this
trend, such as global stock index and employment.
2. Economic Analysis: Japan
2.1. Gross Domestic Products
Gross Domestic Product (GDP) is an indicator of an economy‟s performance. The
Japanese economy has been performing slightly above the OECD average since the
Global Financial Crisis (GFC). It posted year-to-year growth of 0.6% in the fourth
quarter of 2014, or an annualised rate of 2.2% (See Figure 1).3
IP Global forecast
the growth to slow slightly in the first quarter of 2015 and to bounce back above 1%
quarterly growth in the second quarter.4
Low growth is not necessarily a negative for
both IP Global and clients though attention should be paid to the government policies
that could influence the GDP.
Figure 1.
2.2. Unemployment Rates
Unemployment rates are an effective indicator of the economic strength at any given
time. The rates have been decreasing since the GFC and are currently 3.6% (See
Figure 2).5
IP Global forecasts the rates to stay around 3.4% long term.6
Studies
show that people tend to stay in one job for a long time in Japan, and in fact in most
parts of North East Asia, due to loyalty and job security.7
Shortage of available
2
OECD.
3
Trading Economics.
4
Ibid.
5
Ibid.
6
Ibid.
7
Japan Today.

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workers have also pushed construction cost per square meter of floor space to a 21-
year high as of May, 2014.8
This is largely driven by a continuing rise in land price
according to the Ministry of Land, Infrastructure, Transport and Tourism‟s quarterly
report that surveys the land price in Tokyo, Osaka and Nagoya (See Figure 2B).9
The 2014 Q4 report revealed that, since 2013 Q1, more than 50% of the districts
surveyed have recorded a price increase of more than 0% and less than 3% which
reached an all-time high of 82% of all the districts. 90% experienced positive growth
in the Greater Tokyo area, 80% in Osaka and 100% in Nagoya.
Figure 2A.
Figure 2B.
2.3. Interest Rates
Interest rates are an indicator of the direction of the country‟s monetary policy by it‟s
central bank, which in turn reflects the present and future economic activitiy growth.
As will be discussed later, due to the decade-long recession that goes back to the
late 1980s, the Bank of Japan (BOJ) has kept the interest at 0% since 2011 and this
has been no higher than 0.5% in the last decade (See Figure 3).10
IP Global
forecasts that the BOJ could increase the rate by 0.5% in the second quarter of 2015
8
Nikkei Asian Review; Arcadis.
9
Ministry of Land, Infrastructure, Transport and Tourism.
10
Trading Economics.

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due to the new economic policies instigated by the Japanese government.11
Should
clients take a loan in Japan, interest expenses are likely to be very low.
Figure 3.
2.4. Inflation Rates
Inflation rates indicate changes in consumer goods and services price caused by
supply and demand of an economy. In Japan, inflation has consistently stayed at or
below 0% until 2013 when it started to rise, reaching the current level of 2.4% (See
Figure 4). IP Global forecasts the inflation rate to fall below 2% throughout 2015.12
This ensures consistency in property price change for prospective clients but it is not
favourable for existing property owners.
Figure 4.
2.5. Population Growth
Population growth could be an indicator of prospective growth of an economy
through increased labour supply. Japan‟s population has almost flattened out in the
21st
century at 127 million after steady rises from as far back as 1950 (See Figure 5).
In particular, there is a growing concern within Japan in relation to its ageing
population which is putting pressure on the country‟s welfare system and economic
11
Ibid.
12
Trading Economics.

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productivity.13
This could lead IP Global to focus on investing in retirement housing
and resort accommodation.14
Figure 5.
2.6. Exchange Rates
Exchange rates are an effective indicator to estimate the value of transactions in a
desired currency. Considering IP Global‟s preferred currency in the US dollar (USD),
it appears favourable for the company as the Japanese Yen (JPY) against the USD
has weakened gradually since mid-2011, reaching the current level of around 119
JPY / USD (See Figure 6).15
The trend is observed in all the other currencies with
which IP Global deals, with the exception of South Africa (See Figure 7A – 7I).16
Table 1 shows the percentage increase of a nominated currency against the JPY
since March 2010. Noticeable increases among Asian and Middle Eastern
currencies provide more opportunities for investors from these regions.
Figure 6.
13
The Economist.
14
Japan Times; BiggerPockets Online Real Estate Magazine (vacation rentals); Japan-Guide
(vacation rentls).
15
Trading Economics.
16
Ibid.

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Table 1.
XXX / JPY USD17
AUD EUR SGD CNY KRW AED ZAR MYR
% increase 26.71 10.70 4.66 30.49 39.41 33.05 26.70 -22.0118
16.09
Source: Yahoo Finance
Figure 7A. Australia Figure 7B. United Kingdom
Figure 7C. Europe Figure 7D. Singapore
Figure 7E. China Figure 7F. South Korea
Figure 7G. UAE Figure 7H. South Africa
17
Yahoo Finance.
18
Yahoo Finance.

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Figure 7I. Malaysia
2.7. Share Market Index
Share market index is an effective indicator of shareholder‟s perception of various
companies, sectors and economy in general as reflected in share prices. Japan‟s
share market index, Nikkei 225, has increased significantly since 2013 at 18794.94
in February,19
2015 though this is still half of that reached in late 1980s when there
was an asset bubble burst (See Figure 7).
Figure 8.
2.8. Business Confidence
Business confidence is an effective indicator of the perception of future business
performance. Business confidence in Japan has been in the positive since 2013 at a
level just short of that reached in the pre-GFC years (See Figure 9).20
This coincides
with growth in the Japanese property market (See 3.2.4. Outlook).
19
Trading Economics.
20
Trading Economics.

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Figure 8.
2.9. Japanese Government’s Initiative: “Abenomics”
The “Abenomics” is a government-initiated attempt to lift Japan from its long
recession led by its second-term Prime Minister, Shinjo Abe. The plan has the “three
arrows”: monetary easing, fiscal stimulus and structural overhaul. The Japanese
government has been purchasing securities through the BOJ to inject cash into the
economy, lowering the interest rates, putting pressure on the JPY, and in general,
stimulating the economy.21
However, a 3% VAT-hike in April 2014 and a further 2%
in October 2015 have turned away some foreign investors.22
The government now
moves towards the third arrow, structural overhaul: a draft legislation to cut the
corporate tax by 2.5% or more from the current 25.5%, loosening of the labour
regulations, signing the Trans-Pacific Partnership trade pact, raising wages and a
further spending on business investment.23
2.10. Conclusion
The research conducted by IP Global indicates that Japan is a stable economy with
moderate growth perspectives, and hence, it is a suitable market to enter overall. A
few key factors such as favourable exchange rates and low interest rate could
significantly reduce costs. Due to a significant depreciation of the JPY against major
Asian and Middle Eastern currencies, investment prospects from these regions look
positive. Japan‟s unique population growth trend could give IP Global an opportunity
to look into a business model centred around the ageing population. However, IP
Global must continue to monitor the progress and impact of the “Abenomics” as
metropolitan land price rise continues whilst the national price drops.24
As a result,
construction costs are increasing coupled with lack of labourers.
21
Bloomberg.
22
Ibid.
23
Ibid.
24
Bloomberg.

