According to Japan’s Financial Services Agency’s Financing Report, the average vacancy rate for investment-grade apartment buildings is estimated to be around 7%. For ‘apaato’-type buildings less than 5 years old, the average vacancy rate was just 2.6%, but for a 10-year old building it was 7.1% and 11.6% for 20-year old buildings.
As buildings age, vacancy rates and maintenance costs increase, resulting in some investments becoming cash-flow negative for landlords. The Agency has requested that banks take more care to explain the potential risks and pitfalls of these type of investment loans to borrowers.
These investment loans are typically offered to landowners through packages often pushed by real estate companies or builders. Landowners are encouraged to build small blocks of flats on their land as a means of reducing their inheritance tax burden and to provide passive income in retirement. In reality, many of these rental buildings are built in inconvenient locations in outer suburbs, often some distance from the nearest train station, where there is little demand from tenants.
To sweeten the deal, rents might be guaranteed for the first few years, but as the building ages, tenants start to move out, rents drop and a landlord may find the rental income is no longer enough to cover the loan repayments, forcing them to pay the difference out of their own salary.
Japan’s ‘apaato-loan’ system, which involved offering construction loans to landowners to build rental apartments on their land, was introduced back in the early 1970s. It was spurred on in the early 1980s following a major update to earthquake safety construction codes in 1981 which caused many landlords to rebuild to meet the latest standards.
Stricter approval process for property investment loans
A survey by investment property listing site Kenbiya in October reported that 52.3% of respondents were finding it more difficult to obtain financing, up 17.8 points from the previous survey held in April. Banks are reportedly requiring the buyer to put more cash down as a deposit, while those looking for full or over-loans are finding options are becoming more and more limited.
The Nikkei Shimbun, October 25, 2017.
Financial Services Agency Financing Report, October 25, 2017.
Kenbiya, October 24, 2017.