Deal Analysis – Super-central Studio unit, Kyoto

Deal Analysis – Kyoto City Studio Apartment

In this article, we will review and analyse a sample deal facilitated on behalf of one of our clients, in Kyoto city, Japan – once the national capital, it’s second most popular tourist destination (second only to Tokyo), and still its undisputed most important cultural and historical centre. Medium sized population wise (just under 1.5 million inhabitants), the city boasts no less than 17 UNESCO world heritage sites, is home to 20% of Japan’s official National Treasures, and 14% of its official Important Cultural Properties – these include temples, shrines, magnificent gardens (including the previous imperial palace and surrounding gardens), the world famous philosophers’ walk with its’ many tea-houses and meditation spots, the geisha quarter of Gion, the famous golden pagoda, and more.

Regardless of all of the above, the city is also a major economic centre, with its main industries being information technologies, electronics – and, of course, international and national tourism – all in all, a fantastic investment hot-spot and, as a result, normally quite low on yields and high on purchase prices.

Studio unit + Kitchen & balcony – 3.7 mil JPY (app. 34,000 USD)

Kyoto investment real estate property studio apartment

Advantages –

·        Exceptional yield for central Kyoto – close to 10% net pre-tax per annum!

·        Tiny unit (1 room, 15.25 sqm + small balcony) – makes for minimum repair and maintenance fees, as well as for a discounted property tax bill, reserved for units under 200 sqm.

·        East facing balcony – plenty of sunlight – attractive feature for potential future tenants.

·        Current tenant – single male in his mid-sixties, retired – has been in residence for the past five years, without any late payments or other issues – and paid a security deposit equal to approximately one month of rent.

·        Kyoto city, as detailed above, is a large and prominent city, white-collar economy wise, and renown internationally.

·        Location is super-central, within 9 minutes walking distance to the city’s main train, subway and bullet train transportation hub – Kyoto station. Building is located on the banks of Kamogawa, the city’s main river, which crosses it from North to South. One of the best spots in the city.

·        Building built in 1989, which means it is up to the latest earthquake resistant building standards, introduced in 1981.

·        Belonging to the “Asahi Plaza” building brand, a famous national developer which takes pride in well maintained, well populated buildings – a long list of maintenance and renovation items performed over the past decade and earlier seems to indicate this to be true for this particular block of units as well.

Kyoto investment real estate property japan after renovation studio apartment

 

Disadvantages –

·        The tiny unit size means typical tenants would be exclusively singles. Generally speaking, this means shorter tenancies when compared with larger sized units, which tend to attract longer-staying tenants such as families – as singles may more frequently change their status via marriage, work dynamics such as relocation to a different company branch or, at some point, moving in with their elderly parents, as is often the case in traditional Japan.

·        The building’s reserve funds pool (known as the sink fund pool in other countries), used for renovations and repairs, has a relatively low amount in it, compared to the number of units in the building. Monthly fees collected from owners have been raised in 2009, to accommodate for the extra renovations and repairs required with age, but an up and coming major renovation will cost more than the amount currently reserved – which means the building management company will most likely apply for a loan to cover the difference. While this in itself is standard practice, it may mean that any additional, unexpected repair or renovation required in the near future may necessitate either a further hike in building fees, or a one-time payment charged to all unit owners – both cases will reduce the monthly yield, at least slightly.

·        Tenant is aged, which naturally may mean potential future hospitalization, disability or death.

Deal analysis –

Weighing the advantages and disadvantages one against the other, the client has decided to approve this particular deal, due to the reasons specified below –

1.      The high return, aside from being more lucrative, also means more potential manoeuvring room in future due to increased building maintenance/repair/renovation fees. Central city properties in Kyoto rarely yield more than 7% net pre-tax – so anything gained beyond that is a spectacular bonus, considering these central properties may also gain in value over time.

2.      Building profile is excellent – and coupled with its location, all but guarantees a steady stream of potential future tenants – this, along with the current tenant’s security deposit, more than covers for any potential vacancy risk derived from his age.

3.      The fact that the unit is small isn’t really an issue, considering its location, again – plenty of potential single tenants would be more than happy to rent a room conveniently located at the heart of the city. Additionally, any attractive location in Japan (aside from Sapporo city, in the North) only features single or couple sized units at these yield levels as a general rule.

 Summary –

All in all, the deal seems to be quite attractive – an affordable unit generating such high return, in the heart of one of Japan’s most prominent cities, is an exceptionally rare gem. There is a slight risk factor involved, due to the tenant’s age and building accumulated funds/renovation plans and history, but more than easily mitigated by its redeeming factors.

The client, whose main criteria is yield and location, having considered all of the above, has decided to go ahead with the deal, as mentioned – their first purchase in Japan, and an excellent start to a hopefully profitable and hassle-free portfolio.

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