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3. Property Market Analysis
3.1. Historical Analysis25
Sole concentration of economic activities centred around Tokyo and the subsequent
lack of diversification to other cities through government policies led to demand for
real estate outstripping supply since 1970s. From 1970 - 1980, land prices in Japan
rose more than 20% in real terms and almost 40% in six major cities. In the 1980s,
this was around 60% and 200% respectively. Due to the BOJ‟s reluctance to tighten
the monetary policy as economic uncertainties persisted, asset prices soared and
speculation was prevalent.
The crash brought about significant depreciation of the JPY against the USD, halving
of the peak stock market level and sharp falls in land prices in Tokyo, which was
followed by price falls in urban lands. This phenomenon lasting throughout the 1990s
became to be known as the “Lost Decade”.
However, a new administration in 2001 under Junichiro Koizumi saw tighter asset
assessment of major banks and demand for lending increase around metropolitan
areas. Housing loan costs fell accordingly. The BOJ‟s “virtually zero” monetary policy
has been maintained during, and after, the Lost Decade which saw key interest rate
between 0% - 0.1%. However, demand for loans has been weak, given the GFC in
2007-8 and the Hiroshima earthquake in 2011. House prices were either stagnant or
in negative growth.
Property market growth came about in 2010 following economic growth, though most
of activities occurred in Tokyo. Both housing and land prices are steadily rising as
the effect of the Abenomics begins to flow into the economy. Home loan interest
rates have been at their record lows (around 1%) by major Japanese banks such as
Mizuho, creating a low-cost environment.
3.2. Foreign Investment
3.2.1. Restrictions for Foreign Buyers
In terms of foreign property ownership, there are currently no restrictions, but an
investor must submit a report to the Minister of Finance within 30 days of real estate
purchase under the Foreign Exchange and Foreign Trade Act unless such
purchases fall under certain exemptions. This concerns national security and the
smooth management of the Japanese economy.26
3.2.2. Mortgages for Foreign Buyers
Regular Japanese banks have historically not provided home loans to foreigners,
even to those with permanent residency (PR). Loans may be obtained more easily
25
Global Property Guide.
26
Jones Lang Lasalle.

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through banks of majority foreign ownerships or large bodies of finance companies
though the latter has higher interest rates and more strict conditions.27
Different conditions apply to individual foreign buyers subject to their legal status in
Japan.28
General prerequisites are that a mortgagee must reside in Japan and must
use the property for own residence. He or she is capable of providing a withholding
tax certificate and a taxation certificate, and is also capable of basic communication
in Japanese and writing own name and address in Japanese (See the footnote for a
more detailed process).29
Buyer
Type
With PR Without PR
Offshore with no legal
status
Specifics - Locate a branch
that can deal with
foreigners
- Provide income
tax statement of
source of income:
1-3 years of
continuous
employment at the
same company
- If with a Japanese
spouse, can apply
at most domestic
banks if worked
several years at
the same
company and
fluent in Japanese
- Very limited
Banks
that offer
loans
- Commercial
banks: Mitsubisi
Tokyo UFJ Bank
(Toshi Ginko)
- Trust Banks
(Shintaku Ginko)
- Regional Banks
(Chi-gin)
- Mortgage firms
(Life Housing
Loan etc)
- Subject to
employment
-
3.2.3. Incentives for Foreign Buyers
There are no specific incentives for Foreign Direct Investments (FDI) in real estate
but there may be some subsidies available for establishing a local office subject to
conditions set out by The Act for Promotion of Japan as an Asian Business Center.30
Income tax deductions may apply to mortgages against properties less than 25 years
old.31
27
Japan Times.
28
Japan Property Central.
29
Real Estate Tokyo.
30
Japan External Trade Organization.
31

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3.3. Outlook
Interests in Japanese real estate among investors in private funds and Japanese
Real Estate Investment Trusts (J-REIT) increased in 2014. Stronger economy,
weaker JPY and the upcoming 2020 Tokyo Olympics may lead to supply-led
demand in the foreseeable future. 32
Focusing on the six Tokyo central wards,
Chiyoda, Chuo, Minato, Shinjuku, Bunkyo and Shibuya, ongoing infrastructure
projects in Central Tokyo in the lead up to the Olympics are already creating a
positive outlook (See Figure 11). Whilst this may be moderate in Central Tokyo in
general due to lack of investment opportunities, a broad range of properties are
sought after in the Greater Tokyo (ex-Tokyo) as well as major metropolitan areas
such as Osaka and Nagoya. Focus seems to be around hotels, serviced apartments,
healthcare, and logistics facilities.
Figure 10. Infrastructure Projects in the Tokyo area
Source: NRI
3.3.1. Office Market
Demand: 58% of Japan‟s office rental market is in the Greater Tokyo area (as of
Dec 2011), followed by 30% of Japan‟s commercial real estate solely in Tokyo.33
Supply: As office supply hits a 6-year low,34
short to medium supply is likely to be
limited, as demonstrated by decreasing vacancy rates in Tokyo‟s CBD that has
been historically high.35
The eighteen consecutive months of decrease since
December 2013 further highlights this trend, as evident across Tokyo‟s five
central wards (See Table 1 and Figure 10).36
Further pressure may be built for
the next couple of years as a majority of developments in the area are expected
to be complete by 2017 or beyond.37
The same can be said in relation to Osaka
32
Collier International.
33
Nomura Research Institute.
34
35
Nomura Research Institute; Miki Shoji.
36
Miki Shoji.
37
Nomura Research Institute

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and Nagoya CBDs though they are much higher, respectively at 7.92% and
7.53%.38
Table 2. Vacancy rate movement in Tokyo CBD
Tokyo
Central
Wards
Shinjuku Minato Chuo Chiyoda Shibuya Bunkyo CBD
Average
2011 10.5% 10.3% 8% 8% 7.8% n/a n/a
2013 9.28% 8.32% 7.10% 6.13% 5.53% n/a 7.34%
2014 5.26% 5.96% 5.62% 5.61% 3.16% n/a 5.47%
Change -5.24% -4.34% -2.38% -2.39% -4.64% n/a n/a
Figure 11. Tokyo CBD Central Wards (underlined)
3.3.2. Residential market
Demand: Almost 20% of all households in Japan live in non-public rental
apartments.39
The rate of supply in rental apartment has been outstripping that of
rental housing, as well as the overall market, which widened the ratio between
the two from 6:4 to 7:3.40
As of November 2014, 43% of new units were built for
rental purpose in ex-Tokyo.41
This trend is driving the demand for this type of
housing, as evidenced by rent rises as below.
Supply: Supply is likely to be limited medium term due to rising construction costs
and higher land prices,42
even though constructions in the general rental market
38
Miki Shoji.
39
Nomura Research Institute
40
Ibid.
41
Savills.
42
Savills.

