In an earlier article I mentioned how difficult it is to evict tenants in Japan. That specific tidbit created enough of a response to dedicate a separate article entirely for the topic of Eminent Domain laws in Japan. Why is this important? From an investment and development standpoint, sitting tenants and land owners unwilling to sell can be the largest stumbling block to building a smooth real estate investment portfolio.
From a tenant’s standpoint, once a tenant has signed a contract, then they are in the property. Even if the tenant, from the second they receive their keys, decides to stop paying rent, then by law, they have between 4-6 months before the landlord can legally change the locks. If the locks are changed before the landlord officially receives permission from the local jurisdiction to do so, the non-paying tenant has every right to sue. Granted the courts will take little sympathy on a tenant suing a landlord for locking the tenant out of the premises after not paying rent for three months, the tenant will still technically win the case as the laws are heavily one sided in the tenant’s favor.
From an investment standpoint, non-paying tenants provide the greatest threat to the profitability of a property next to negative market forces. If you purchase a property with a contracted tenant already in place, a large part of your real estate agent’s due diligence is to get as much information regarding the history of the rental contract, how much time is left on the contract and if there have been any troubles with the current tenant at all. One obvious point to make sure of is whether the tenant is consistently paying the rent on time but other points should also be investigated such as if the tenant is producing noise complaints from other people in the building.
From a development standpoint, Eminent Domain laws in Japan are notoriously weak. Eminent Domain (America), Expropriation (Canada), Compulsory Acquisition (Australia) or Compulsory Purchase (UK), is the state’s ability to relocate landowners with fair market compensation, though without the necessity of consent. In the above countries, Eminent Domain laws are fairly straightforward. They outline clearly what the state has to do if your land is necessary for state infrastructure purposes (highway expansion, bridges, etc). However here in Japan, Eminent Domain laws are extremely weak when compared to the above countries.
The development of Narita Airport is Japan’s most famous example of how an intricately thought out development plan can be run amok by land owners unwilling to sell.
Slated to open in 1971, protests by local landowners, student militants and left wing opposition successfully delayed the opening of the airport until May 28, 1978. Rather than a joyous opening day ceremony that would usually mark the end of a momentous project, the birth of Narita Airport was attended by almost 14,000 police officers and over 6,000 protesters. While taxis carrying passengers were being checked by police one by one, protesters were exploding firebombs and throwing rocks while police responded by firing water cannons to keep the protesters at bay.
The fun didn’t stop there, either. Narita Airport quickly grew to capacity in terms of how many flights and passengers it could handle and needed to expand. The process of expansion reignited the protests as more land was forcibly expropriated to increase flight capacity. In fact, the lengthy and violent disputes displayed at Narita Airport during initial construction and later in subsequent expansion efforts were the major factor in building Kansai International Airport in the open water of Osaka Bay rather than on established terra firma.
Weak Eminent Domain laws affect private projects just as much as public ones. Roppongi Hills is another example of how long it can take just to acquire the land necessary to break ground on a project. Opened April 23, 2003, Roppongi Hills sits on 27 acres of land amalgamated from over 400 smaller plots of land that took 14 years to acquire. During the land acquisition, Mori Building (Roppongi Hills developer) had to offer unusually high inducements to existing land owners and in some cases offered replacement dwellings in the Roppongi Hills Residences, sacrificing the ability of the donated dwelling to generate any rental income at all.
This is not to say that investing in Japan is all doom and gloom, in fact quite the opposite, at least in Tokyo anyway. Net yields of between 6-7% are not unheard of and real estate investments are often very fruitful ventures. Just make sure you don’t let the upsides blind you to the downsides.