Kawasaki studio – High-yielding gem near Tokyo

Ziv Nakajima – Magen analyses the pros and cons of buying a tenanted studio unit in up-and-coming Kawasaki, Japan’s fastest growing city.

Kawasaki city, aside from its immediate proximity to central Tokyo – 15-20 minutes by train – is also Japan’s fastest growing city (over 20,000 people move to Kawasaki annually, which, considering its current population of just under 1.5 million, means approximately 1.5% growth per annum).

The city’s economy is extremely white collar, featuring mainly heavy industries, electronics and high-tech development – and it is considered one of the most attractive residential areas nationwide. And, while it still offers slightly higher yields than Tokyo itself, this is changing rapidly – and attractive deals are extremely rare and far between. Which is why one of our clients submitted an offer to purchase the property listed below within an hour of its listing, securing one of the best gems in his portfolio in the process.

 

 

ADVANTAGES

• Exceptional yield for this location – just under 10% net pre-tax per annum!
• Small unit (1 room, 16.73 sq m + balcony) – makes for minimum repair and maintenance fees, as well as for a discounted property tax bill, reserved for units under 200 sq m.
• Nevertheless, in spite of its small size, the unit features a separate, walled off kitchen area, which is quite rare and attractive for units of this size.
• Current tenant – single male in his mid-50s, employed as technical staff at a local college, in residence no less than 15 years – this may seem unusual in most countries, but quite common in Japan, and naturally points to a potentially even longer tenancy. No late payments or other issues over this entire period of time. Solid gold.
• Tenant’s security deposit is non-refundable, and may be used for cleaning upon vacating –saving potentially hundreds of dollars if and when this occurs in the future.
• Dedicated laundry machine area set-up in the unit – again, unusual for such a small property – which is a necessity for most modern residences. Its existence would, again, save the owner approximately USD800-900 in installation fees if and when the unit becomes vacant again.
• Building is very well maintained, and quite small (only 20 units) – major renovations, including re-waterproofing of the roof and exterior walls renovation/repaint were all done within the last six years, thereby minimising the risk of any significant out-of-pocket expenses or raising of building monthly fees in the near future.
• Building built in 1991, which means it is quite young, and also up to the latest earthquake resistant building standards, introduced in 1981.

 

DISADVANTAGES

• The tiny unit size means typical tenants would be exclusively singles. Generally speaking, this means shorter tenancies when compared with larger sized units, which tend to attract longerstaying tenants such as families – as singles may more frequently change their status via marriage, work dynamics such as relocation to a different company branch or, at some point, moving in with their elderly parents, as is often the case in traditional Japan.
• The building’s accumulated funds pool, used for renovations and repairs, has a relatively low amount in it, compared to the number of units in the building and their approximate cost.
• Building is located a 15-minute walk from the nearest train station – not a disaster, but out of the ideal 10-minute comfort zone which would guarantee a large tenant base.

DEAL ANALYSIS

Weighing the advantages and disadvantages, the client has decided to approve this particular deal, due to the reasons specified below –

1. The high return, aside from being more lucrative, also means more potential manoeuvring room in future due to increased building maintenance/repair/renovation fees. Kawasaki properties very rarely yield anything over 7% net pre-tax per annum– so anything gained beyond that is a spectacular bonus, considering these central properties usually also tend to gain in value over time.
2. Building profile is excellent – and coupled with its’ location, all but guarantees a steady stream of potential future tenants – this, along with the current tenant’s security deposit, more than covers for any potential vacancy expense risk.
3. The fact that the unit is small isn’t really an issue, considering its location – Kawasaki city is one of the most sought-after residential areas in Japan, as mentioned, and its proximity to Tokyo adds value as a potential “bedroom community” for company employees working in Tokyo and far from home. The medium distance to the train station, considering all of the above, is more than surmountable.
4. The low accumulated funds pool status is more than accounted for by the excellent renovation history – funds seem to be well managed, and risk of sudden large renovations, as mentioned, quite low.
5. The small size of the building makes it easier for developers to purchase the land and compensate existing owners, in case of re-development or total-loss damages sustained by natural disaster – providing compensation to 20 unit owners is a relative “walk in the park” for any serious developer considering a new building or commercial project on this land.

SUMMARY

As mentioned above, the very existence of a Kawasaki property generating such high yields is extremely rare, so the scales in this particular case were tipped towards green-lighting the deal in any case – it would have taken a very red risk flag for us to pass on it. Considering the above, slight disadvantages, all of which were more than manageable and accounted for by other, positive mitigating factors, it was indeed an easy decision to make, and a worthwhile addition to any portfolio. Without a doubt, had we not acted upon this listing almost immediately upon receiving it, it would have been gone in a matter of days, if not hours – we were fortunate and responsive enough to get our foot in the door double-quick, netting an excellent deal for our clients, a young professional couple from Australia.