Deal Analysis – Commercial Office Property

 Fukuoka City Office – 2 Rooms– 5.9 mil JPY (app. 52,000 USD)

Fukuoka city, which we have written about extensively in the past, has been the target of a large exodus of Tokyo businessmen and company employees since the double disasters of 2011 – the devastating tsunami and subsequent nuclear spillage at the Fukushima Daichi plant. Due to its’ geographical position as Japan’s gateway to South-East Asia, a vast influx of Chinese investors crossing over from the north-west and purchasing large quantities of investment properties, would seem to also indicate the promise of this area. Monocle magazine has included Fukuoka city, the prefecture capital, in the world’s top 10 most live-able cities several years already. In Q4-2012, Fukuoka city property prices have begun rising, and haven’t stopped since.

fukuoka city commercial investment real estate property

Advantages –

·        Location – in the heart of Fukuoka’s central business district, and within only 5 minutes walking distance to the city’s main transport hub, Hakata station (bus/subway/train/bullet train). Without a doubt, the best spot in the city for a business.

·        Dual-purpose unit – current tenant is a Chinese trading company – but the property may be used for residential purposes as well if required in the future.

·        Exceptional yield for this location – 8.4% net pre-tax per annum – unusual for central city properties in Fukuoka, and ever rarer for properties of this size (36.5 sqm).

·        Tenant has rent insurance, covering up to 3 months of delinquency – also obliged by lease to pay a cleaning and restoration fee upon vacating.

·        Three large renovations performed in 2013-2014 (exterior, water supply & drain pipes, new elevators installed).

 

Disadvantages –

·        Built in 1980 – one year prior to the introduction of the latest earthquake resistant standards.

·        Previous building management company replaced in 2013 due to financial mismanagement.

·        Current accumulated renovation/repair funds quite low, covering less than 5% of the purchase price per unit owner.

Deal analysis –

The new management company has immediately taken action to act on the large renovation items required since their hiring in 2013 – the building now seems to be in good hands. The lack of large accumulated funds is slightly disturbing, but with three large renovations already performed, chances of another large item being required in the near future is greatly reduced. Furthermore, the exceptionally high yield for this profile and location provides the investor with a buffer in case of monthly fees being raised or a one-off payment required, as annual yields will still be most likely acceptable.

Coupled with the fact that, in this particular location, prices have more than doubled in the course of the last five years, growth potential, while only secondary criteria, is also quite likely – and more than compensates for the older build.

The tenant, in place for more than two years upon purchase, seems to be well established and profitable – with no late payments or other issues, and a rent insurance policy and cleaning/restoration fee most likely covering any substantial potential vacancy expenses.

Considering all of the above, our client, a Thailand-based family office, has decided to add this property to their already substantial portfolio – this purchase marked their second commercial/mixed purpose property purchase, and provided them with further diversity and hedging in an already highly profitable investment portfolio.

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