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have been increasing and there is an expected 5.9% rise in new rental
apartments in the ex-Tokyo area in 2015.43
This is evident from rising rents
across all types of apartment in ex-Tokyo since 2011,44
particularly in the central
5 wards at a rate of 2.9% p.a. in Q4 2014.45
This is further supported by the J-
REIT mid-market rental apartment occupancy rate of 95.9%, which has stayed
above 95% since Q3 2010.46
In terms of supply by unit size, there was a
relatively high supply of smaller units (15 – 45 m2
) to the bigger units (45 – 75 m2
)
in ex-Tokyo in Q4 2014, as evidenced by rent rises of 1.8% and 4.5%
respectively.47
However, the long-term supply in Tokyo looks positive as the area has the lowest
homeownership rate in Japan at 44.63% compared to the national average of
61.12%.48
The 2010 House and Land Statistics Survey showed that there is an
inverse correlation between the rate and the number of couples with children and
one-person households.49
In fact, seven of the eight areas with the most inbound
visitors (except for Okinawa) used in 3.2.4.3. Hotel market scored the lowest
home ownerships (See Figure 13).50
Figure 13.
43
Nomura Research Institute; Japan Property Central.
44
Kenedix.
45
Savills.
46
Savills.
47
Savills.
48
Statistics Japan.
49
Statistics Japan.
50
Statistics Japan.

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3.3.3. Hotel market
Demand: Research shows that the occupancy rate of guest rooms is rising
nationwide, as can be explained by an improving economy.51
The same can be
said for high-grade hotels in Tokyo.52
A majority of tourists are expected to stay in
western style hotel according to surveys by the Japanese Tourism Agency (See
Figure 14A & B).53
Figure 14A. Figure 14B.
Supply: Research shows that the supply of new/planned guest rooms has turned
around in mid-2011 due to the earthquake and been on a sharp upward trend.54
This corresponds with the rising number of guest rooms and hotels. 55
An
increasing number of hotel transactions over 100 million USD also signals more
players on the hotel market.56
51
52
53
Japanese Tourism Agency (Compiled data between 2011 – 2014 from the JTA and calculated the
average).
54
55
56

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4. Legal Analysis
4.1. Tax Implications on Real Estate Income57
4.1.1. Calculating Real Estate Income in Japan
In calculating real estate income, all types of income are considered including key
money, deposit or guarantee money.58
In addition, deductible expenses are considered subject to limitations on certain
interest and payments. Interest expenses on mortgages and fixed asset depreciation
costs are “necessary expenses” that are tax deductible for individual real estate
income under the Japanese Income Tax Law Article 37.59
Interests paid on
borrowings to purchase land or rights over land are only tax deductable against real
estate income,60
whilst interests paid on borrowings to purchase land are tax
deductable against any form of income as long as there is an overall real estate loss
for the year. Accordingly, potential clients should be aware of total interests paid and
any interests payable proportionate to the land value for tax purpose.61
Expenses
regarding maintenance or improvements to the property are also deductible.62
Potential clients can also be exempt from double taxation in both Japan and their
country of personal or business residence due to Japan‟s tax treaty with a number of
countries including those with which IP Global deals. Individual treaties are available
online (see the corresponding footnote).63
An example tax return form is also
available online (see the corresponding footnote).64
4.1.2. Liability to Japanese tax
For IP Global‟s potential clients who intend to draw income from their real estate,
understanding their liability to Japanese tax on such income is crucial because
Japanese tax residency and the obligation to file a Japanese tax return is not related
to citizenship, unlike the US.65
This analysis will focus on five key areas: the scope of
real estate income as defined for Japanese tax purposes; individual tax residence;
real estate income and business income; real estate income from trusts and
partnerships; capital gains.
57
This section is based on information written by japantax.org in December 2010. Some contents
may be out-dated as the Japanese government has undergone extensive tax reforms as part of the
Abenomics policy since 2013. The viewer of this report may look for updated data. Alternatively, we
recommend to seek tax advice from Japanese tax accountants.
58
The Japan Tax Site.
59
The Japan Tax Site.
60
Special Taxation Measures Law 26 no 6(1); The Japan Tax Site.
61
The Japan Tax Site.
62
The Japan Tax Site.
63
The Japan Tax Site.
64
The Japan Tax Site.
65
The Japan Tax Site.

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4.1.2.1. Scope of Real Estate Income
The legal definition for tax purpose („fudousan shotoku‟) is broad and includes
income from the rental of real estate and rights over real estate.66
4.1.2.2. Real Estate Income and Individual Tax Residence
There are three types of individual tax residency: resident, non-resident (NR) and
non-permanent resident (NPR).67
Legal Definition of Resident
A person is a resident under the Income Tax Law Article 2-1-3, if he or she has an
“address” in Japan or who has spent continuously a year or more in Japan until his
or her resident status is determined.68
Address is defined as a “base to carry on
one‟s life”.69
The Japanese Tax Authority (NTA) state that for individuals who reside
in two or more countries, which is likely for some potential clients, they will consider
the nature of clients‟ work and determine where the “…center of [the clients‟] life” or
“center of vital interests” is.70
Depending on Japan‟s tax treaties with other countries,
this definition may override its counterpart or be overridden (see the corresponding
footnote for an example between Singapore and Japan71
).
In interpreting one‟s residency status, facts should be considered carefully as an
example from The Japanese Tax Site illustrates.72
An individual who leaves Japan
but intends to come back may be a non-resident. However if he or she leaves behind
a family in a rented apartment for a period of time, his or her “center of vital interests”
as “a base to carry out [his or her] life” may render him or her still a Japanese
resident.
Legal Definition of Non-permanent Resident
A NPR is the sub-category of resident to mean a foreign nationality who has spent
five years or less in the past ten years as a resident in Japan.73
Legal Definition of Non-resident
A person is a NR if he or she is not a resident under the Japanese Income Tax Law.
A non-resident means an individual who stays in Japan for less than a year,
including a temporary visitor.74
Withholding Tax for NR
66
The Japan Tax Site.
67
The Japan Tax Site.
68
The Japan Tax Site.
69
Japanese Civil Code Article 22; The Japan Tax Site.
70
National Tax Agency.
71
The Japan Tax Site.
72
The Japan Tax Site.
73
The Japan Tax Site.
74
Jones Lang Lasalle.

