Deal Analysis – Takamatsu City, Kagawa

28 May, 2020 –

In developing a Japanese real estate portfolio, we recommend starting with safer tier 1 and 2 investments – those with more moderate income, younger builds — which tend to be more profitable and stable over time. We would recommend getting more “adventurous” with higher yielding properties outside of metropolitan areas once a more stable baseline of 60% to 70% of the portfolio is established.

One of our clients was ready to step into slightly higher yields with a property in the city of Takamatsu, albeit still central in Kagawa prefecture on the island of Shikoku in Japan. It is the capital city of the prefectural government. The area’s occupancy rate is generated through the large concentration of nationwide companies’ branch offices, which play a large role in its economy, and contains most of the national government’s branch offices for Shikoku.

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Japan Real Estate

Description

We are pleased at what the property has to offer –

  • Conveniently located, only a 5 minute walk to the nearest train station
  • Small studio unit, (most easily tenanted) 18.10 sqm on the 1st floor of a 12 storey building
  • Built in 1992 after changes to the Building Standards Act (1981) for earthquake resistant construction methods
  • Asking Price: ¥2,250,000 (approx. USD $21,000) with Monthly Income of 18,429 jpy (USD $171)
  • 8.40% yield net pre-tax, higher if lower price negotiated

Due Diligence

The main things we look at during the course of due diligence is the accumulations pool and renovations/repairs. We would like to see either healthy funds to cover the costs of renovations, or renovations to justify the lack of such funds.

This property shows Accumulated (Reserve) Funds of approximately ¥16,098,000 (approx. USD$150,000) at the time of our due diligence, and major renovations conducted in December of 2005. Funds are accumulated through approximately 30% of the purchase price per unit owner. We were quite satisfied with the management of the funds and the building. Although there have been no major renovations in the last 15 years, the reserve funds are sufficient for the next big renovation required. Since this building is not too old (1992), it would likely be another five to ten years before major renovations are required.

Next, we looked at the background of the tenant to ensure income stability and minimal risk on our client’s investment. The tenant is a pensioner in his seventies and in residence since Jan 2016. A reliable tenant with no late payments. He provided a security deposit and pays his own water bill.

Elderly tenants are common in Japan because of the aging population. Because of the risk of death in the property, we include a “death in property” insurance clause to cover expenses (up to app. ¥1 million (approx. USD $9,300) for cleaning, renovation and repairs). The insurance will also cover two years of lost or reduced rental income following the death. The caveat is that the next tenant in line will need to be informed of the death, which could potentially mean a slightly reduced income.

The Offer

Our client was keen on the property, but willing to take a risk by offering a lower price. The asking price was ¥2,250,000 (approx. USD $21,000). At her request, we negotiated down to ¥2,100,000 (approx. USD $19,500).

Offer accepted bringing the yield from 8.40% net pre-tax to 9.01%!!!! Low price, high yield, an excellent addition to the portfolio!

Another happy client!

 

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