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Aota-uri: ‘green’ condominiums to be wary of

by Philip Brasor and Masako Tsubuku

Each year between 1990, when Japan’s asset bubble burst, and the 2007 recession, about 200,000 new condominium units were added to Japan’s housing stock. After 2007, the number dropped to about 100,000, but, depending on the year, anywhere from 50,000 to 70,000 of these units were built in the Tokyo Metropolitan Area. In contrast, during the same time period about 5,000 single-family houses were built in the Tokyo region every year. Condos have thus become the mainstream style for new housing in the capital region, mainly due to the higher cost of land.

Because people continue to gravitate to Tokyo, developers have no problem selling new condominiums in the area, even though there is a swelling inventory of older condos on the market. This undiminished demand partly explains the recent wave of data falsification revelations in the residential construction industry, which came about after one condominium in Yokohama was found to have faulty structural work.

Except for the Yokohama case, there has so far been no evidence that data falsification has resulted in bad buildings, but it does point to a general sloppiness that’s indicative of the corner-cutting, what’s referred to in Japanese as tenuki kōji, that often occurs in the residential field. The same thing happened in 2005, when it was found that one architect was using inferior quality steel to save money and time.

Tenuki kōji is a natural outcome of two common practices in the real estate trade. One is that developers in Japan usually use the same company to carry out both the design of a residential building and its construction. In most developed countries the two tasks are handled by separate firms, with the architect acting as a monitor to make sure construction follows proper regulations and procedures. In Japan, the company that supervises construction is also the party carrying out the construction, which saves the developer lots of money but also encourages tenuki kōji. (It’s notable that developers almost never use this business style for commercial buildings that they will occupy or own.)

The other problematic practice is aota-uri, which literally means “selling a green rice paddy.” In real estate lingo, it means selling homes — be they condominiums or detached houses — before they are finished, sometimes several years before they are finished. This sales style originated right after World War II, when the government housing authority estimated that more than 4 million units were needed right away. They built them as fast as they could, and until the late 1980s developers, both private and public, could sell anything they built. Since prospective buyers knew that land and housing prices were constantly on the rise, they were willing to sign contracts as soon as they could, even if the house or apartment was only at the blueprint stage.

The aota-uri method is extremely beneficial to the supply side of the housing equation. Developers can receive non-refundable payments even before construction begins, thus giving them capital to purchase land, pay for part of construction and, most significantly, ease the burden of borrowing, which is necessary to manage the money needed during the whole construction process.

In other countries it isn’t unusual for developers of subdivisions to use this sales style — a buyer chooses a design and orders a house built. When it comes to condominiums, however, it’s considered riskier since collective housing has more unknown variables. The buyers have to base their decisions on model units built on the ground, ones that are usually decked out in grander style than the units they will eventually receive. They are then is taken to vacant lots and compelled to imagine how the building will look. In other words, buyers cannot possibly know what a finished product will be like until it’s completed.

It’s less of a gamble for the developer, but only as long as construction stays on schedule and costs can be accurately predicted. In exchange for the initial payment when the contract is signed, the developer pledges to deliver the unit on a certain date, which means any unforeseen delays could cause the developer not to fulfill his side of the bargain. Moreover, the contract is for a set price, which means costs have to be projected carefully. Time and cost considerations are not a problem for post-construction sales, since the price of the condo is calculated based on what has already been spent. But if the developer misjudges the cost of an aota-uri condo, he could lose a lot of money. The builder is also under pressure to keep costs below a certain level, which can be difficult for projects that typically take two to three years from sale to completion.

Under such conditions, general contractors and subcontractors are more likely to cut corners and cover it up by falsifying data; especially now, what with material costs increasing and an acute shortage of construction workers.

Some experts think that aota-uri should be abolished. It hasn’t made sense since the end of the bubble era, when property values and prices of older condos started going down. If a developer can guarantee that all the units in a building can be sold, then there’s no problem, But in the early ’90s, building developers would often be left with unsold units, and there were many instances where condo owners sued developers because units of comparable size in the same building were being offered for lower prices than what these owners had paid through the aota-uri process.

A small group of major developers are sidestepping this problem by concentrating on tower condos in central Tokyo, which are popular and tend to sell out as soon as they go on the market. Tower condos require a huge investment even before sales activities begin. This is an important consideration for buyers because one of the supposed benefits of aota-uri for consumers is that it keeps condo prices down, but the system relies on big promotional outlays for model rooms, advertising and extra sales staff, all of which greatly add to the price of a property.

Philip Brasor and Masako Tsubuku blog about Japanese housing at www.catforehead.wordpress.com.