After going through the pros and cons of buying an apartment in Sapporo, an investor with global portfolio decided to buy it. Find out why.
In the next few articles, we will review and analyse several deals facilitated on behalf of our clients, in order to clarify the purchase criteria, due diligence and decision-making processes involved in our work. We will highlight the particular positive and negative items, and attempt to illustrate the analysis process that has led us to the decisions made – in the hope that this insight into our operating process will assist you in making your own informed decisions as you kick-off and expand your own Japanese property portfolio.
Please feel free to send in questions or requests for clarifications on any of the information contained herein or in previous articles in this series – and I will attempt to address all of your queries in our Q & A sessions, or future articles.
DEAL 1 Sapporo City – 3 Bedrooms + Living/Dining/Kitchen Area – JPY4.5 mil (app USD36,600)
Advantages –
Relatively large unit (4 rooms, 62.12 sqm) – will attract small families or higher earning singles, which makes for more stable and lengthy tenancies. Also includes separate toilet/ bathroom and a dedicated laundry area setup.
Top floor unit – more attractive to tenants and can command higher rent.
Current tenant in residence over 5 years, paid security deposit and has personal guarantor. No late payments or other issues.
Sapporo is Japan’s 4th largest city (just under 2 million population and slowly rising) – white-collar city, with main industries being academic, retail, IT and tourism. Properties are currently under-valued in the market, as the area is largely dependent on tourism, which has slowed down after the 2011 tsunami and nuclear spillage disaster, which occurred some 800 kms to the south. Tourism has since picked up again, but property prices have yet to catch up – which means, in this case, a relatively high yield of over 9% net pre-tax per annum.
Location is a popular residential area, central but quiet, with a bus stop right outside the building, and only 8 minutes’ walk to the nearest subway station.
The building is very well-maintained, with the last large renovation (exterior) carried out three years ago – another large renovation (roof) planned for next year.
Building management allows pets in units.
Disadvantages –
The larger size of the unit makes for higher maintenance and renovation costs, particularly when a tenant moves out.
Sapporo city is in Hokkaido, which is a cold, snowy area – this means heating equipment maintenance and communal building heating fees, which can account for higher expenses when the unit is vacant or when internal heaters break down. Furthermore, the gap between the under-value tendency of the market and the official government valuation amounts to a slightly higher than usual property tax (1.16% of the purchase price per annum).
The current tenant is in her early 70s, which could potentially mean a shorter tenancy, and unexpected costs should she pass away inside the unit.
Building built 1974 – prior to the latest earthquake resistant building standards (1981).
Accumulated funds pool status (reno/repair or sink fund pool) quite low, accounting for just under 2% of the unit price per unit owner, assuming similar prices for all 124 units.
Deal Analysis –
Weighing the advantages and disadvantages one against the other, the client has decided to green light this particular deal, the logic being as follows –
High return for a unit of this size is quite rare – we would normally see these yield levels only for studio or single bedroom units in most cities, which mean single tenants and shorter tenancies (as singles tend to get married, move to a bigger and fancier place as they move up in their career, etc – whereas families tend to stay longer in one residence). Over the long term, this would more than cover for the higher maintenance and renovation costs associated with the larger property.
The age of the current tenant means she is unlikely to move out of her own volition anytime soon – and the fact that she has been in the unit for more than half a decade further strengthens this assumption. Her securities will cover at least half of the average renovation and repair cost in most cases, and her family guarantor can be held accountable for any unexpected additional expenses, should she pass away in the unit. (“Family honour” is a big thing in traditional Japan, which means personal guarantees hold more weight than they normally would in other countries). Furthermore, combined with the fact that the size of the unit lends itself to families or higher income earners, as mentioned above, there is great renovation and rent raising potential in this unit, should the unit become vacant in the near future. The building’s pet tolerance further diversifies tenant potential.
The building seems to be very well maintained, despite its age, and the two big renovations carried out in the last few years and planned for the immediate future mitigate the risk of any unexpected and sudden renovation debt of any sort – thereby also mitigating the risk of any significant and immediate hike in building fees. The lack of funds in the reno/repair pool seems to be justified, as funds are being used for regular maintenance, improvements and renovations.
SUMMARY –
All in all, the deal seems to be quite attractive – the low price, high return and good location more than justify the slight risks inherent in the building and tenancy profile and, coupled with the fact that prices in Sapporo city, although slowly rising, have yet to catch up with official valuations, make for added re-sale profit potential in future. Transaction speeds in the city, which see deals regularly snatched within a few days of listing, and seller resistance to negotiation lead us to reasonably believe that prices will indeed continue to rise in coming years – however, this is only an educated guess, and cannot substitute positive and attractive rental income cash-flow (which this unit fortunately has plenty of ).
Last but not least, the client’s portfolio, which is well hedged and diversified, including properties in many parts of the country, as well as others in other countries, make the small risk inherent in this deal more than manageable.
Based on everything researched, discussed and analysed above, the client, based on our recommendation, has decided to go ahead with the deal, which we have successfully facilitated on his behalf.
Ziv Nakajima-Magen, is Manager of Asia- Pacific, Nippon Tradings International (NTI), which specialises in assisting investors in capitalising on Japan’s vast property market.