The number of secondhand ‘one-room’ or studio apartments listed for sale in greater Tokyo has reached an all-time high. According to Tokyo Kantei, as many as 70,000 units were listed in 2012, an increase of almost 10% from 2011.
Many of the studios were built during the bubble period from the late 1980s to 1990 and are hitting the market as investors show a trend towards reducing their asset holding time.
Attracting tenants without reducing rent
Nihon Zaitaku is an industry leader in managing rental properties for their clients, with a total of 11,222 apartments under management and a vacancy rate of just 1.9%. In comparison, Japan’s national vacancy rate is 18.9%, while the vacancy rate for studios in Tokyo’s 23-ku is normally between 5 ~ 8%.
They came across unusual circumstances when they took on the management of an apartment in Yokohama. The 20 sqm (215 sqft) apartment was in a 22 year old building. The tenant, who had jut moved out, was paying 60,000 Yen a month – 10% higher than similar units in the same building – because their contract began some time ago when rents were higher. Naturally, when advertising for a new tenant the rent would have to be adjusted downwards to reflect the current market.
The landlord was against lowering the rent, but was worried about the apartment being vacant for an extended period of time. Nihon Zaitaku suggested that the landlord give the apartment a low-cost renovation to justify the higher rent. Consequently, they found a tenant willing to pay the same rent almost immediately after the renovations were complete.
Typically, to avoid an apartment being vacant for a long time, the landlord will reduce the advertised rent. However, this can lead to a downward spiral as the apartment, left as is, may not attract a tenant and can erode the landlord’s investment.
The all-in-one bathroom and toilet units which were used in almost all bubble-apartments are now considered undesirable by tenants. But, the general cost to renovate a bath-toilet bathroom into a separate bath and toilet can range from 1.5 ~ 2 million Yen. For a studio apartment, such a large outlay may not be possible for some investors. Nihon Zaitaku offers a cheaper alternative for renovations. For 398,000 Yen, their renovation company can upgrade the interior styling of the apartment so that it will appeal to a wide variety of tenants.
So far they have renovated 120 apartments. Based on their own data, renovated apartments are typically vacant for 14 days less than an un-renovated one. They are also rented for an average of 3,110 Yen/sqm/month more than the market rent in their area.
The appearance of the apartment is extremely important
Portfolio is a Tokyo-based company that specializes in renovating studios. In 2010, they introduced a low-cost renovation plan called “Renovation One”. Their estimated cost for renovating a 20 sqm studio is 550,000 Yen, and 650,000 Yen for studio between 20 ~ 30 sqm. To date, they have renovated over 260 studios.
The company president, Eiichi Saito, said that consumers tastes have diverged since the 1990s when apartments were all uniform in design. As their main target tenants are female university students or office workers, they make a point to decorate the studios accordingly. White wallpaper is replaced by paint in accent colors, accessories added to bathrooms, and so on. As a result, landlords have been able to achieve an average rental increase of 9%. The company plans to have renovated 1200 studios by 2014.
Market Rental Returns
The average gross rental return for studio apartments in greater Tokyo was 8.39% between January and September this year, up 0.36% from the same period in 2011. With building regulations over the development of new studio apartments becoming more and more strict, the popularity of existing secondhand studios continues to remain high.
Portfolio’s Renovation One
Source: The Sankei Shimbun, December 12, 2012.