22 | P a g e
Potential clients of IP Global are most likely NRs, who are only taxed on their Japan-
source income.75
For tax purposes, income from real estate located in Japan is
subject to Japanese tax regardless of the beneficiary‟s tax residence.76
The relevant
factors as follows determine how much withholding tax applies depending on the
type of source income (Excel table is also available online77
).
- Whether they have a taxable presence, i.e. permanent establishment (PE)
- The nature of that PE, i.e. branch, agent, construction site
- The underlying nature of the income concerned.78
See 6.2.2.1 for more information.
International Double Taxation Treaty
If non-residents are from countries that have tax treaties with Japan that exempt
them from Japanese tax, they may file a treaty claim for reduced tax rate or complete
exemption.79
This depends on each treaty‟s terms. This is important for non-
residents who receive real estate income from a corporation in the form of dividend,
or who stay for 183 days or less in Japan and have earned income not paid by an
employer in Japan and not borne by an employer‟s PE in Japan (See Real
4.2.2.4.).80
Benefits as a Non-permanent Resident
For non-permanent resident clients, they are taxed on Japanese source income and
non-Japanese source income that is remitted to Japan and is related to domestic
source income.81
The latter case is likely if potential clients are regular investors
around the world. This is an advantage to them as Japanese residents are taxed on
their worldwide income.
4.1.2.3. Real Estate Income and Business Income
There are different tax implications for real estate income generated from activities
that are sufficient enough to be regarded as being conducted by a business. The
Japanese NTA defines whether the level of activity can be regarded as a business
based on normal social norms.82
An activity is a business if it conducts the renting of
75
The Japan Tax Site.
76
The Japan Tax Site.
77
National Tax Agency (File: Scope of Japanese Income Tax for Individuals).
78
The Japan Tax Site.
79
The Japan Tax Site.
80
81
The Japan Tax Site; National Tax Agency (File: 2014 Income Tax and Special Income Tax for
Reconstruction Guide – For Aliens).
82

23 | P a g e
ten or more rooms and separate apartments, or five or more separate family
homes.83
There are different taxation implications for certain business related expenses,
known as the „Business Scale Real Estate Income (BSREI).‟
Disposal of fixtures and fittings
Such associated expenses for rental properties may be deductible against BSREI in
the year incurred. This expense is the only item that can exceed net real estate
income before deduction of the losses on such assets.84
Bad Debt Deduction
Such associated expenses arising from non-payments of rental fees may be
deductible against BSREI in the year incurred. This expense is the only item that can
be treated as having been earned on the day in the year that it became due for the
deduction purpose.85
For individuals who earn income other than the BSREI may re-
open old tax returns to reclaim taxes when bed debt arises given the valid time-limit
applies.86
Blue or White Tax Return Deduction for Dedicated Employees
Such associated expenses arising from salaries paid to certain family members of
the taxpayer, such as a spouse, for assisting the running of the business, may be
deductible against BSREI. This is particularly beneficial if the lower marginal tax rate
applies to the family member. The deduction is not available for other non-BSREI.87
Special Deduction for Blue Form Tax Return Files
Such associated expenses may be deductible against BSREI up to JPY 650,000 if
the taxpayer meets certain conditions to file a „blue form‟ tax return (See the previous
section). If the taxpayer earns other non-BSREI, a „blue form‟ special deduction is
limited to JPY 100,000.88
4.1.2.4. Real Estate Income from Trusts and Partnerships
This part should be considered when real estate IP global markets is owned by an
entity and prospective clients intend to draw income from the real estate. There are
different tax implications for income drawn from real estate owned by a partnership
or a trust (an entity) subject to the entity‟s „fiscal transparency‟ for Japanese tax
83
84
85
86
87
88

24 | P a g e
purposes.89
This is important as the fiscal transparency status determines how
individual beneficiaries are taxed.90
Definition of Fiscal Transparency
The fiscal transparency status of various Japanese entities has already been
determined alongside corresponding tax requirements (See the diagram link in the
footnote).91
Difficulties arise when it comes to determining the status of a foreign
entity. A benchmark is to compare the legal indicia under which the foreign entity is
established and equivalent Japanese law to determine if the foreign entity is similar
to a Japanese fiscally transparent entity.92
However this is subject to legal
interpretation of individual jurisdictions. There is limited published guidance for
foreign entities as the Japanese NTA, as an example, only provides criteria to
determine the fiscal transparency status of a US Limited Liability Company.93
The
Japan Tax site suggests to seek professional advice from a Japanese tax
accountant and IP Global would propose the same to potential clients.
Effect of being a Fiscally Transparent Entity
Individual owners of real estate owned by a fiscally transparent entity will be taxed at
rates as if the entity does not exist. This is called „pass-through taxation‟.94
In this
case, the entity does not need to file a tax return. It may only file an information
return of estimated tax assessment of all taxable members.95
Unlike individual owners, beneficiaries of the entity generated income are limited in
claiming tax deductions against their income if the entity experiences an overall loss
for the year concerned.96
This only applies to Japanese civil law partnerships (nin‟i
kumiai) or foreign entity equivalents (See the footnote for exact conditions).97
Effect of being a Non-fiscally Transparent Entity (Corporation)
Real estate income generated by a corporation which is subsequently distributed to
individual owners is deemed to be dividends or a return of Entity capital. Tax
implications for dividends are another matter to be considered (See the footnote for
more information).98
For simplicity, IP Global assumes that fiscally transparent
entities are preferred.
89
The Japan Tax Site.
90
The Japan Tax Site.
91
The Japan Tax Site (Venn Diagram).
92
The Japan Tax Site.
93
94
The Japan Tax Site.
95
The Japan Tax Site.
96
The Japan Tax Site.
97
The Japan Tax Site.
98
The Japan Tax Site.

