Yuzawa’s resort condo market facing unique issues

Almost 20% of Japan’s resort apartments are located in the ski resort area of Yuzawa in Niigata Prefecture. The town has 58 resort apartment buildings containing approximately 15,000 units. Yuzawa also has the highest percentage of apartments as a share of total households nationwide, with 4 times as many apartments as registered households.

These resort apartments were built during Japan’s bubble economy in the late 1980s, with as many as a third of the resort apartments developed during that era located in Yuzawa. Buildings featured hotel-like facilities such as large hot spring baths, indoor pools, karaoke rooms and restaurants. Some buildings featured maisonette-type apartments over 100 sqm in size that were priced over 100 million Yen when new. However, many of the apartments were only designed to cater to short-term residents, with tiny kitchens with 1 cooktop.

From the 1990s onwards, apartment owners, saddled with high monthly building fees, effectively abandoned their apartments, causing many of the owners associations to face increasing debts from owners who had long-since stopped paying fees.

Following the collapse of the property bubble, the price of these resort apartments plummeted. In recent years, elderly have started to buy resort apartments as permanent homes for their retirement. The town, which was once bustling with young skiers, has seen a rapid change in demographics as elderly move in. 43% of residents in resort apartments are over the age of 65, 8 points higher than the town average.

Some of the apartment owners had purchased their apartments when they were brand new during the peak of the bubble, while others purchased them in recent years at much lower prices. Some have taken the opportunity to buy something that was once an unaffordable luxury item.

According to Yuzawa Town records, the town had 8,144 residents as at April 2016, of which 1,008 (12%) were living in resort apartments. The number of residents living in resort apartments has more than doubled since 2006. There have even been cases of long-time town residents moving out of detached homes, which come with burdens such as snow removal in the winter months, into apartments.

In December 2016, the Niigata District Court auctioned off nine resort apartments at a foreclosure auction. The apartments were in buildings built between 1988 and 1990. Each apartment had a court valuation of 10,000 Yen, with one valued at 150,000 Yen. Seven of the nine apartments were sold, with sale prices ranging from 10,000 to 160,000 Yen (88 ~ 1,420 USD).

The reason for the low sale prices was due to unpaid building fees owed to the various building owners associations. These fees ranged from 370,000 ~ 14,660,000 Yen (3,250 ~ 129,000 USD) per apartment. These debts automatically pass on to the new apartment owner, so the buyers of these foreclosed apartments would also be responsible for paying these fees back to the owners associations.

One of the foreclosed apartments had an appraised court value of 1,290,000 Yen, but 1,360,000 Yen was owing to the owners association. Since the courts do not allow negative valuations, the minimum bid price was set at 10,000 Yen.

The apartment with a minimum bidding price of 150,000 Yen was valued higher than the other foreclosures because the owners association had written off the debt owing by the previous owner.

According to the Real Estate Foreclosure Association, the average sale price of a foreclosed resort apartment in Yuzawa in 2010 was around 14,000 Yen per square meter. By 2015, this had dropped to just 2,600 Yen per square meter (2 USD / sq ft).

Many of the buyers of the foreclosed apartments were the buildings’ owners associations. The associations are also the ones who are responsible for foreclosing on the apartments. By buying the apartments cheaply at auction, they can cancel any unpaid building fees and then search for a new buyer on the open market. Of the seven apartments sold at December’s foreclosure auction, six of them were purchased by owners associations.

One building has successfully managed to foreclose on and purchase 40 apartments in the 250-unit building that were previously held by owners who had fallen behind on building fees.

The process, however, seems to be repeating itself as new buyers sometimes struggle to pay the high monthly building fees. In some buildings these fees can be as high as 500,000 Yen per year.

The chairperson of one owners association remarked about the troubles they have had since a buyer from Okinawa purchased two units in the building at a foreclosure auction. Since the purchase, huge numbers of tourists have been staying in the two units and using the resident facilities and baths, causing concern for the owners association. Another building’s chairperson said they were worried about apartments being sold to shady companies or organizations that could cause havoc for the management of the building. This occurred several years ago in a resort apartment building in Atami, and it took the owners association several years to clear them out.

Buildings struggling with growing outstanding debts owed by various apartment owners are finding it difficult to maintain or repair equipment. In buildings with resident facilities such as heated pools and hot spring baths, maintenance costs can be prohibitively high. The buildings, too, are now several decades old and will require more and more expensive maintenance work as they get older.

High property taxes

Not only are the monthly building fees high, but property tax valuations on these resort apartments can also be unusually high when compared to their actual market prices. Tax valuations on the building portion of an apartment are based on the replacement cost with consideration given to the age of the building. This means that an apartment of the same size and age in a major city would have the same building tax value as one in Yuzawa, despite the vast difference in actual market prices. Facilities such as pools and spas will also be concluded in tax valuations, resulting in high annual taxes for apartment owners.

One apartment in a 27 year old building in Yuzawa that sold for 680,000 Yen had annual property taxes of 60,000 Yen, almost 9% of the purchase price.

The town relies heavily on these property taxes, with 80% of the town’s tax revenue coming from fixed asset taxes. Of that, approximately a third, or 900 million Yen, is received from property taxes on resort apartments. The peak tax revenue reached 1.5 billion Yen in 1994. After this time, however, there has been no new construction and the depreciation of existing resort apartments has meant that tax revenues continue to decline.

The town is also suffering from unpaid fixed asset taxes from property owners to the tune of 940 million Yen, the majority of which is owed by out-of-town owners of resort apartments.

In 2016, Yuzawa Town introduced a scheme providing tax breaks, housing, education and transport subsidies to entice young families to move to the town. The town will provide reductions on annual property taxes which also applies to resort apartments, as well as a subsidy of up to 50,000 Yen a month for people who commute to work via the Shinkansen bullet train. One of the requirements is that the applicants must be a married couple with a combined age of under 80 years. This rules out the predominant buyer of a resort apartment.

Yuzawa is approximately 80 ~ 90 minutes by Shinkansen from Tokyo Station. In 2015 the town had 4.33 million tourists, of which 2.46 million (57%) were there for skiing. The number of ski tourists was down 4.1% from 2014 and down 70% from the peak in 1992, but is still more than double the number of ski tourists in Hakuba and triple the number that visit Niseko.

Source: The Asahi Shimbun, February 1, 2017.

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