Deal Analysis – Fukuoka Studio Apartment

Fukuoka Studio – JPY2.48 mil (app. 20,500 USD)

Advantages –

Japan Overseas Property

Japan Investment Property

• Location, while in a less central suburb and not in the heart of the city, is a few minutes walking distance from 7 different schools and nurseries, as well as 15 minutes’ walk from a large university campus –steady tenant supply should be easily forthcoming, whether it’s teachers/faculty staff or university students.

Only 9 minutes’ walk to nearest train station

Fukuoka city (population just under 1.5 million and rising) is one of Japan’s most up and coming cities, with its location at the Western end of the country making it the gateway to Southeast Asia (actually closer to South Korea and China than it is to Tokyo, and only 2 hours’ flight to Taiwan). It is a modern governance, international city, where core family numbers – meaning couples with young children – are on the rise, in sharp contrast to the rest of the country.

Extremely affordable purchase price.

Building constructed in 1990 – up to the latest earthquake resistance standards, introduced in 1981. Has security cameras and monitors (more attractive to single females).

Accumulated funds pool accounts for approximately 14% of the purchase price per unit owner, assuming all 58 units are similarly priced – coupled with an excellent renovation history (two major renovation performed in the last nine years) and the appointment of a new building management firm in 2009, it seems to be in excellent shape, with a very low risk factor related to maintenance, renovations or building fee hikes.

Tenant is 57 y/o, government support recipient, in residence over 6 years without any payment issues – government support is withdrawn if a landlord reports the tenant has missed payments – and also has a personal guarantor (older brother).

Tiny sized unit (19.6 sqm plus 2.8 sqm balcony) makes for very small maintenance/repair/ renovation bills. Photos seem to indicate the interior is in excellent shape, even renovated in the last few years.

Fantastic yield– over 10.6% net pre-tax per annum.

Dedicated laundry area set-up – attractive to single tenants, as it saves them from having to leave the unit to do their laundry (some buildings might have a laundromat on the ground floor, but in others, one has to leave the building altogether).

Disadvantages –

The suburban location would most likely mean more modest capital growth potential, particularly when compared with the centre of the city.

University student tenant base often means shorter occupancies, as students normally move out at the end of their studies. Additionally, missing out on semester start period could mean a longer vacancy, or having to settle for lower quality tenants such as government-supported, unemployed, sick or disabled folks. Students can also be less mindful of the condition of the property and, particularly if they are foreign students, may try to illegally share their unit with other students or colleagues, to reduce costs – which leads to higher cleaning and renovation costs upon vacating.

Current tenant on government support (which usually means unemployed) – not the ideal tenant profile. No security deposit further reduces attractiveness.

4th floor – no elevator – rules out elderly tenants and single mothers, thereby reducing the potential tenant base.

Deal analysis –

Weighing the advantages and disadvantages one against the other, the client has decided to green light this particular deal, the logic being as follows –

1. Achieving such high returns in one of the most popular cities in the country is a rare gem – Fukuoka suburban properties would normally yield 8-9% at most –if the client would not have gone for this deal, it would undoubtedly be taken by another buyer within a matter of days. Furthermore, the Japanese market being mainly a rental yield/cash-flow oriented environment, growth potential, while a nice second tier of potential profit to go for, is usually not a main criterion for purchase, but rather treated as an unexpected bonus in any case.

2. Current tenant, employed or not, has been paying regularly and without any issues – the threat of potentially losing his government support in case of default is usually enough to all but guarantee continued and timely payments, in all but the most problematic of cases. Furthermore, an unemployed man soon to be in his sixties, as in our previous deal analysis, isn’t as likely to be relocating with the frequency of a younger, more employable individual, and is most likely to stay put, statistically, unless he is forced to move by any unexpected health or family issue – the fact that he is living alone at his age also indicates that such family issues aren’t very likely to occur. And while student tenants come with their own potential issues, as mentioned above, the proximity to a university campus also promises a steady and stable supply of potential tenants, which is a mitigating bonus.

3. The building is quite young for these price and yield levels – built only 25 years ago – and has gone through two substantial renovations in the not-so-distant past. It also has a comfortably large funds pool remaining for any unexpected renovations or repairs required in the immediate future, and the appointment of the new management company indicates that the owners’ association has their fingers on the pulse and does not hesitate to make changes when necessary to maintain adequate services – thereby keeping the building attractive to potential tenants in years to come.

4. The fourth floor positioning of the unit, while less than ideal, is mitigated by the potential tenant base which, in many if not most cases, would be single young school or nursery staff, students and faculty – for whom climbing a few flights of stairs is not a big issue normally. Furthermore, the secure entry to the building also attracts more single females, thereby differentiating the unit from comparable ones in the area, which may not offer the same level of security – this also accounts for more potential tenants and/or higher rent potential.

Summary – 

Numbers-wise, this is a very attractive deal – additionally, for this particular client, who has a modest budget, it provides a unique chance to enter one of Japan’s most attractive cities, where average property prices are usually close to double the asking price, at a minimum.

The small size of the unit is also a budget factor, considering future property tax payments, maintenance and renovation costs – and while the yield is high cost-ratio wise, a vacancy would mean only a small reduction in his overall portfolio income stream. Green light on all fronts.

(First Published in “Asian Property Review“, Pic – Fukuoka, Japan / “Judith Plows“)

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