Sub Standard

CIMG3720Last year we wrote a Home Truths column about real estate schemes being promoted to property owners whose legacies would be subjected to higher inheritance taxes under new government rules. Since the government also is in thrall to the construction industry, it offers tax cuts and deductions to people who build on their property or improve it. The focus of our report was on rental apartment buildings that property owners could have built by companies that would then manage them for the owners, thus killing two birds with one loan: greatly reducing the inheritance tax burden for the owners’ children, and bringing in income from the property itself.

However, according to a special report that NHK aired a few months ago, these schemes have turned out to be a great deal of trouble for property owners. Typically, a real estate company gets a landowner to build an apartment building on his piece of land and helps the landowner secure a loan. The company then guarantees a certain amount of “rent” to the landowner for the next thirty years and subleases the apartments. The company does all the work: solicting tenants, maintaining the building, collecting rents, etc. The owner simply pays for the structure and sits back and collects money. Or, at least, that’s how the scheme is sold.

The NHK program profiled an elderly farm couple living in Gunma Prefecture. Though both are in their 70s, they continue to work the land, but don’t have the energy to work all of their land any more. However, if they let part of it go fallow, the property taxes for that portion will go up. And then there was the inheritance taxes to think about when they died. Ten years ago they were approached by a real estate company who had a plan that would solve all their problems and set them up with a monthly income for the rest of their lives. All they had to do was take out a ¥100 million loan to build an apartment building on the unused portion of their land. They took the offer.

As one neighbor told NHK, it was strange to see a new apartment building in the countryside “so far from a station.” But as a matter of fact, NHK found that the real estate company had been quite successful in this particular neck of the woods, because there was more than a few sublease-style apartment buildings constructed on farmland. Consequently, there is competition for tenants, and at present 18 of the couple’s units, or one-third of them, are vacant. In March, the management company that works for the realtor told the couple that they would be reducing the amount of “guarantee” they paid them for renting out the units. “I don’t remember their saying they would ever reduce the guarantee,” said the wife.

Her memory didn’t fail her. In the contract, the couple is supposed to be paid the same monthly fee every month for 30 years. That’s why they call it a “guarantee.” However, if you read the confusing fine print, it says that the company can change the amount paid “under certain circumstances.”

NHK talked to other people who had bought into similar schemes, and almost all of them complained about the same thing. The National Consumer Affairs Center has received 245 complaints in the last four years about these kinds of sublease arrangements, and always about the same thing: Once the management company can not find enough tenants, they reduce the guarantee, in most cases to an amount below that which the owner is paying to the bank for the mortgage. As one former employee of such a real estate company told NHK anonymously, “there is never a demerit for us or the loan company” with such a deal. Any losses are “only borne by the owner” of the property. The situation will only get worse since the “supply” of tenants is dwindling. However, there is no short supply of older property owners who are afraid of not being able to pass on their land to children or relatives. What they end of passing on, however, is just more debt.

Addendum, June 27, 2015: Yesterday, the builder Sekisui House announced that its revenues for the first half of the year were higher than they were last year, and the main reason was their success in building rental apartments for landowners who wanted to reduce their taxes. In line with the above-mentioned blog post, they said the sub lease business was booming, and that the tenancy rate for their new buildings was 96 percent, an amazingly high number, even for the major cities. If this number is correct (pardon us if we’re a bit suspicious), then Sekisui or whoever manages the buildings they sell must employ some of the greatest real estate salesmen in the world; or, they only deal with buyers who have property right next to train stations.


  1. Troy · July 3, 2015

    Shows the supply of renters has declined 10% nationally since 2000.

    This is a dynamic that has turned real estate on its head, and will continue to do so, even reaching the big cities this century eventually.

    Every OECD nation outside of Germany and France has bankrupted itself on land speculation, Japan being the original poster child from the Showa boom and following Heisei aftermath.

    Many if not most consumer goods have fallen in price thanks to technology, but housing seems to only go up & up.

    Japan being able to escape this treadmill of housing taking everyone’s wages is a hopeful future for me.


    • 猫に小判 · October 8, 2015

      It’s actually working age population (defined as ages 25-54) which has declined 10% since 2000 in Japan, and that is in line with the general aging of the population. It’s not clear from this fact that the supply of renters has declined commensurately.

      The point about technology is an interesting one, however. I would argue that many forms of technology have made housing more expensive rather than less so. The arrival of Airbnb, for example, has meant that regular contracted renters can be efficiently displaced in favour of temporary renters — in many neighbourhoods (chiefly in western europe and north america, but increasingly elsewhere) this effect is not small. This pushes up rents (as long-term rental units are withdrawn from the market) but also pushes up property prices as the economic utility of property increases. Technology has generally benefited landlords in other ways — web listing services mean that every property can immediately be exposed to the widest possible pool of potential renters, effectively increasing competition amongst those forced to bid for property rights. Properties in desirable areas (close to schools and transportation) now come on the market and vanish again with astonishing speed, leaving prospective tenants very little time to comparison shop or make a considered decision.


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