In this article, we will review and analyse a sample deal facilitated on behalf of one of our clients, in Sapporo city – one of Japan’s bigger cities, and the gateway to Hokkaido’s internationally acclaimed sky and winter holiday resorts, in the country’s cold north.
Deal 1 – Sapporo City – 1 Bedroom + Living/Dining/Kitchen Area – 2.7 mil JPY (app. 31,500 SGD)
• Relatively small unit (2 rooms, 28.83 sqm + small balcony) – which makes for reduced repair and maintenance fees, as well as for a discounted property tax bill, reserved for units under 200 sqm.
• South facing balcony – plenty of sunlight (more attractive to tenants)
• Separate toilet and bathroom – rare for a unit of this size and attractive to tenants.
• Bedroom has a tatami floor-mat – again, rare for a unit of this size, and attractive to tenants (warmer and softer than the standard wooden floors normally available in units of this size and profile).
• Current tenant – single male, restaurant cook, 57 years old – in residence over 7 years – no late payments or other issues. Paid one month rent as security deposit.
• Sapporo is Japan’s 4th largest city (population just under 2 million population and steadily 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 very high yield of over 11% net pre-tax per annum.
• Location is a popular residential area, central but quiet, and only 7 minutes’ walk to the nearest subway station.
• The building is very well maintained, with the last large renovation (exterior) carried out in 2012 – another large renovation (roof) performed in 2005. Also has a very long list of ongoing smaller renovation items and repairs, which indicates a well-cared for building – which will make it easier to find new tenants should the current one vacate in the future.
• Building built in 1982, which means it is up to the latest earthquake resistant building standards, introduced in 1981.
• The smaller unit size means typical tenants would be singles, young couples, or a single mother with a baby or younger child. Generally speaking, this means shorter tenancies when compared with larger sized units, which tend to attract longer-staying tenants such as families.
• 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 evaluation amounts to a slightly higher than usual property tax (1.16% of the purchase price per annum).
• Ground floor unit, which makes it less attractive for single females, for security reasons.
• Building just over 30 years old – relatively old – which means higher maintenance/repairs/renovation costs over time.
• 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 147 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 –
1. The high return, aside from being more lucrative, also means more potential maneuvering room in future – whether due to increased building maintenance/repair/renovation fees, or due to lower rents. Excellent safety buffer, as the deal would still be attractive at 10, 9 or even 8% net pre-tax yield per annum.
2. Current tenant profile is quite attractive – long term tenant, single and close to sixty years of age, which reduces the chances of him marrying in the foreseeable future. His employment status also means he is unlikely to be moving in with family in the next decade at lease. All in all, excellent chances for a stable, trouble-free tenancy for years to come – and more than compensates for the potential reduction in available tenant base due to the ground floor positioning.
3. The building seems to be very well maintained, despite its age, and the two big renovations carried out in the last decade 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.
All in all, the deal seems to be quite attractive – the low price, high return, good location and excellent tenant profile more than justify the slight risks inherent in the building profile – and, coupled with the fact that prices in Sapporo city, although slowly rising, have yet to catch up with official evaluations, makes 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 the data 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 their behalf.
Ziv Nakajima-Magen is an Australian, born and raised in Israel, and has been deeply immersed in Japan’s culture and business environment since 2003 , when he forsake his career as in IT corporate project manager, wishing to spend more time with his family and secure their financial future.
Having made the transition to real-estate investment and successfully kick-started his own portfolio, he subsequently established Nippon Tradings International (NTI) together with his Japanese wife and business partner, he is now assisting others in capitalizing on Japan’s vast and lucrative property market.