Investment in facilities for the elderly in Japan

Japan has an aging population. In 2025, the first baby boomers (people born between 1947 and 1949) will be 75 years old or older. This means that one-quarter of the Japanese population will be 75 years or older. As the Japanese population continues to age at an unprecedented pace, the demand for senior housing and care facilities is also increasing dramatically. To address this, the Japanese government established a special committee¹ in 2013 to promote and encourage investment in the senior housing and care business through incentives and subsidies.

Types of facilities for the elderly

There are two types of facilities for the elderly: those operated by public entities (ie national or local governments or their affiliates) and those operated by private entities. Since private investment in facilities operated by public entities is generally impossible, this article focuses on facilities operated by private entities, especially fee-based homes for the elderly and serviced residences for the elderly, which are among the most popular types of facilities and where there are most investment opportunities.

Fee-based homes for the elderly

Fee-based homes for the elderly (yuryo rojin home) are facilities regulated under the Act on Social Welfare for the Elderly (rojin hukushi ho, Act No. 133 of 1963). Facilities that house elderly people aged 65 or older and provide one or more of the following services fall under the fee-based homes for the elderly:

• nursing care for bathing, toileting and eating
• meals
• housekeeping services such as laundry and cleaning
• health care services

A facilities operator who intends to establish a fee-based home for the elderly must notify the relevant local government in advance. If a facility operator meets certain requirements and obtains designation from the local government pursuant to the Long-Term Care Insurance Act (kaigo hoken ho, Act No. 123 of 1997), the facility operator may provide nursing care services covered by the public long-term care insurance (kaigo-hoken) (the Long-term Care Insurance Services). Under the Long-term Care Insurance Act, all Japanese residents aged 65 (or 40)² or older are insured and can receive Long-term Care Insurance Services by paying only 10% to 30% of the cost (the remaining amount is paid by public insurance). Fee-based homes for the elderly that provide the Long-term Care Insurance Services are referred to as fee-based homes for the elderly with nursing care (kaigo-tsuki yuryo rojin home).

Serviced residences for the elderly

Serviced residences for the elderly (service tsuki koreisha muke jutaku) are residential premises leased to elderly people (facilities users) with safety and health confirmation services and consultation service provided by the operator. An operator of residences can register them as the serviced residences for the elderly under the Act on Securement of Stable Supply of Elderly Persons’ Housing (koreisha no kyoju no antei-kakuho ni kansuru horitsu, Act No. 26 of 2001), if certain requirements with regard to the facilities, services provided in the facilities and the content of the contracts with elderly people (facilities users) are met. The facilities requirements include:

• The floor area of each unit, in principle, needs to be 25 m² or more.
• Each unit, in principle, needs to have a kitchen, a flushing toilet, storage space and a bathroom with a bathtub.
• The facilities need to be constructed barrier-free.

The service requirements include the presence of care professionals (doctors, nurses, certified care workers) in the facilities, at least during the day, to provide users with a consultation service on daily life and safety and health (of the facilities users) confirmation service. In addition, the agreements (which are often lease agreements) between the operator and the facilities users must be in writing. And to protect the facilities users, the operator is not allowed to terminate the agreements for certain reasons, such as the long-term hospitalization of the facility user.

If an operator registers its residences as serviced residences for the elderly satisfying all the requirements, new construction or renovation will be eligible for government subsidies. Tax benefits, such as abatement of the fixed asset tax and real estate transfer tax, and loans from the Japan Housing Finance Agency (which is a quasi-public entity) are also available.

If fee-based homes for the elderly meet the above requirements, the facilities can be registered as serviced residences for the elderly.

Types of agreements between operator and facilities users

In principle, there are three types of agreements between an operator and facilities users for elderly people’s use of facilities:

• right-of-use agreement
• building lease agreement (excluding lifetime building lease agreement)
• lifetime building lease agreement

A right-of-use agreement usually governs the facilities user’s rights to use the facilities and to receive services in one agreement. The agreement term is usually whole-life of the user and ends when the facilities user dies.

A building lease agreement is based on a lease agreement under the Act on Land and Building Leases (shakuchi shakka ho, Act No. 90 of 1991). When the facilities user dies, the agreement is usually inherited by their dependents. An agreement for the facilities user to receive certain services is usually executed separately from the building lease agreement.

A lifetime building lease agreement is a lease agreement that terminates on the death of the facilities user (the lease is not inherited by their descendants. To enter into a lifetime building lease agreement, an operator must obtain the approval of the relevant local government, and a lifetime building lease agreement can only be executed with elderly people who meet certain requirements. As in the case of a (non-lifetime) building lease agreement, an agreement for the facilities user to receive certain services is usually executed separately from the lifetime building lease agreement.

