Financing your real estate investment in Japan: Is it facing the risk of contraction ?

Recently the Financial Services Agency (FSA) ordered Suruga Bank to stop extending fresh loans for real estate investment for six months, over its improper practices related to such financing.
In recent years, the FSA has strengthened its oversight of surveillance over building financing for rental houses that have spread as tax saving measures for inheritance tax. There are an increasing number of examples of building properties in areas with low rental demand and inability to obtain enough rent income assumed by increasing vacancy.
There are cases in which loans can not be repaid and leading to the foreclosures.
Those who are affluent with the upscale property have been targeted by the developers of new apartment buildings and the real estate companies.
Since around 2010, these developers and real estate companies have focused not only on loans involved in landowner’s tax saving measures but also on loans to individuals who do not own the land with limited self-funding. Then shared house scandal involving Suruga bank and Smart days (operator of shared house) exposed to the light in early 2018.
Given that Suruga’s improper loans to the shared house investment ‘Kabocha-no-Basha’ scandal, SFA is said to be investigating other regional banks on the similar improper loans.
FSA wants to know whether the regional banks accurately assesses the individual’s ability to repay, including its own funds, determines the amount of the loan and whether he / she is accurately grasping the change in the rental income as a repayment resource even after financing.

Since the individual salaried workers usually raise funds for the investment (land and building) almost entirely through borrowing,
the borrowing amount tends to be in the order of 
100 million yen. Although it is good to be able to repay it with rent income, if the property is not fully occupied, you may have to fill in the gap with salaries and financial assets, making management unstable.
Also FSA wants to check the way banks evaluate collateral. If the loan is based on a price that is significantly greater than the actual situation, the bank can not collect all the loans even if the collateral is disposed of, and the risk of foreclosures increases. Although FSA is not asking for uniform collateral evaluation system for each bank, FSA is eager to verify whether the evaluation method is appropriate.
In the share house for women (Kabocha-no-Basha), in which Suruga lent a large amount of money, owner’s lease management stalled due to the collapse of the operating company.
The owner got the property at a price far exceeding the actual situation, and even if it sold it, the situation caused the borrowing money not to be repaid. Many of the surgical silver financing for share houses become defective and the collateral valuation method is also questioned. If the FSA tolerates similar excessive loans, it seems banks’ bad loans may inflate.
FSA wants to know whether the banks accurately assesses the individual’s ability to repay, including its own funds, determines the amount of the loan and whether he / she is accurately grasping the change in the rental income as a repayment resource even after financing.

Since the individual salaried workers usually raise funds for the investment (land and building) almost entirely through borrowing, the borrowing amount tends to be in the order of 100 million yen. 

The owner got the property at a price far exceeding the actual situation, and even if it sold it, the situation caused the borrowing money not to be repaid. Many of the surgical silver financing for share houses become defective and the collateral valuation method is also questioned. If the FSA tolerates similar excessive loans, it seems banks’ bad loans may inflate.

Regional banks’ business environment is under pressure with extremely low interest rate for decades and shrinking population in their territory.
Banks in the local prefectures where the economic foundation is weak and they followed Suruga bank.
Many cases have forcibly increased real estate lending in the metropolitan area which is not usual battle ground for them. 
A business suspension order effective for such a long period is very uncommon in Japan.

The FSA began an on-site inspection of the bank in April 2018. As a result, the agency recognized a lack of governance at the bank, citing the failure by its management to detect the lending irregularities, including manipulations of documents.

Due to the fact the large amount of money is involved, the real estate investment usually requires
the financing by the bank. 
Very few people buy the property in cash. So banks play the major role in the transaction.
When the banks tighten the lending, the real estate market normally loses momentum.

FSA wants to know whether the banks accurately assesses the individual’s ability to repay, including its own funds, determines the amount of the loan and whether he / she is accurately grasping the change in the rental income as a repayment resource even after financing.

