Osaka Case Study
This is the third and final installment in our Buy to Let in Japan series. You can see part 1 here and part 2 here. The author works in the sector, has written for "Asian Property Review" (Malaysia), "iProperty Group" publications (Singapore), "Bigger Pockets" & "Real Estate Investing Wealth Monthly" (both US based), been interviewed at length for "Real Estate Japan", and regularly posts articles on LinkedIn and other social media. I've found him very approachable and helpful but haven't done business with him -this is not an endorsement, just a chance to learn from an expert :)
Take it away, Ziv!
To summarise and hammer home the points raised in the previous two articles (Advantages and Challenges of Japan’s property investment market), there follows a sample deal analysis of a studio unit in Osaka, recently purchased by one of our clients.
City - Osaka is Japan’s third largest city, with a stable population of approximately 2.7 million residents, and a major global commerce centre, with its’ own diverse economy, stock exchange (now united with Tokyo’s), and one of the country’s largest commercial ports.
Area – Excellent spot, within ten minutes’ walking distance to one of the city’s major transportation hubs and bullet train stop, Shin-Osaka station, also within a six minutes’ walk to yet another local train station. The building is also very close to several schools and a police station (a major attraction for single female tenants).
Unit – Relatively large in Japanese studio unit terms, which start at around 13 sqm – this property is just under 22 sqm – and features a southward facing balcony, which provides for plenty of sunlight.
Building – 151 units in total, built in 1974, but extensively maintained and renovated throughout the years - with the latest exterior renovation performed eight years prior to purchase, and the roof re-water proofed only three years ago. Accumulated funds pool is currently quite low, covering just under 5% of the purchase price per unit, assuming a similar price - but the extensive renovation history accounts for this status, and provides for a low risk factor – as no large renovation items are likely to be required in the near future. A hotel-like lobby, security cameras and some trees planted in and around the block further increase its appeal to potential tenants.
Tenant – Male, 52 years old, in residence 13 years (!) – paid a huge security deposit of 300,000 JPY, to be returned if the unit is vacated with no more than standard wear & tear damages. 37,500 JPY is to be retained by the landlord as cleaning fee upon vacating.
Additional advantages –
- Exceptional yield for this location – just over 8% net pre-tax per annum.
- Small unit –makes for minimised repair and maintenance fees, as well as a discounted property tax bill, reserved for units under 200 sqm.
- The relatively small 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 longer-staying 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.
- Building’s year of build and relatively low accumulated funds pool status slightly increase risk potential.
Deal analysis –
Weighing the advantages and disadvantages one against the other, the client has decided to approve this particular deal, due to the reasons specified below –
- The high return, aside from being more lucrative, also means more potential maneuvering room in future due to increased building maintenance/repair/renovation fees. Osaka properties very rarely yield anything over 6% 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.
- Building location and appeal is excellent –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.
- Extremely affordable, considering Osaka properties rarely sell for anything under 6 mil JPY.
- 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.
As mentioned above, the very existence of an Osaka property generating such high return 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, the slight disadvantages, all of which were more than manageable and accounted for by other, positive mitigating factors, made for an easy decision, and a worthwhile addition to any portfolio, large or small.
The author – Ziv Nakajima-Magen is executive manager of Asia-Pacific and a partner at Nippon Tradings International (NTI), a proxy and buyers’ agency representing foreign investors in Japanese real-estate property. He can be reached at firstname.lastname@example.org or +81 92 600 1613