Structures for investment in facilities for the elderly

The investment structures available for investment in facilities for the elderly are generally the same as those for real estate investment in traditional asset classes.³ In general, there are no restrictions on foreign investors acquiring facilities (real property assets) for the elderly. Investment structures for foreign investors wishing to acquire Japanese real property assets include:

• a direct acquisition (by a foreign investor)
• an acquisition by a foreign investor's Japanese subsidiary
• the GK (godo-kaisha)-TK (tokumei-kumiai) structure
• the TMK (tokutei-mokuteki-kaisha) structure

Investors often use the GK-TK structure and the TMK structure. Under those structures if certain conditions are met, the pay-through tax treatment is available for the real estate holding company (ie the real estate holding company may deduct its profit distributions to investors from its taxable income, and by distributing all of its profits to the investors the real estate holding company's taxable income can theoretically be zero).

GK-TK structure

A GK (godo-kaisha) is a limited liability company similar to a US LLC. The maintenance cost for a GK is generally lower than that for a KK (kabushiki kaisha or joint stock company). Investor(s) invest in the business of a GK (which acts as a TK (tokumei-kumiai) operator) under a TK agreement. TK (silent partnership) is a contractual relationship between the GK as the TK operator and the TK investor(s).

The TK investors are not shareholders or members (shain) in the GK. And different from NK (nin'i kumiai or general partnership), TK investors are generally not entitled to manage or participate in the business of the GK. If certain conditions are met, the GK is entitled to deduct from its taxable income profit distributions to the TK investors. There are several license or registration requirements under the Financial Instruments and Exchange Act (kinyu-shohin torihiki-ho, Act No. 25 of 1948) which need to be considered when structuring a project.

TMK structure

A TMK (tokutei mokuteki kaisha) is a special purpose limited liability company under the Act on the Securitization of Assets (shisan no ryudo-ka ni kansuru horitsu, Act No. 105 of 1998). A TMK issues asset-backed securities (shisan taio shoken) to investors, including preferred equities (yusen-shusshi) and specified equities (tokutei-shusshi).

A TMK is highly regulated. To acquire the target assets or to issue asset-backed securities, a notification of commencement of business (gyomu-kaishi-todoke), including an asset liquidation plan (ALP)⁴ must be filed with the relevant Local Finance Bureau. If a plan stipulated in an ALP is changed, the amendment has to be filed again. If certain conditions (eg domestic investors hold more than 50% equities (with economic interest) in the TMK) are met, the TMK is entitled to deduct from its taxable income profit distributions to its preferred equity holders and specified equity holders.

The TMK structure is sometimes combined with the GK-TK structure in a way that the domestic investor (equity holder) in the TMK is a GK and foreign investors invest in the GK's business under a TK agreement as well as the foreign investors' direct investment in the TMK. With this arrangement, the tax burden of the domestic investor in the TMK (ie a GK) may be reduced since as mentioned above, if certain conditions are met, the GK can deduct profit distributions to the TK investors from its taxable income.

Opportunities and advantages

There are opportunities and benefits when investing in facilities for the elderly in Japan. Here are some examples.

Market

Contrary to the declining population in Japan, the business and market for the elderly in Japan is one of the few industries expected to grow.

Property prices

Since senior users (elderly people) usually don’t need to commute to and from places such as offices, senior housing does not necessarily need to be in metropolitan areas. And properties outside metropolitan areas could also be valid potential investment targets. The cost of acquiring properties outside of metropolitan areas could be considerably lower.

Occupancy

According to a report by the Japanese Ministry of Land, Infrastructure, Transport and Tourism, the occupancy rate of serviced residences for the elderly that have existed for more than two years was about 92% in 2019. This occupancy rate is considerably higher than for rental housing, which is about 82%.

Subsidies

The Japanese government encourages the establishment of senior housing. Subsidies and tax benefits are available, examples of which are mentioned above.

In addition to the rent, a facilities operator can generate income by providing the Long-term Care Insurance Services. Since anyone aged 65 or older and in need of assistance or nursing care can access the Long-term Care Insurance Services covered by the public insurance, this can help stabilize facilities operators’ revenues.

Points to consider

The construction cost of facilities for the elderly can be higher than those of ordinary residences because of the requirements for equipment and facilities that are required by law or necessary for the elderly. For the same reason, converting ordinary residences to facilities for the elderly can be difficult and costly.

Changes in government policies in relation to facilities for the elderly are another potential risk to be considered. Operation of and investment in facilities for the elderly relies on government subsidies, tax incentives, long-term care insurance and other public programs. So the risk of shifting government policies and political considerations must be taken into account. For example, an increase in the self-pay ratio (out-of-pocket long-term care costs ratio) under the Long-term Care Insurance Act could have a profound impact on a facilities operator’s business plans. This will affect investors’ projections.

Since the value of facilities for the elderly depends largely on the quality of the operator’s services and reputation, choosing the right operator (and other service providers) is paramount to the success of the business. It’s also important for investors to monitor the quality of the services and the financial conditions of the operator (and other service providers) and take appropriate measures to make sure their investment is sound. It may also be an option for an investor to act as an operator and manage the operation of the facilities for the elderly, rather than entrusting management to a third party.