Tag Archive for risk

High yielding, guaranteed rent should be too good to be true ?: ‘Kabocha no basha’ subletting problem in Japan

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Pitfall of sub-leasing(sub-letting) real estate investment

High yielding, guaranteed rent（sub-leasing)  should be too good to be true ?
Recently one of the scandals which rattled the industry is KABOCHA-NO-BASHA
(Pumpkin Carriage) problem.
The background of the scandal is as follows.
Investors were guaranteed a fixed monthly amount over an extended period if they invested money by contracting with a real estate company called Smart Days(Tokyo)
that used the funds to set up and manage share house facilities under sub-leasing agreement.
Since 2015, Smart Days, operator of women-only share houses called Kabocha no Basha (Pumpkin Carriage), has promoted high yield investments through the media and has mainly acquired customers of office workers. In the sub-leasing contract, rent payment collected through the sub-leasing is sought to pay back the debt for a long period plus small profit.
For example, suppose you borrow 100 million yen from a bank and the monthly repayment amount is 500,000 yen, if you earn rental income of 550,000 yen a month, it will generate 50,000 yen a month profit. This system is typical leveraging in the real estate investing and there is no red flag about it.
In an ideal setting, Smart days as the sub-leasing company would rent out rooms to tenants and bring in a steady and continuous supply of rent, a portion of which would go to the investors.The shared house with shared toilets and bathrooms is not as wide as 7 m² in living space, but the initial cost of moving in is kept low (so they say), and it was expected that more women moving into Tokyo from rural cities will choose to stay in these share houses.Smart days also promoted the business to support tenants finding a job (This is an alarming part)

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What is the 2022 problem in Tokyo property market ?

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Some critics in the industry are predicting the price of condominiums in Tokyo shall drop soon simply because they are too expensive for people to buy.
According to Nikkei in December 2017, the average price of a newly built condo in the capital region — Tokyo and the surrounding prefectures of Kanagawa, Saitama
and Chiba — rose 7.6% in 2017 to 59.08 million yen ($533,000).That was higher than the average in 1989 and 1991 and the second-highest level ever,
trailing only the 1990 record by 2.15 million yen.
Are condominiums really too expensive ? Are those critics are right ?
We need a crystal ball to predict the future
but today I am going to discuss the reason why the price of condominiums may go down.
Personally though, I am still mildly bullish about the market right now due the global aspect (see below UBS report)
and the  healthy growth of the secondhand condominium market.
It is always to good to listen to the people with different opinions.
Let’s listen to what  critics have to say.
We saw the condominiums developers go bankrupt one after another in the recession after the global financial crisis in 2008.
Nonetheless, the current price of newly built condominiums in greater Tokyo area has risen up sharply over several years and they are becoming more and more unaffordable for average salaried workers.
In the latest Tokyo kantei report in 2017, the average price of new condominiums are about 8-10 times higher than average annual income of the skilled workers in greater Tokyo area.(vs. 14 times in London)
London house price
The reason for raising is not because real demand is strong because everyone wants to buy them.
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Vacancy risk: Risks in private real estate investment in Japan (Part2)

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Vacancy risk
Previously I discussed the defect risks when you acquire the property.
Today I will discuss the risks while you are owning the property.
In fact, there are several challenges while you own and manage the property.
Vacancy is one of them.
Vacant rooms obviously do not generate any income so it is very important
to fill your property (whether it is a rental house or a small multiunit rental property) with good, rent-paying tenants.
However in practice, you will see vacant rooms for certain time period over the years and there are tenants who don’t honor the leasing contract.
Let’s look at the ‘vacancy risk’ and how to mitigate such risk.
The beauty of real estate investment in Japan is that your can expect very
stable income every month. Rents are usually  paid monthly.
Therefore finding stable trustworthy tenants is a key for success.
However, due to certain reasons such as inconvenient location of the property,
Investors may face the situation where the property being vacant.
If your occupancy rate is very poor, you may have the problems to pay back
the loan. That is the ‘vacancy risk’.

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Hidden Defects : Risks in private real estate investment in Japan (Part1)

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There are risks associated with any investment – loss of capital, finance, leverage and liquidity risks and so on.
Not like buying the paper assets such as REITS, many of these are only relevant to the direct investment (where the investor invests, owns and has control over the real estate asset).
This article will highlight the main risks associated with investing in real estate in Japan and provides commentary on how to analyse and mitigate these risks.
Today I am going to discuss the risks at time of acquisition.
Unlike regulated industries such as accounting and financial planning, working for a property company (as distinct from working as a traditional real estate agent),
does not require a great deal of education, experience, or study prowess. Marketing investment property requires nothing really but the ability to sell.
That is one of the reasons why there are unlicensed (often rogue )
‘property consultants’ in Japan.
Engaging in the marketing activity to lure the investors without holding a license is against the
Building Lots and Buildings Transaction Business Law. If your consultant or agent do not hold
the license, your contract is not protected by the said law.
For more information, please see my post on February 11, 2018.
Are there any rogue real estate agents in Japan ?
At the end of the day, even the good agents cannot guarantee the success of the investment and thus investors must learn the risks and returns
before they make a investment.

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