Office Workers Once Profited from 'One-Room' Investments... Japan's Radically Changed Inner Story [Kim Yongnam's Real Estate Asset Management]

The rental housing market in Tokyo, Japan, particularly the residential rental market in the 23 wards, is showing clear strength. According to a first-quarter report this year from global real estate consulting firm Savills, the average rent in Tokyo's 23 wards was 4,547 yen (approx. $45.47) per square meter, a 5.0% increase from the previous quarter and a 7.3% increase from the same period last year. Quarterly rents rose in almost all wards, with every ward recording remarkable annual growth rates.

Notably, the average rent in the central five wards (C5W) rose for the seventh consecutive quarter to 5,524 yen (approx. $55.24) per square meter. This figure reflects a 5.2% increase from the previous quarter and a 9.9% increase from the same period last year. Within the C5W, Minato ward showed prominent growth with an 8.0% increase from the previous quarter. This phenomenon is the result of a combination of supply shortages and increased demand, suggesting a growing rent burden for tenants.

Behind this rise are structural changes in the Japanese real estate market. According to a Nikkei Asia report, during the long-term recession of the past, small condominiums known as 'one-room mansions' were seen as a stable investment for salaried workers. The method of purchasing them at a low price to generate rental income and use as a fixed income source after retirement was popular, but this investment strategy is now becoming increasingly difficult.

The main cause is the Bank of Japan's (BOJ) interest rate hike. As the era of ultra-low interest rates that lasted for decades has ended and shifted to a period of rate hikes, the burden of mortgage interest has increased. Compounded by rising real estate prices and management fees, one-room condos are no longer an attractive option for salaried workers.

Real estate analyst Masanori Koda pointed out in an interview with Nikkei Asia, “Young people, especially salaried investors, have disappeared from the real estate market. Banks are also reluctant to lend to them.” He analyzed, “Until three years ago, there were buyers, but the surge in one-room condo prices has lowered yields, making them unattractive.”

Currently, the Tokyo real estate market is led by wealthy Japanese individuals, Asian investors, and large corporations. Among young investors, only some high-income earners at foreign companies can access the market. According to Tokyo Kantei, the average price of a new one-room condo in 2023 was 32.86 million yen (approx. $328,000), a 50% increase from 21.79 million yen (approx. $217,000) in 2004. Used condos averaged 16.02 million yen (approx. $160,000) in 2023, a 72% surge from 2004.

On the other hand, yields are on a downward trend. According to Nikkei Asia, the yield for new one-room apartments in 2023 was only 3.37%. This is a 0.61 percentage point drop from 3.98% in 2014, and used apartments fell to 5.66%, a 1.73 percentage point drop from 7.39% in 2014.

This trend is also deeply related to the Japanese government's economic policies. The government has encouraged investment over savings, revising and introducing the Nippon Individual Savings Account (NISA). However, concerns are being raised that it is not easy to cover large expenses such as marriage, childbirth, and children's education with NISA.

Going forward, the rental markets in Tokyo and Osaka are expected to remain strong due to increasing demand from foreigners. In 2024, the net population inflow into Tokyo's 23 wards reached a record high of 116,000 people. More than half of them are foreigners. The growing preference for rentals among foreigners is further solidifying the demand base.

However, such market changes raise concerns about widening social inequality. As rising interest rates and real estate prices make home ownership more difficult, dependence on rentals is increasing, and the rent gap between urban and suburban areas is expected to continue to widen.

The Japanese real estate market has entered a new phase. As the era of deflation and ultra-low interest rates ends and an environment of rising prices and wages emerges, the market is continuously being reshaped. Who benefits and who is left behind in this change is expected to become a key challenge for Japanese society.

<Korea Economic The Moneyist> Kim Yongnam, CEO and President of GlobalPMC Co., Ltd.