25 | P a g e
4.1.2.5. Real Estate Income and Capital Gains
The Japanese tax system imposes capital gains tax treatments for income drawn
from a lease of real estate over an extended period of time that is disproportionate to
the value of the property.99
Specified Lease (shaykuchi ken) Transaction
When a third party receives a lump sum for a long-term leasing right and, among
other conditions, such an amount is 50 per cent or more of the value of the property,
the lump sum will be subject to capital gains tax.100
Specified Lease Prepayments
When a third party does the exact same as the above but the payment is not large
proportionate to the property value and it has features of advance payments of future
rental income, capital gains tax also applies.101
However, instead of being taxed
immediately, such taxable income in the year received is accrued into income over a
longer period which will then become subject to capital gains tax.
99
The Japan Tax Site.
100
The Japan Tax Site.
101
The Japan Tax Site.

26 | P a g e
5. Strategic Analysis
5.1. SWOT Analysis
A SWOT analysis helps a business explore possibilities for new projects and make
decisions about their direction in the future.102
STRENGTHS WEAKNESSES
- Ability to underwrite apartments
- Geographical advantage with the HQ
location (HK)
- Ongoing project in Niseko
- Success by other companies in the
industry
- Experience in global operations and
expansion
- Lack of presence in the country
- Lack of experiences in North East
Asia
OPPORTUNITIES THREATS
- Improving global and Japanese
economy
- Weakening JPY
- Low interest rates
- Increasing foreign visitors and the
hotel market
- Ageing population and the retirement
housing
- 2020 Tokyo Olympics
- Supply-led demand in the hotel and
residential market
- Growing investments in the ex-Tokyo
area, Osaka and Nagoya
- Chuo and Chiyoda ward in Tokyo
CBD that experienced the lowest
decline in vacancy rates
- Abenomics and prospects of
loosening of regulations
- Uncertainty of the Abenomics
- Low GDP growth rate
- Relative lack of opportunities in Tokyo
- Further VAT hike to 10% in October,
2015
- Difficulty for foreigners to obtain loans
- Rising construction costs on the back
of rising land price and the shortage
of skilled workers
- Legal definition of useful life of
buildings
- Complicated tax system
5.2. PESTLE Analysis
A PESTLE analysis is a marketing-focused approach that can be used for
companies implementing a new project. It looks into the political, economic, social,
technological, legal and environment aspects of a particular project.103
Technological
and environmental analysis were not considered to be relevant here.
102
Community Tool Box.
103
PESTLE Analysis.

27 | P a g e
5.2.1. Political
There are a range of political factors that could influence any investment in Japan.
The “Abenomics” is in its transition from the initial two phases of monetary easing
and financial stimulus to structural overhaul. There have been mixed reactions to the
effect of the policy as economic growth is still stagnant and there is a growing gap
between central and regional growth. Given subsiding inbound investments and
uncertainties of the policy among public, IP Global should continue observing the
impact of upcoming policies such as a VAT hike to 10% in October this year, labour
law relaxation and corporate tax reduction.
5.2.2. Economic
Growth has been seen across a number of key economic indicators in the past
couple of years that is favourable for IP Global, including weakening JPY, low
interest rates, low unemployment rates, moderate GDP growth and inflation rate.
However, outlooks for 2015 in some of the indicators are relatively disappointing
given Japan‟s nationwide attempt to turn around its deflationary economy that has
been in a 20-year recession. There are some signs of supply-led demand within
Japan‟s improving property market in residential and hotel housing though there is
an uneven growth in metropolitan areas (Tokyo, Osaka and Nagoya). This is
particularly so in Tokyo in the lead up to the 2020 Tokyo Olympics.
5.2.3. Social
Japan‟s ageing population and the shortage of skilled workers continue to pose a
range of problems for its property market. Developers are expected to face rising
construction costs that is at its 21-year high. Whilst Japan‟s retirement housing boom
seems to have reached its peak, the issue of affordability still remains. IP Global
could position itself favourably if it can comprise between demands for the retirement
housing and its affordability. Opportunities also exist for IP Global in vacation rental
housing and leisure accommodation such as hot spring due to a rising number of
inbound visitors on the back of the weakening JPY against all major currencies.
There are also plenty of potential within rental apartment industry in areas with low
home ownerships as these areas have more one-person and nuclear family
households. For example, in Tokyo, the supply of bigger units relative to smaller
units was low, which positions IP Global to market more products in this area.
5.2.4. Legal
Whilst there are no obvious restrictions on property ownership in Japan, there could
be difficulties for offshore investors to apply for a loan. Clients in this category could
approach banks with majority foreign ownership and familiarity in dealing with foreign
clients. There is also limited information on property and contract law available in
English in Japan which means clients should approach international law firms that
operate in Japan or local firms who provide services in English.

28 | P a g e
In terms of tax implications on real estate income, non-residents, who are most likely
within IP Global‟s client market, are better positioned than those with other residency
status. They are taxed on Japan source income unlike residents whose worldwide
income is taxed regardless of source countries.
The Japanese tax system defines the useful life of every structure depending on
building materials. As such, the value of a building depreciates by the factor of its
useful life. However this does not affect the land value and such expenses can be
deducted on tax return.
If the activities that generate real estate income are considered to be done by a
business, there are a few special deductions that can be claimed against Business
Scale Real Estate Income (BSREI). Different tax implications exist depending on an
entity‟s fiscal transparency status which can be complicated to define. Capital gains
tax may also apply for a lump sum payment on a long-term lease under certain
circumstances.
However, based on 2010 data, Japan‟s so-called National Burden Ratio (the sum of
tax and social security burden divided by national income) suggests that the country
has relatively low tax burden ratio of 22.1% compared to other major economies
(See Figure 15).104
Figure 15.
IP Global suggests its potential clients to seek advice from Japanese tax
accountants.
104
International Monetary Fund.

29 | P a g e
6. Financial Analysis
An example of property buying costs in Japan is given in the footnote as a
reference.105
6.1. Acquisition
6.1.1. Letting Costs
25% of the periodic payment (works out to be one week rent) or 10% deposit
before the contract date if purchased.106
The following acquisition costs are „miscellaneous costs‟ that could be up to 10% of
the sales price.107
6.1.2. Stamp Duty (National Tax)
Stamp duty is paid when a contract is signed.108
The levy is based on the
property value or a flat rate. It can vary from JPY 200 to JPY 200,000.
Source: Real Estate Tokyo, 2015.109
6.1.3. Registration and Licence Tax (National Tax)
Reducing measures are not valid as of March, 2015.
Source: Real Estate Tokyo, 2015.110
105
Real Estate Tokyo.
106
Niseko Alpine Developments; Global Property Guide.
107
Real Estate Tokyo.
108
Real Estate Tokyo.
109
Real Estate Tokyo.
110
Real Estate Tokyo.

