Life in Japan blog - 4 –Real estate trends in central Japan, the effects of decreasing birthrate

The decrease in household number and population in the Kinki (近畿地方) (Kansai) region of Japan is more significant than in other central regions or the capital. There are concerns about a medium, long-term real estate demand shrinkage. On the market, rental real estates supplied younger generations from household divisions and families for long time, but following economical stagnation and low birthrate problems, such a market, compared to the capital region where there is population inflow, shows slowdown symptoms. On the other hand, while then number of owned houses and on sale properties under construction decreases, the number of rental estates under construction, due to reasons such as the inheritance tax measure, increases and this results in excess demand in various areas.

We can say that basically everywhere in the Kinki of Japan, the real estate market is dull

In order to be able to react to various needs on the Japanese real estate market, there should be a well balanced state between owners and renters, therefore there is a desire for something which generates new demand. In the following article I will introduce the situation of the Kinki real estate market and also the new trends of the Japanese rental real estate businesses. Since the demand on the real estate market is strongly influenced by the number of households, we have the grasp how this number will evolve in the future.

According to official Japanese surveys in the Kinki region (2 big cities, 4 prefectures) the 8.830.000 households will decrease to 8.550.000 from 2015 to 2030. If we look at the details, the number of single households significantly increases everywhere in Japan, so does the number of single parent single child households. Up to now, parents living with children making up families were considered as the standard household model, but they don’t reach 30% of the whole anymore and clearly household miniaturization will advance in the future. Considering the 2030 year point, it will only be Shiga prefecture (滋賀県), where the number of households increases, but in the same time single households and single parent households as a result of household miniaturization is also the most significant in Shiga. Japanese experts think that the thing in the middle is that while Japan struggles with problems caused by population aging, there are more and more old family members living together with the family.

If we look at the current Japanese rental real estate market, we might have a strong excess supply feeling, in Kyoto, where the vacant house rate is the lowest, it is 16.5%, in Nara it is 21.6% and in Wakayama prefecture it is 23.3%.

In Osaka there are more than 420.000 unoccupied houses to be rented out. By doing a simple calculation, there is one unoccupied estate for every 4-6 estates in the Kinki region and Japanese real estate specialists think that due to the shrinkage in household number the excess supply will be even more severe in the future. If we have a look at the Kinki Reins data, we see that the number of lease contracts signed increases, however the rent amount seems to be less and less.

In the Kinki region, the average rent per sq. m in 2016 from April to June was 1779 yen, which is 3.9% lower than before (2008 April to June) the collapse of Lehman Brothers. Similarly form April to June 2016 in Osaka it is 2005 yen (-3.6%), in Kobe 1850 yen (-3.1%) and in Kyoto 1897 yen (-6.2%). In Osaka from 2013 the fall in rent seems to stop and starts to increase slowly, but in Kyoto and Kobe the market crawls sideways, therefore we can say that basically everywhere in the Kinki region of Japan, the real estate market is dull.

If we have a look at the Japan Property Management Association’s survey which has been carried out to reflect the occupation rate city by city, we can see that assignment management and sublease rents are improving but if we compare it with capital regions of Japan, the occupation rate is restoring slowly. Furthermore the number of non-payers in the Kinki region increases somewhat at the beginning of the month, but after two months payments are collected due to the strict payment management system.

The average rental period for singles and students is 2 to 4 years, 4 to 6 years for families and more than six years for elderly people. While the number of singles and students representing the former rental demand layer on the Japanese real estate market decreases, the number of foreigners and elderly people renting for the same period of time, increases and Japanese real experts are expecting that this will restore the balance on the market. Although elderly people in the Kansai region of Japan tend to rent for relatively long periods, but it is noteworthy that if one could establish a system which would hinder market instabilities, we could ensure long term stable occupations.

In the following I will introduce the factors surrounding the Japanese real estate market.

What is the My Number system?

Japanese citizens were informed of the My Number system in October 2015, it became effective in January 2016 and real estates rental businesses have to use it from then.

My Number is basically a number, which is assigned to every citizen, thus they can treat various issues like insurance, tax and disaster related cases in various public offices uniformly.

Japanese experts expect that My Number system will increase the effectiveness of every day administration and using it they we’ll be able to prevent inappropriate tax evasion and unfair payment cases.

Considering a simple rental real estate case, if a legal entity rents out a company owned house or a sublease contract is signed, if the total yearly rent exceeds ¥150,000 (excluding companies executing agency or introductory tasks) legal documents (payments regarding real estate utilization) have to be submitted to the tax office. The previously mentioned My Number has to be on these formal documents. In a general management case the company renting the property has to obtain the My Number from the owner. The management company can help in this case. The management company is entrusted by the company renting out the property to obtain the owner’s My Number.

Unavoidably, in some cases an assignment contract has to be signed. In case of a sublease, the My Number has to be obtained from the owner, it has to be written on the official document, and has to be submitted to the tax office. When obtaining the My Number, one has to present his number and another document to prove his identity, and if somebody privately rents out his property, the persons receiving the payment has to submit his number, address and name which is monitored strictly. It is already possible to fill the number on the official documents and documents regarding payments arising from January 2016 need to be submitted by 31 January 2017.

