Buying Guide Land Ownership

Land Ownership Rights

There are two main categories of land ownership rights in Japan – freehold and leasehold. Leasehold is broken into two types – surface rights and right to lease.

Freehold (Shoyuken) - The absolute ownership of land and building.

Surface Rights (Chijoken) - The land is leased, while owners of the building and units have the right to buy/sell as they please. This form is most commonly found on land used for apartment buildings.

Right to Lease (Chinshakuken) - The land is leased, while owners of the building and units must attain the landowner’s approval before they can transfer or sublease. Also, before rebuilding the structure on the land, the landowner’s permission must be obtained. This form of leasehold is mainly used for land designed for individual houses, and only rarely for apartment buildings.

Freehold

The most common, or preferred, type of land ownership is freehold whereby you have absolute possession over the land underneath your house or a portion of the land underneath the apartment building.

For an apartment building, each individual unit has a portion of ownership of the land upon which the apartment was built. This figure is expressed as ratio (usually the individual apartment size in relation to the total size of all the units in the building). In the same building, larger units will have larger land ownership than the smaller units.

What does this mean for apartment value?

Because a freehold apartment includes ownership over a portion of the land, the apartment value will never depreciate to zero. As the building ages, the portion of the value attributed to apartment itself may depreciate, but at the same time the value attributed to the land may increase. A newer apartment’s price or value may be 70~80% for the land, while an older apartment’s price or value may be close r to 90% for the land. This is why some of the very old apartments you see may still have high prices because they come with a significant portion of land ownership. It is worthwhile to purchase a freehold apartment in an area that has relatively strong land values.

Benefits

Freehold apartments always have a residual value (land), no matter how old the apartment gets.
- You can theoretically hold the property for eternity.

Disadvantages

Freehold apartments are generally priced higher than leasehold types.

Leasehold

Sometimes private individuals or developers will build a house or apartment building on land that is leased from someone else. The benefits to the developer include much lower initial costs, as purchasing land can amount to a large portion of total project costs. Some leasehold properties require the occupant to pay the owner of the land a monthly fee.

For apartments in particular, the fixed term land lease starts from the date set between the developer and the landowner, not from the time you purchase a unit in the building. If you purchase a new apartment in a building with a remaining 60-year land lease, and then re-sell your apartment in 20 years time, the new buyer will be left with a 40-year lease on the land. For some lease agreements, upon completion of the lease term, the land may have to be returned to the landowner in its original condition. This means tearing the building down. Part of the monthly restoration fee paid by all unit owners will go towards this demolition fund. However, should the costs to demolish the building exceed the current funds available then all of the current unit owners may be required to pay the remaining amount. Another type of leasehold is where the landowner will purchase the building at the end of the lease term.

Benefits

Prices are usually cheaper than freehold apartments, affording you a nicer property in a better location.
- Because prices may be lower, there is a possibility of higher rental yields (tenants will not usually be concerned about the land being leasehold).

Disadvantages

You never actually own the land underneath the property and eventually you may have to move-out in order to return the land to its owner.

Leasehold properties may be more difficult to re-sell, and you may not see any capital gains.