30 | P a g e
6.1.4. Real Property Acquisition Tax (Local Tax)
This is a tax on building purchase as well as renovation.
For reducing measures to apply, gross floor area must be more than 50 sqm
and not over 240 sqm which is the case for potential products. The property
must be purchased as a residence for the buyer and must meet one of the
following conditions:111
o Aged not over 20 years for wooden buildings and not over 25 years for
fireproof buildings (metal, concrete).
o Built after January 1st
, 1982
o Does not meet either but is certified for the earthquake resistance
standard or is insured for the defect insurance.
6.1.5. Legal Fees
Judicial Scrivener Fee is charged by a paralegal who settles and registers
property transactions. It is negotiable but 0.1% of the property value is a
norm.112
6.1.6. Real Estate Agent Fee
3.15% of the sale price of the property plus JPY 63,000 and consumption tax
of 8% of that amount.113
VAT is expected to rise to 10% from 1 October,
2015.114
6.1.7. Costs to Obtaining a Loan
This includes bank commission, guarantee commission and fire insurance
premium.115
Based on an example from Real Estate-Tokyo, this is
approximately 2.24% of the sales price.116
111
Real Estate Tokyo.
112
113
Global Property Guide; Real Estate Tokyo.
114
Jones Lang Lasalle.

31 | P a g e
6.2. Management
6.2.1. Depreciation Costs
New buildings in Japan have their “useful life” for depreciation purpose. The
National Tax Agency defines the number of years depending on building
materials (See Table 3).117
Table 3. Useful life of a building by building type
Building Type Useful Life (Years)
Steel frame reinforced concrete
buildings or reinforced concrete
buildings
47
Brick, stone or block construction 38
Metal construction (thickness of
internal frame exceeds 4 mm)
34
internal frame exceeds 3 mm)
27
internal frame is 3 mm or below)
19
Wood or wood composite
construction
22
Wood frame mortar construction 20
For second-hand properties, the acquisition cost of the building is depreciated
over its remaining “life” though this can often be difficult to estimate. In such
cases, there are two main simplified approaches.118
In terms of depreciation methodologies used, the fixed amount method
applies for properties purchased on or after 1 April 2007. This is calculated by
multiplying acquisition cost with the reciprocal of the useful life of the
building.119
115
Real Estate Tokyo.
116
Real Estate Tokyo.
117
118
The Japan Tax Site.
119

32 | P a g e
6.2.2. Income Tax
6.2.2.1. Individual Income Tax
In general, Japanese residents are subject to income tax as part of national
tax,120
which is one of the highest in the world at an effective top marginal rate
of 50.84%.121
Income tax consists of national income tax and two local taxes.
National Income Tax
The national income tax rate schedule in JPY for 2013-14 is as follows:
Source: HSBC, 2014.122
The 2013 tax reform also added a tax rate of 45% for JPY 40 million and
above.123
Since the Tohoku earthquake disaster, surtax of 2.1% is also
imposed on the amount of national income tax until 2037 for reconstruction
assistance.124
Local Tax: Individual Inhabitant Tax
If an individual is classified as non-resident as of 1 January each year, he or
she is exempt from individual inhabitant tax.125
Local Tax: Individual Enterprise Tax
An additional tax rate of 3% - 5% applies for incomes derived from businesses
or professions, though this is unlikely for potential clients.126
Particulars for Non-residents
120
Jones Lang Lasalle.
121
Trading Economics.
122
HSBC.
123
International Monetary Fund.
124
HSBC.
125
Jones Lang Lasalle.
126
HSBC.

33 | P a g e
Non-resident clients should check the particulars of an international double
taxation treaty between their country of residence and Japan to determine if
the Japanese income tax system applies, particularly in relation to real estate
income in dividend form (See 4.2.2.2.). The Japan Tax Site and the NTA
provide a useful guide on calculating individual taxable income and lodging a
tax return.127
Withholding Tax
Under the Japanese Income Tax Law Article 161-4, a withholding tax of 20%
applies for non-residents without a Permanent Establishment in Japan who
does not lodge a tax return, followed by Comprehensive Taxation at marginal
rates.128
Payers of rents will withhold the tax and remit to the NTA. This also
applies for those who have a PE in Japan.129
In order to avoid the withholding
tax, non-residents must lodge an annual tax return. Otherwise, the tax applies
along with the comprehensive taxation and an exemption from filing a tax
return must be applied.130
Code No.12006 of the NTA suggests two methods to calculate income tax for
non-residents: Aggregate taxation and separate withholding taxation at
source.131
One: Aggregate Taxation
This method aggregates all kinds of Japan-source income for the year into a
single taxable income and applies the National Income Tax rate on the
taxable income. A non-resident with or without a PE in Japan must lodge a tax
return and pay the tax.132
However for non-residents without a PE is subject to
aggregate taxation only in relation to real estate rental income.133
Two: Separate Withholding Taxation at Source
This method applies the withholding tax system on each taxable income. If a
property is owned by an entity, any income from such a property is deemed to
be a dividend from a corporation. This does not apply to a non-resident with a
PE. For those without a PE, a flat tax rate of 20.42% is applied for each
income.134
127
The Japan Tax Site; National Tax Agency (File: 2014 Income Tax and Special Income Tax For
Reconstruction Guide – For Aliens).
128
Income Tax Law Article 161(1); National Tax Agency.
129
130
The Japan Tax Site.
131
132
133
134

