Deal Analysis – Sapporo House

Single Family Home, Sapporo

Single family homes, as opposed to condo units, offices and shops, are often the investment asset of choice in many countries, due to the larger land parcel attached to them, which makes for better capital growth potential – and also due to the flexibility inherent in ownership of said land parcel, as far as future renovations & re-development prospects are concerned.

In Japan, however, houses tend to take a back seat to condo and other building units, at least as far as investment is concerned. This is mainly due to the building materials and standards in use – which are primarily wood and light metals, as opposed to bricks, mortar and concrete, in the vast majority of cases.

In addition, larger, family sized properties such as houses are harder to find tenants for, due to the decreasing population trend. Singles, as well as couples without children, are simply far easier and faster to populate properties with in Japan.

Lastly – capital growth in Japan is far from a given for the decades ahead, as discussed extensively here and on countless other platforms. Houses also require more maintenance on average, due to that larger floorplan, and also due to the owner’s responsibility for all exterior and structural issues – which, in the case of co-owned condo buildings, are covered in most cases by monthly contributions to the reserve funds and management funds pools.

As a result, houses can carry more “surprises” in store, as far as expenses are concerned, and aren’t as stable and predictable, income-wise, as condo residential or commercial units in co owned blocks. One of the down-sides of owning individual units in co-owned buildings, however, is the fact that the use of the property is limited to owner co-op bylaws and regulations and so, short term rentals, sub leasing, commercial use, etc, are far less of an option for landlords, which reduces income potential whereas house owners are often free to do as they wish with their property, including very creative hacks such as turning it into a shared house, guest house, etc.

Lastly, while family tenants are more rare and can take longer to source, they tend to be longer term tenants, as opposed to singles, whose life circumstances can change far more often, for various reasons.

Sapporo City

Japan’s 5th largest city, with a population of just under 2 million people, Sapporo is the largest city in Hokkaido, the country’s Northern most landmass, which is characterized by long and snowy winters. It is also Japan’s 4th most popular tourist destination, drawing over 13 million visitors annually, particularly for its internationally renown winter
festival, which takes place towards the end of January annually.

As opposed to Japan’s other large cities, however, Sapporo is much cheaper – precisely because of this reliance on tourism. The city suffered a massive decline in visitor numbers following the 2011 Tohoku Tsunami and subsequent nuclear spillage in Fukushima. Although Hokkaido is a far cry from those locations, international tourists were concerned, and the city’s economy suffered as a result – and so didn’t enjoy the price hikes that the rest of the country’s major cities have benefitted from, between 2012 2016 – or at least not nearly to the same degree.

The tourists have returned since 2013 or so, but property prices haven’t recovered significantly as of 2019 , which makes for fantastic potential rental yields.

Main industries are, naturally, mainly tourism – but also academic education and retail  –
a robust, mainly white collar economy, with the only disadvantage being much longer vacancies on average – since the relatively harsh winters mean that very few tenants change their residence between the months of September and March.

Sapporo House – 6 Rooms – 3.8 mil JPY (app. 34,000 USD)

Sapporo House Single Family Home SFH Exterior Layout Floorplan

As mentioned above, prices in Sapporo are phenomenally low. The house in question, built in 1973 , has 5 bedrooms, a living room, large kitchen/dining area, and takes up 125 square meters of a roughly 193 square meter land plot.

It has beem well-maintained and renovated throughout the years, and while it isn’t within walking distance to a nearby train or subway station, it comes with a carpark, like many houses in Japan – which means that anyone renting it is far less concerned with public transport accessibility.

Single mother + 3 children in residence for the past 7 years – no payment or other issues to date, paying approximately 360 USD per month, for an annual net pre-tax yield of about 10.6%

Advantages

• Obviously, the cost and yield are phenomenal – no further explanation necessary

• As mentioned above, a family tenant, who, with any luck, may stay in the property for life, or at least for a good few decades

• The house appears to be in good shape, at least as far as visible items are concerned. The exterior and roof have been well maintained and do not require any maintenance in the
foreseeable future

• Quiet and popular residential area

Disadvantages

• The age of the structure would dictate more maintenance and renovations overall, during the property s life cycle

• All of the general disadvantages mentioned above, inherent in the purchase of a stand alone house, as opposed to a unit in a co owned building.

• The previous owner of the property has been taking care of snow clearing from the roof and surroundings of the house during the winter months an added expense of approximately 300 USD, or slightly less than one month rental income
annually.

Deal Analysis & Summary

In this particular case, the buyer, an asset & portfolio management company based in Hong Kong, has intentionally targeted houses, as opposed to individual units or small buildings as they preferred to focus on the advantages inherent in owning an entire land parcel, as specified above and also due to the lower demolition and removal costs  projected for future re-development purposes (far lower for small wooden structures, as opposed to metal framed or reinforced concrete builds).

Due to this preference, they have already considered and accepted the vast majority of existing and potential disadvantages listed above and so, it was only a matter of finding the appropriate property that would satisfy their budget and yield requirements.

The additional expense of the snow-clearing “perk” provided to the current tenant, easily factored into annual projections, while reducing overall yields, also provides for a satisfied and loyal tenant, which further increases the stability of the investment at the time of purchase all in all – making for an easy deal to approve from their perspective.

 

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