I have already presented that the level of unoccupied rental objects in the Kinki region is very high. Autonomous organizations all around Japan are starting to deal with the issue. In Kyoto, they are developing area coordination type empty house stimulation projects and coordinators (experiments with real estate educational background) receiving help from the city are trying to match empty house owners to people looking for accommodation. As everybody knows, there are many houses in Central Kyoto remaining from pre-war periods, but there are also many unused objects that cannot be matched with modern lifestyle.

In case of the projects mentioned above, local autonomous organizations along with the coordinators are helping to prepare empty house documents, research the intention of the house owners, furthermore they create rules regarding empty houses in the area and also distribute information to tenants about empty house maintenance, management and restoration.

The city of Kyoto helps to introduce coordinators and also provides aid to support various activity costs. Up to now, houses in Kyoto served as second houses for people living in Tokyo and alley houses that cannot be reconstructed were used as guest houses, experts think that the original owners will move in again. Houses in Kyoto exceeding certain size are also used as share houses. A similar trend is that deteriorated row houses in Osaka from pre-war periods are being activated, and something alike is expected to happen with general deteriorated wood structure apartments.

In Wakayama prefecture, where the number of empty houses is the largest, putting the retirement of the baby boom generation and the intention of metropolitan citizens to live on the countryside in the background, in 2008 „Countryside Life Wakayama Promotion Council” (田舎暮らし応援県わかやま推進会議) was established. 86 private organizations along with 29 towns are dealing and promoting issues like migration and living in secondary areas. They consistently provide empty houses in response to migration, offer renovation aids to owners and introduce empty accommodations to people willing to live on the countryside.

The council mentioned above, cooperating with local business organizations, the countryside living residential collaboration carries out matchings between migrants and owners. In order to satisfy the needs of both the owners and tenants, they activate fixed term rental systems and also create standardized contract forms by adding countryside living support contract elements.

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In the previously mentioned Wakayama prefecture case, their are numerous tenants willing to renovate their own house. In the previous years, not only the number of completely restored estates rented out increases but also accommodations refurbished by the tenants are getting more and more numerous.

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What is the DIY system?

In the Ministry of Land, Infrastructure, Transport and Tourism they have presented a new way of renting out real estates, which has been christened to DIY (do it yourself). In case of a DIY rental, the owner does not refurbish the object, the tenant does and obviously the rent is lower then what the market dictates. Since there has not been a single case of a DIY previously, the Ministry of Land, Infrastructure, Transport and Tourism is creating and new contract form. In such contracts small-scale renovations ( wallpaper changes, structural wall placement and so on) on the expenses of the tenant are mentioned and basically three types of documents (rental contract, agreement regarding renovations and agreement) are made.

In the rental contract, the circumstances of a special DIY renovation are stated and the conditions regarding the rent and the real estate are also established. In the agreement regarding renovations the details (objects, original state restoration, cost calculation, etc) of a DIY construction are clarified. The rights of the tenant and the owners are made clear in the agreement.

The Ministry of Land, Infrastructure, Transport and Tourism has created a guidebook which contains the details of a DIY rent and also talks about how we should think about it. The guidebook also contains the way to reach the contract and there is a contract form as well.

Besides, there is a new way of thinking in the business world about partial rents.

In empty houses it is common that the inner parts are used to store household belongings or luggage, which makes moving around very difficult. In such cases, it happens a lot that the property as a whole is not rented out, but only a portion of it is occupied by the tenant while the owner keeps using the storage rooms.

The owner has to obviously solve the problem of isolation (keys, other management issues), so that the tenant can occupy a fully separated place. Nowadays there are many debates around self-catering accommodations, however if this situation stays the same there will be many options to choose from both for the owners and for the renters.

In the following few years, there will be numerous residential forms emerging on the Japanese real estate market. Moreover, as a result of the popularization of fixed term rental contracts, the number of relocations, guesthouses, share houses, monthly mansions, and apartments with furniture and electronic appliances are increasingly adopted.

Not only big companies but middle to small size businesses are also dealing with sublease cases, therefore the rent paid to the owners are separated into fixed rent guarantee form and a part which depends on the actual rent performance. The amount of risk emerging for the owner and the business entity is not the same, therefore both parties have to pay attention when signing these contracts.

Six years ago The Real Estate Transaction Promotion Center (不動産流通近代化センター) officially announced the new trends of rental and residential businesses and pointed out the following five points:

  • (1) We have to end optimistic market visions of “creating a new real estate means that somebody will move in”
  • (2) The foundation of a stable business model where rental management businesses are specialized on specific areas and operating there as small or middle sized businesses
  • (3) The necessity to professional attitude for management businesses and the capability of appropriate reaction to market changes
  • (4) Increasing the degree of satisfaction of tenants as customers
  • (5) Clarifying the target market of families, women, elderly people and foreigners

These points can be used as tips in the future, especially point number one and five are useful to predict the structure of a future market. Above all, it would be necessary for management businesses and owners to create an attitude, which can react to market changes, prioritizing middle and long terms, instead of overreacting the changes of the tax and law systems.

In the Kinki region of Japan where aging population and decreasing birthrate advances, a new positive structure, which can react appropriately to new market needs is desired.

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