34 | P a g e
6.2.2.2. Corporate Income Tax
Corporate income tax consists of four taxes: corporate tax (national tax),
corporate inhabitant tax (local tax), corporate enterprise tax (local tax) and
special local corporate tax (local tax). The first is 25.5%. The second includes
a per capita levy depending on the company size in terms of employees and
capital, and a corporate tax levy that varies between 17.3% and 20.7%. The
third varies from 1.5% to 3.48% depending on the taxable income and the
location of the company. The fourth is 148% of taxable income multiplied by
the third.135
6.2.3. Fixed Asset Tax (Local Tax)
Fixed asset tax is paid on a pro-rata basis for the year the property is
purchased and applies annually afterwards. It is appraisal value times 1.4% -
2.1%. Appraisal value is generally 50-70% of construction cost for building a
property. This is halved for 3 years after the completion of a house and for 5
years after the completion of an apartment. All building must have been built
by 31 March 2014.136
6.2.4. City Planning Tax (Local Tax)
City planning tax is paid on a pro-rata basis for the year the property is
purchased and applies annually afterwards. It is surtax on the fixed asset tax
and applies to properties within urban districts or local government designated
city planning districts. It is appraisal value times 0.3% and there are no
reductions.137
6.2.5. Property Management Costs
There are two types: management fees for general building and premises
maintenance, and repair fund fees.138
Fees are calculated based on the size of the apartment though this may be
determined by the developer initially. A general rate is JPY 200 per square
meter including body corporate fees and another JPY 300 – 600 per square
meter for repair fund fees, though this could be as low as JPY 100 due to
affordability.139
When buying a new unit, a large fee may be paid upfront for
repair funds.140
A particular attention should be paid to the building‟s repair
schedule, e.g. a 50% increase in the fifth year and another 50% in the tenth
year.141
The general market rate is 10% of gross rental income.142
135
KPMG.
136
Real Estate Tokyo.
137
Real Estate Tokyo.
138
139
140
141

35 | P a g e
Upfront payment cost for a sinking fund (10%)
For landlords, these costs are tax deductible.143
6.2.6. Carpark Fees
Central Tokyo fee is JPY 50,000 per month on average but it can be as high
as JPY 70,000 per month. Some bylaws allow for renting the carpark to
another resident or a third party.144
6.2.7. Utilities
Utilities are payable by tenants. For a 2-people 85 square metre flat in Tokyo,
monthly utilities cost (heating, electricity, gas, water) is approximately JPY
20,000.145
6.3. Disposal
6.3.1. Capital Gains Tax
Capital gains tax consists of two taxes: income tax and residential tax. At
disposal for individuals, the rate is 30% and 9% respectively for lands held for
5 years or less. It is 15% and 4% each for lands held for more than 5 years.
For corporations, there is an additional capital gains tax of 10% and 5% for
respective cases.146
Taxable gain is the total gain minus acquisition costs,
improvement costs, and transfer costs from the gross sale price.147
6.3.2. Legal Fees
See 6.1.5.
6.3.3. Real Estate Agent Fees
See 6.1.6.
142
Niseko Alpine Developments.
143
144
145
Expatistan: Cost of Living Index.
146
Jones Lang Lasalle.
147

36 | P a g e
7. Scenario Analysis
We take one 45 square metre apartment unit as an example for the purpose of
this analysis. Please refer to the attached Excel cash flow calculations.
Key variables, among others, may be:
o Price per square metre148
o Mortgage rate149
:
 Bank of Tokyo, Mitsubishi UFJ, Sumitomo Mitsui Banking
Corporation: 1.25% on a 10-year fixed-rate loan
 Mizuho: 1.20%
 Resona: 1.20%
 Japan Housing Finance Agency: a minimum 1.54% on a 35-year-
fixed-rate loan and a minimum 1.31% for 20 years or less
 NAB150
: 3.2% (cost of funds plus 3%)
 Citibank151
: 1.08% for loans less than JPY 100mn
o LTV152
o Loan term153
o Exchange Rate
o Rent growth
o Inflation
Qualitative assumptions are that:
o A non-resident client obtains a loan from a Japanese bank as long as he
or she has a stable income.
o Straight-line depreciation of 47 years for a steel-supported structure
applies.
o A non-resident client closes on the loan position by selling the real estate
on the first day of the sixth year.
o Carpark fee and utilities cost are not included since these are payable by
tenants.
Please see the attached Excel calculations for quantitative assumptions.
148
149
150
Housing Japan.
151
Housing Japan.
152
Housing Japan.
153
Housing Japan.

37 | P a g e
8. Recommendation
Whilst the Japanese economy shows below-average growth in 2015, given its
performance since 2011 and the government‟s Abenomics policy, market entry is a
right decision for IP Global overall. The Japanese property market is likely to show
limited short to medium term supply in office and residential markets in the presence
of above-average demand.
In considering purchasing real estate in Japan, potential clients must consider their
residential status first. Non-residents are most likely followed by non-permanent
residents and residents. Little official information exists for obtaining a loan for non-
residents though there is a higher possibility through approaching foreign-majority
owned banks. Being non-residents entitles the clients to various tax benefits and tax
requirements which are generally in their favour with appropriate tax advice.
The second factor to consider is the type of real estate owners. Taxation may be
imposed unfavourably for real estate owned by trusts or partnerships that are
recognised as being „fiscally transparent‟, i.e. Japan Real Estate Investment Trust (J-
REIT). For businesses, some deductions exist. Real estate owned otherwise is
subject to „pass-through taxation‟, meaning normal individual taxation applies.
The third, and the most important, factor to consider is financial costs. Potential
clients, if they can obtain a loan, are favourably positioned in managing their real
estate because of the low interest rate in Japan. They must be aware of acquisition
costs where there may be up to 10% of miscellaneous costs that include taxes, fees
and commissions on top of sales price. A minimum of 10% deposit is also required.
Considering a majority of market activities are concentrated heavily in Tokyo
followed by Osaka and Nagoya and property and land prices have been rising
recently, costs may be significant. In terms of costs associated with property
management, clients must pay particular attention to individual income tax for non-
residents, depreciation and repair funds which are all unique to the Japanese market.
Unless clients pursue short-term capital gains, IP Global recommends holding real
estate for more than 5 years due to lower capital gains tax imposed on such
properties.
The scenario analysis demonstrated that an investor should expect a ROE of 41.49%
on a newly built 45-sqm unit in the Tokyo Metropolitan Area. The ROE increases
marginally if the unit size increases, whereas a change in LTV, loan rate, rent per
month per square meter and rent growth rate affects the ROE significantly. For
example, a LTV of 80% as opposed to 70% results in a ROE of 53.58% though net
returns decrease by almost a million JPY. Another key observation is an increase in
the loan rate which is very likely through the contractionary monetary policy of the
BOJ, as the Japanese economy enters into the third „Arrow‟ phase of the Abenomics.
The loan rate of 3.50% as opposed to 3.20% results in a ROE of 37.37%.
Fortunately, as the rent growth rate is gradually increasing in the Tokyo Metro, 4%
as opposed to the current average of 3.15% results in a ROE of 53.89%. Combining

38 | P a g e
all the above indicators, an investor can expect the ROE of 65.10% as opposed to
41.49%.
By considering the above three factors as well as monitoring closely the effect of the
Abenomics on the Japanese economy and seeking appropriate tax and investment
advice, potential clients are soundly positioned to achieve their investment objectives
over medium to long term in Japan.

