On April 9th, the Nikkei Shimbun reported that the wave of rising property prices has finally begun to affect domestic residential rents in Japan.
The index showing rental housing rents in the Consumer Price Index (CPI) increased by 0.1% compared to the previous year in 2023, marking the first positive change in 25 years.
Key takeaways:
Rent negotiations at time of renewal becoming more common with property managers proposing 5-7% rent increases.
Japan labor and material costs contribute to rent increase
More tenants are agreeing to higher rents with impact on CPI; focus on future rent trends amid Bank of Japan policy changes.
According to the Nikkei, Ambition DX Holdings, which manages approximately 25,000 rental properties, has started proposing rent increases of about 5-7% to existing tenants upon lease renewal.
Speaking to the Nikkei Shimbun, company president Tsuyoshi Shimizu explained that rent adjustments with lease renewals are attempted based on economic conditions such as inflation and comparisons with nearby similar buildings.
According to Leopalace 21, which handles numerous single-person units, rents have increased by around ¥1,000 on average nationwide.
While the intensity varies by region, there's a noticeable rise in rental prices in areas like Kumamoto Prefecture, which is thriving due to semiconductor-related investments.
Sumitomo Realty & Development, known for its luxury rental series La Tour, told the Nikkei Shimbun that rents are increasing, particularly for spacious units due to rising property prices, prompting adjustments upon lease renewal.
Recruitment rents are rising, especially in central areas, creating an environment where rent hikes are more easily accepted.
According to the Real Estate Economic Research Institute, the average price of new condominiums in the Greater Tokyo Area (Tokyo, Kanagawa, Saitama, Chiba) surged by 28.8% year-on-year in 2023, reaching a record high average of ¥81.01 million.
Material costs and land prices are contributing to this surge, which rose by 35% over the past five years.
Those hesitant to buy condos are flowing into the rental market, pushing rental prices up.
The "private rent", which represents the rent of general rental housing as measured in CPI calculations, rose by 0.5% in 1998 but has been declining ever since.
Looking at monthly figures, rents rose by 0.2% year-on-year for both January and February 2024, marking two consecutive months of increase.
Although this increase significantly trails behind the "comprehensive excluding fresh food" CPI (2.8%) in February, the growth rate reached a level not seen since February 2000 (0.2%).
In March, rents in the Greater Tokyo Area rose by 0.4%.
This rise is attributed to the soaring labor and material costs. The "facilities repair and maintenance," which includes repair materials and waterworks costs in the CPI, surged by 6.5% year-on-year in 2023, marking the highest growth rate since 1980 (12.7%).
The rising costs of both goods and services are increasing the maintenance costs of housing, putting pressure on rents.
In contrast, rents in the United States saw a significant increase, with CPI-based rents in February reaching over 5% year-on-year, significantly higher than Japan's. This is because many rental contracts are linked to property prices, leading to rent increases during contract renewals.
In Japan, tenants of rental housing are protected by the Act on Land and Building Leases, and rent increases at lease renewal are often negotiated and agreed upon by both parties.
The keyword is "agree" as, depending on the type of lease contract, landlords can not raise rents without tenant agreement which meant, particularly during deflation, landlords have struggled to raise rents except when recruiting new tenants.
However, there have been changes. According to Satoshi Maeda of Mitsui Sumitomo Trust Research Institute, who specializes in rental housing trends speaking to the Nikkei Shimbun, "There is a divergence between the rents of newly recruited units and renewal rents, leading to more cases of proposing increases to existing tenants upon renewal."
According to Tokyo Kantei, a real estate survey company in Shinagawa, Tokyo, the recruitment rents for condominiums in the 23 wards of Tokyo rose by 6.2% year-on-year in February 2024.
In response to this situation, landlords seem to be making efforts to narrow the gap between rents for existing tenants and those for new contracts. According to Maeda's interviews with rental management companies, "There is an increase in tenants accepting rent hikes, and there is a growing momentum for negotiations."
In reality, renewal rents have begun to rise gradually. According to publicly available information from Advance Residence Investment Corporation, a real estate investment trust (REIT) specializing in domestic rental housing, about 50% of the properties subject to renewal had rent increases proposed from August 2023 to January 2024, and approximately 66% of tenants agreed.
As a result, the total rent for renewed properties increased by 1.2% compared to before renewal.
If rents, which have long kept prices down, start to rise in response to wage and price trends, they could push up the overall CPI, supporting the government and the Bank of Japan's target of 2% price stability.
Yoshimasa Maruyama of SMBC Nikko Securities points out, "The current rise in rents may indicate a significant change in inflationary trends. Whether this rise will continue steadily into the new fiscal year is now the focus."
The Bank of Japan lifted its negative interest rate policy in March 2024. Depending on future rate hikes, there's a possibility that the increasing variable interest rates for housing loans could further raise housing ownership costs, exerting additional upward pressure on rental housing rents.
Source:
Nikkei Shimbun (Japanese only; paywalled)