Final thought

Japanese individual investors have been enjoying the relaxed banking lending policies from early 2010
According to the report by Japan bankers association, the loans outstanding to rental houses throughout Japan are slightly less than 23 trillion yen (about $200 billion). Increase by 20% compared with 2009 just after the global financial crisis, the share of regional banks accounts for more than 60%. (Suruga bank is one of the regional banks)
Apparently the agency urged the bank to strengthen its compliance and customer protection and improve its loan screening procedures. The strong message from the agency shall definitely give a negative impact of the lending policies and stance by the banks. Some investors who bought shared housing units with loans from Suruga Bank are struggling to repay their debts due to sluggish occupancy rates. And some of these investors have formed a victims’ group, demanding the bank to forgive loan repayments however it will be highly unlikely for the bank to forgive the loan.
On macro view, in light of the historically low interest rate, Japanese regional banks need to find someone else to lend the money or they have to quickly find some promising projects in which they play a role of the financier. Can they do it ?  I doubt it. So my expectation is that the loan for financing the real estate investment by regional banks will gradually be taken over 
by some other sound banks.
As far as I can see, a majority of national banks such as Mizuho, Mitsui-Sumitomo and some regional banks with the solid internal governance are still continuing the lending to the real estate investment if the property is in good location and the investor’s financial background is healthy. In a sense, the market has come back to the healthy condition without reckless and naive investors.
I am hearing some rogue real estate brokers are luring investors by seminar telling them that they can offer the real estate for the investment with guaranteed financing by a bank. Please do your own due diligence before you purchase the property.

Other Helpful Articles 
Now, the real truth about the real estate investment in Japan : Kabocha no Basha and Suruga Bank scandal
How to avoid mistakes when choosing a real estate agent -Perennial Ryote-torihiki(両手取引) and Kakoikomi(囲い込み) problem-
High yielding, guaranteed rent should be too good to be true ?: ‘Kabocha no basha’ subletting problem in Japan

Scandal-hit Suruga Bank ordered to halt new property loans for 6 months (Asahi Shimbun)

Toshihiko Yamamoto

Real estate investing consultant and author.
Toshihiko’s book, “The Savvy Foreign Investor’s Guide to Japanese Properties: How to Expertly Buy, Manage and Sell Real Estate in Japan”
is now out on Amazon, iBooks (iTunes, Apple) and Google Play.

About the book
Founder of Yamamoto Property Advisory in Tokyo.
International property Investment consultant and licensed
real estate broker (Japan).
He serves the foreign companies and individuals to buy and sell
the real estates in Japan as well as own homes.
He holds a Bachelor’s degree in Economics from
Osaka Prefecture University in Japan
and an MBA from Bond University in Australia Link

The best buy places to own a new condo unit in Japan

(Kashiwa station, Chiba)

Do you want to know the best buy places to own a condo unit in Japan ?

Toyokeizai, one of the renowned business magazines in Japan
recently featured the unique real estate (condo unit for home) information in Japan.

The magazine picked up some best buy railways stations in greater Tokyo, Osaka and Nagoya to own for your home.

The ranking is based on unique method of PER (Price Earning Ratio).
This particular PER is used to calculate the length (years) to pay back the property price
(new 3 bed room unit with 70 m2) if you rent out.

For example, Read more

Priceless Opportunity : Magnificent House in Yakushima (World Heritage) and Huge Land for sale

(View from the property)

One of my good friends in the industry has just listed a beautiful house in Yakushima.

The small, remote island of Yakushima, which lies off the southern coast of the southernmost of Japan’s four major islands, Kyushu, is shaped something like the Hawaiian isle of Kauai. And just as on that other circular bit of rock over 4,000 miles away across the North Pacific, visitors arrive here seeking respite in subtropical rain forests and mountains. (from NYT)

Situated in the sacred island, this sophisticated new construction is in the exclusive Yakushima island.
The property boasts 1932 square meters of forest land and the fantastic ocean-view.
The house is compact wooden with a toilet which is equipped with the natural disintegrator system.
You don’t need the sewerage.
Read more

What to Know About Defects Problems and Industry Issues in Japan Before You Buy a Condo

In Japan’s condominium industry, there are some serious issues.
In 2015,  there was a huge scandal involving the condo complex called
“Park city La La Yokohama” developed by Mitsui Fudosan.