Description Details
Building appraisal value ¥6,000,000 ballpark figure based on http://www.realestate-tokyo.com/sale/guide/property-buying-cost-taxes/
Unit size (sqm) 45 Median of available sizes in Tokyo
Acquisition Cost 10% of purchase price: general rate - could be higher
Price / sqm
Ex-Tokyo Tokyo Met Mar-15
¥812,000 ¥990,000
LTV 70% NAB rate for non-residents
Loan term (years) 5 NAB (min 1 max 35)
Loan rate 3.20% NAB rate for non-residents (Citibank 1.08% for non-residents. Similar with other domestic banks)
Inflation 2.40% Mar-15
Average rent / month (sqm)
Ex-Tokyo Tokyo Met Feb-15
¥2,626 ¥3,201
Rent growth rate 3.15% Average of January rent growth rate in Japan for 15 - 45 sqm @ 1.8% and 45 - 75 @ 4.5%
Repair fund / month (sqm) ¥600 Maximum. Lowest is JPY 100
Management Fee / month (sqm) ¥200 Could include body corp rate
Property Management Cost 10% of monthly rent
Car park fee / month ¥60,000 Tokyo Met
Utilities / month ¥20,000 85sqm unit standard
Legal fees 0.10% of purchase price
Real estate agent fee 3.50% of purchase price
Capital Gains Tax 19% of taxable capital gain for properties held for 5 years or less

Property Summary
Property Type Apartment Exclusive Size (sqm) 45
Appraisal Value Land n/a Appraisal Value Building ¥6,000,000
1 2 3 4 5
Depreciation Schedule (47years) ¥127,660 ¥127,660 ¥127,660 ¥127,660 ¥127,660
Balance ¥6,000,000 ¥5,872,340 ¥5,744,681 ¥5,617,021 ¥5,489,362
Ex-Tokyo Tokyo Metro
Price per sqm ¥812,000 ¥990,000
Purchase Price ¥36,540,000 ¥44,550,000
Misc Cost (10%) - inclusive of below ¥3,654,000 ¥4,455,000
Stamp Duty
Registration and Licence Tax
Real Property Acquisition Tax
Legal Fees
Real Estate Agent Fee
Costs to Obtaining a Loan
TOTAL ACQUISITION COSTS ¥40,194,000 ¥49,005,000
ANNUITY
PROPERTY VALUE ¥49,005,000
Loan to value ratio 70%
Equity contribution (From client) ¥14,701,500
Loan Amount (Debt) ¥34,303,500
Life of Loan 5
Loan Type Bank Loan
Loan Rate 3.20%
Inflation 2.40% 1.024
Total Interest Accrued ¥5,943,458.47
Interest Payment Schedule 1 2 3 4 5
Tokyo Met ¥1,188,692 ¥1,188,692 ¥1,188,692 ¥1,188,692 ¥1,188,692
Ex-Tokyo
Expenses

INCOME 1 2 3 4 5
Rent (Feb 2015)
¥1,728,540 ¥1,782,989 ¥1,839,153 ¥1,897,086 ¥1,956,845
Gross rental yield (rent/purchase price) 3.88% 4.39%
Income Total ¥1,728,540 ¥1,782,989 ¥1,839,153 ¥1,897,086 ¥1,956,845
EXPENSES 2015 2016 2017 2018 2019
Interest Expense (no contribution/no tax) ¥1,188,692 ¥1,188,692 ¥1,188,692 ¥1,188,692 ¥1,188,692
National Income Tax ¥86,427 ¥178,299 ¥183,915 ¥189,709 ¥195,684
Earthquake Surtax on National Income Tax ¥1,815 ¥3,744 ¥3,862 ¥3,984 ¥4,109
Individual Inhabitant Tax ¥0 ¥0 ¥0 ¥0 ¥0
Individual Enterprise Tax ¥0 ¥0 ¥0 ¥0 ¥0
Fixed Asset Tax ¥50,400 ¥49,328 ¥48,255 ¥47,183 ¥46,111
City Planning Tax ¥18,000 ¥17,617 ¥17,234 ¥16,851 ¥16,468
Property Management Costs ¥172,854 ¥178,299 ¥183,915 ¥189,709 ¥195,684
Repair fund (upfront) ¥324,000
Expense Total ¥1,842,188 ¥1,615,978 ¥1,625,874 ¥1,636,127 ¥1,646,749
2015 2016 2017 2018 2019 TOTAL
NET INCOME -¥113,648 ¥167,011 ¥213,279 ¥260,960 ¥310,096 ¥837,698
Net Yield (not including interests) 2.41% 3.04% 3.15% 3.25% 3.36%
Management Fee ¥108,000 ¥110,592 ¥113,246 ¥115,964 ¥118,747 If management costs broken down
Carpark Fees ¥720,000 ¥737,280 ¥754,975 ¥773,094 ¥791,648 Payable by tenants (CPI applied)
Utilities ¥127,059 ¥130,108 ¥133,231 ¥136,428 ¥139,703 Payable by tenants (CPI applied)

-¥500,000
¥0
¥500,000
¥1,000,000
¥1,500,000
¥2,000,000
¥2,500,000
1 2 3 4 5
JapaneseYen
Year
5-Year Cash Flow (One 45sqm unit in Tokyo Metro)
Gross Income
Net Expense
Net Income

Future Sales Price ¥52,022,818 Property value grows at market rent growth rate
Original Purchase Price ¥44,550,000
Total Capital Gains ¥7,472,818
Acquisition Cost (on purchase price) ¥4,455,000
Improvement Costs ¥0
Legal Fees (Trans costs from gross sale price?) ¥52,023
Real estate fee ¥1,968,844
Total Deductions ¥6,475,867
Taxable Capital Gains ¥996,951
Tax on Capital Gains ¥189,421
Net Capital Gains (Total-Tax) ¥7,283,397
Legal fees ¥52,023
Real estate fee ¥1,968,844
Net Disposal Gains ¥5,262,530
Management Gains ¥837,698
Disposal Gains ¥5,262,530
Net Returns ¥6,100,228
ROI (%) - net returns / total acquisition expenses 12.45%
ROE - Return on equity 41.49%
Gross Exit Yield 4.39%
Net Exit Yield 3.36%
Total Net Rental Yield on Equity 5.70%
Overall Investment
Sold on the first day of Year 6

New_Market_Entry_Japan_CFAnalysis

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