Sendai’s property bubble

Somewhat sensationalist magazine Nikkan SPA has reported that Sendai is experiencing a property bubble brought on by the reconstruction work following the Tohoku disaster.

Vacancy rate of just 6%

“Out of our managed properties, we have a vacancy rate of just 1%. There are very few vacant properties, and as soon as tenant moves out, there is another waiting to move in” – President of Sendai real estate company Yamaichi Jisho.

The nationwide vacancy rate in Japan is approximately 20%, but in Sendai, the situation is quite remarkable.

The conditions were a result of the 2011 Tohoku disaster. The city has seen its population increase as those affected by the tsunami, as well as those involved in the clean-up and reconstruction efforts relocated to the city.

The population increased to 1.06 million in 2012 (it was 1.03 million in 2008).

“Landlords are attracting tenants without any effort. Rents are starting to rise. I have not changed my rent, but since the disaster-affected families can receive government assistance of up to 80,000 Yen/month, there are landlords who are putting up their rent.” – an owner of a 80-unit apartment complex in central Sendai.

Rental returns have increased by 2 ~ 3%

Major property funds have also started to make their presence felt in Sendai, with investment by REITs in the Tohoku region increasing 6-fold over the past 12 months to 11.4 billion Yen.

However, the investment is not spread equally between the three disaster-hit prefectures. In Iwate and Fukushima, for example, there were never many investment properties to begin with, so conditions have not changed. As a result, the majority of funds have been directed towards Sendai.

“Construction companies are renting entire residential buildings to house their workers. Rental yields have probably increased by 2 ~ 3% per annum.” – Eiji Takahashi from Apartner, a Tokyo-based real estate company that specializes in investment-type apartments.

With conditions like this, one would think it is impossible to find bargain properties. But there are some peculiarities to the local market.

“Following the magnitude 7.7 Miyagi earthquake in 1978, many owners panicked and the market was flooded with properties for sale. Because of that, there were many good buys to be found, so it is not a bad time to be buying.” – Yamaichi Jisho.

This does not mean that the current demand is set to continue forever.

“The current low vacancy levels will return to their previous levels within the next 10 years” – Yamaichi Jisho.

New housing for evacuees from the tsunami-hit areas is also close to completion.

“Over the next 3 years, 2000 units and houses are due to be completed within Sendai City, so the vacancy rate could be expected to rise.” – Eiji Takahashi.

If you are thinking of investing in Sendai City, here are some pointers:

Check for any signs of earthquake damage to the building

“While the seller must provide a warranty against defects, there are many sellers who sell with a disclaimer that negates this warranty. Be careful when buying a property sold ‘as-is’ because you will be responsible for any defects that arise” – Naohiro Sakaguchi from investment property listing site Rakumachi.

There are also more than a few properties in Sendai that were left leaning following the earthquake.

“Just to fix the building itself may cost at least 10 million Yen. To fix the level of the floors can cost 100,000 Yen per room.” – Eiji Takahashi.

So, what are property investors doing in this market?

“An acquaintance of mine is currently in the process of buying an apartment near Sendai Station. Even if the vacancy rates revert to the previous levels, the prime location means that the rent may be increased in the future, providing a better return” – Naohiro Sakaguchi.

Some are predicting a last-minute rush to purchase investment properties prior to the increase in consumption taxes.

“Prior to the final increase of consumption tax to 10% in 2015, the Moratorium Law [aka the Act Concerning Temporary Actions to Facilitate Finance of Small and Medium Sized Enterprises] is set to expire. As repayment conditions become more difficult for small and medium companies, they will be forced to sell off any real estate assets. I predict property prices to fall by 30% at this time.” – Naohiro Sakaguchi.

The Moratorium Law expires in March 2013. At this time, there may be opportunities for investors to pick up properties at discounted prices.

Source: Nikkan Spa, October 15, 2012.
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