Mitsui Fudosan is the top developer in Japan.

Construction based on false data was carried out in October 2015, and a scandal where the building was inclined was discovered because the plurality of piles did not reach the appropriate depth in the ground. Safety for earthquake resistance was suspected.Read more

Buying a house in Japan ? Here’s all-too common mistakes to avoid

We don’t need to tell you about the brilliance of Japan quality: detailed, good service and competitive price etc etc.  
But for how good Japan quality in general is, it’s equally easy to screw up. Badly.
Japan’s real estate industry and construction industry are full of fraudulent companies.
A number of them are rogue (of course, there are good and trustworthy companies, too.)
You need to be very careful to deal with them.
When you build your brand-new house in Japan, you must be extra mindful because it could be a disaster if it goes wrong.
It is widely known to the industry professionals that the laws are not necessarily protecting the consumers
Why is the owner (consumer) in so disadvantageous position ?

There are five main reasons.
1.The industry is not seeking a repeat business so they don’t look after customers well
2. High overhead cost
3. The related laws have many loopholes
4. The owner(customer) trusts the contractor  (real estate agents and builders included) too much
5. Victim’s tragic stories are not widely reported in the media.

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You want to get Japan’s green card by the real estate investment ? : Here is what you practically should do

Here is an idea worth considering. Imagine being able to get Japan’s new green card only in a year.
Japan needs more skilled foreign workers.
To attract more foreign workers, Japanese government relaxed requirements for permanent residency (so-called green card) last April (2018)
Before relaxing the requirement, high skilled professional (HSP) workers had to stay in Japan for at least five years before applying for green card, but now just one year is required.
In fact, it is the fastest green card system in the developed countries.
Some pundits are saying relaxed law will bring more foreign high skilled workers but whether it will be a game-changer remains to be seen.
Japan is also said to be a tough country for foreign workers to live due to the very unique traditions such as corporate culture and seniority system, which is another hurdle to clear even after obtaining the green card.
In 2012, Japan introduced a point system for skilled workers. The points are given based on individual backgrounds, including business experience, income, Japanese-language fluency and academic degrees. The system is intended to give preferential status to such skilled workers, including a shortened path for permanent residency.  When the system was enacted, those who had 70 points or more could apply for green card after five years. Normally, it takes 10 years to apply for the status.

Read more

Pitfall of the condo unit investment in Japan : Management company and work matter

There are many apartment buildings which are failing in the their management in Japan.If you live in the apartment buildings you have to be cautiously attentive how your building is managed.

What about the property for the investment ?

KENBIYA (major Japanese property web site) recently wrote an interesting story about the management of the residential buildings (both for living and investment) 

As an investor, perhaps the management of the building does not seem to be your business but I have to warn you that actually the management of many residential buildings for the investment is more likely to
be failing.

But Why  ?

The reason is very simple. Owners (investors) don’t care because they don’t live there.
In some cases monthly management fee (管理費)is not paid by many owners, management fee (fund) is spent improperly. In some cases someone took the money and run away.

Case 1
Serious trouble of the property for investment that were built the bubble period.
One of the relatively common examples is the an apartment in Tokyo, which is close to the city center.
These buildings (usually with units of studios) were built as a tax saving measure for salaried workers in the bubble period.

