Whole building investment scam widens

The scandal surrounding dubious lending practices and falsified loan documents on investment properties widened last week with the Asahi Shimbun newspaper obtaining over 1,000 records of correspondence that allegedly implicates real estate agents and several Suruga Bank employees. The correspondence, which took place via email and LINE messages, is alleged to show the bank staff receiving numerous falsified documents including faked rent rolls for investment buildings.

In recent years, unethical real estate spruikers have been targeting company employees, doctors and other high-income salaried workers to offer them ‘high-yielding’ whole building investments, such as rental flats, in regional areas with prices ranging from 10s to 100s of millions of Yen. The real estate agency introducing the property has a tie-up with Suruga Bank to provide financing. Suruga’s financing is highly dependent on the property’s rent roll, with more financing provided for buildings with a higher level of rental income.

According to the Asahi newspaper, the real estate agents sent both genuine and faked rent rolls to the bank via email. The rental income on the faked documents was inflated by as much as 1.7 times.  When the bank’s valuation team were going to inspect the property, the real estate agent would make sure that  curtains were installed in the vacant rooms to make them appear occupied from the exterior, and connect electricity to those rooms.

The regional bank has been under pressure after it was discovered that income statements and other documents used to obtain loans for buyers of share houses were falsified. Initially the victims were thought to have been limited to investors of one particular failed share house company, but it is now becoming evident that the practice is potentially widespread throughout various investment spruikers.

In 2017 the bank identified potential improper lending and abruptly stopped working with several real estate companies. However, as the Asahi Shimbun newspaper reported on April 13, it appears that many of the sale real estate companies continued to deal with the bank via third-party companies, with the practice continuing up until February this year.

As at the end of March 2018, Suruga Bank had outstanding loans of 203.5 billion Yen (approx. 1.85 billion USD) to 1,258 individual investors of share houses. The new allegations of loan fraud extending to whole building investment, such as apartment blocks, could see this number rise further.

Suruga’s share price dropped 5% following the publication of the Asahi newspaper article and reached a 5 year low. On June 6 the bank announced a revision to their March 2018 balance sheet with a net profit that is down 84% from the same period in 2017 and down almost 70% from their earlier announcement.

Advice to buyers

Take extra care when buying investment properties such as whole building investments in Japan, especially via seminars or companies with high-pressure sales tactics.

Fraudulent activities by dodgy companies may include faking sale contracts to show a higher sale price, faking the rent roll to show higher rent, faking the occupancy ratio, providing falsified rental contracts when a room is in fact vacant, and even going so far as to install curtains and turn apartment lights on and off to make it seem like a building has tenants when it does not.

How can you be sure? It can be extremely difficult to truly verify the accuracy of fake rental contracts and to understand the real vacancy in a block of apartments. Check the vacancy rates in the neighborhood. Are there are a lot of vacant apartments listed for rent in the area? What are the market rents for similar properties and do they match the rents on the rent roll provided by the agent? This may not be a reliable indicated as the dodgy real estate agents were using market averages for the falsified rent of vacant rooms.

If the investment is such a strong performer, why is the seller selling it and why is it being offered at a seminar? Remember, if an investment seems too good to be true, it probably is.

Sources:
The Asahi Shimbun, June 5, 2018.
The Asahi Shimbun, June 6, 2018.
The Asahi Shimbun, June 13, 2018.
Nikkei Gendai, June 6, 2018.
Bloomberg, June 6, 2018.