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Fast track for permanent residency for highly skilled foreigners :Japan’s Groundbreaking New Green Card system

Japan dramatically relaxed Green Card system !
Bold new opportunity to obtain Japan’s new Green Card.
Are you interested in Japanese Green Card with Japan’s social security and universal healthcare service ?
Here is what you should do. 
Invest in the property here and get the ‘business manager’ status.
Japan is facing the acute shortage of workforce.
To address the issue, Prime Minister Abe has been drastically relaxing the immigration control for both low skilled workers and high skilled professionals.
Japan needs both low skilled workers as well as advanced skilled managers.
There is a new visa category called Highly-Skilled Professionals (HSP).This new category was relaxed dramatically last year and now Japanese government is offering preferential treatment for the category, which makes applicants much easier to apply for the so-called

In this relaxed category, HSP can apply for ‘GREEN CARD’ earliest within ONE YEAR (subject to your points) after you
get status of HSP. The Green Card application procedure is based on the points-based system.
The new approach follows the government’s introduction of a point system for highly skilled professionals in 2012.
Under this system, people are scored according to factors such as academic background, career background and annual salary, and are categorized under the field of “academic research,” “technical activities,” or “business management.”Read more

The lure of Japan’s hidden treasures : Why are so many houses abandoned in Japan ?

Terrifying hidden crisis or treasures ?
In Japan, recycling is so much part of our culture.
And yet, it is also the norm for Japanese to demolish their houses with almost less thought than most people would give to disposing beloved ceramic bowls.
People believe homes are usually built to last 50 odd years. Japanese building culture is often described as ‘scrap and build’.
The reasons for this phenomenon range from the ageing to need for constantly updating building technology as it revolves.
With shrinking population, the result is a housing problem that is the opposite of what most countries face. Japan has too many houses that no one wants.
According to the government statistics, the number of vacant houses (空き家、akiya) in 2013 reached 8.2 million.
(But the 8.2 million includes houses/apartment units for rent that are only vacant temporarily as owners try to find tenants or buyers. So genuine empty homes that have been abandoned altogether number about 3 million)
Moreover, many who inherit a house are unable to sell them because of a shortage of interested buyers. The problem is particularly acute in rural areas.
According to one statistics, the top ten ranking of akiya in prefectures as of 2013 was as follows.
(The number indicates the percentage of akiya in dwellings of  each prefecture)
In these prefectures, 1 out 5 properties are empty.

1.Yamanashi   22%
2.Nanago        19.8%
3.Wakayama   18.1%
4.Kochi            17.8%
5.Tokushima    17.5%
5.  Ehime          17.5%
7. Kagawa        17.2%
8. Kagoshima   17.0% 
9.Gunma           16.6%
10.Tochigi          16.3%
10. Shizuoka     16.3%

(top10 ranking)

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THE IMPACT of NATURAL DISASTERS. Nankai Trough Earthquake : Risk in Tokyo Bay from future tsunami

Cleanup, rescue operations underway in Japan after severe rains kill over 200 people and strand thousands in the recent flooding and landslides in west Japan.

On Mar 11, 2011, a devastating 9.0-magnitude quake struck under the Pacific Ocean, and the resulting tsunami caused widespread damage and claimed tens of thousands of lives.
It also sent three reactors into meltdown at the Fukushima nuclear plant, causing Japan’s worst postwar disaster and the most serious nuclear accident since Chernobyl in 1986.
The devastating tsunami hit sites along the Tohoku coast. 
A public beach just opened in Rikuzentakata on July 20, 2018 for the first time in eight years, underscoring the destruction of sites.

In 1703, an 8.2 magnitude earthquake(Genroku earthquake) along the Sagami Trough triggered a tsunami that rippled towards Japan’s then capital, Edo. It is estimated that a couple of thousands lives were lost.
Japan has a lot of natural disasters and many foreign investors are worrying about it.
A major earthquake is expected to strike sometime along the Nankai Trough, a submarine trench running off the Japanese archipelago from around Shizuoka Prefecture in Honshu to the seas east of Kyushu.

How at risk is Tokyo Bay from future tsunami by Nankai Trough earthquake ?
The Nankai Trough is a 700-kilometer-long sea-bottom depression that runs about 100 km off the southern coast from Shizuoka Prefecture to the Shikoku region.

Read more