Many Japanese people are wary of investment as a means of growing their savings. There are a variety of reasons for this caution, so most keep their money in a bank, gaining almost no interest in the process, in the hope that they won’t lose any in the long run. However, some salaried workers who understand that their state pensions won’t be enough to live off of when they retire do invest money in real estate, despite the fact that Japanese real estate has seen limited growth ever since the inflated asset bubble burst in the early 1990s.

Lately, there have been news reports of real estate investment scams. One is for so-called share houses. Originally, the term “share house” was used in Japan to describe a housing situation common in the U.S. and Europe but uncommon in Japan: apartment or house sharing by a number of unrelated people who split the rent and utilities. In such cases, each tenant has a bedroom and all share common areas such as kitchens, bathrooms and living rooms. One of the reasons this style of living did not catch on in Japan is the compact physical nature of Japanese housing, but more often landlords simply did not and often still don’t want to rent to multiple numbers of unrelated persons.

Nowadays the term “share house” covers various kinds of accommodation in Japan. Some are modernized versions of what used to be called simply “apartments” after World War II: separate, distinct living spaces all under one roof, with a shared kitchen and toilet facilities. In the 1950s and ’60s, these apartments usually didn’t have baths, so residents had to use public baths. Now, they come with showers. What they often don’t have is a shared meeting area like a living or dining room and the kitchens tend to be strictly utilitarian. There’s only enough room to prepare a meal, which will likely be eaten in the individual’s room.

In other words, such share houses are not set up to be communal in the sense that the residents also share lives; though, of course, they can if they are so inclined.

The lack of a communal atmosphere, however, is not intentional. It is simply a result of the share house’s main reason for existing, which is as an investment. Salaried employees are lured into deals wherein they finance the construction of a share house and the real estate company manages the business through a sublease arrangement, collecting rent from tenants that the owners use to pay off their loans.

Since these kind of share houses can cost upwards of ¥100 million to build, the financing can be tricky for younger salaried employees, and the mortgage payments will likely last their entire careers, but once the building is paid for, all rental income is profit, and can help support the owner’s retirement. Most real estate companies also say that share houses are so in demand in major cities such as Tokyo that investors can start making money right away, even while paying off their loans.

As with other, similar real estate investment schemes, share houses are now scrutinized as being not as good an investment as realtors claim. An article published by the Asahi Shimbun says that in January some 800 share house owners in Tokyo are currently having trouble making their loan payments due to insufficient rental income. About 700 made their investments through a realtor called Smart Days, which stopped passing rent money on to the owners in January.

Asahi reports that Smart Days may have falsified information on the documentation the owners submitted to receive their bank loans, without the applicants’ knowledge. Apparently, some investors called Suruga Bank, the lending institution in all the Smart Days cases, to explain that they would have to be late with payments because they had not been receiving their rent money. That’s when they found out about the falsification of information on their loan applications. In some cases, savings balances were increased tenfold so that the loan would be approved.

It seems that Suruga Bank and Smart Days worked on the scam together. Last week, Asahi reported that the number of dissatisfied Smart Days investors had risen to 1,000. It’s likely that no one would have uncovered the scam if the share houses were fully occupied, but they turned out to be less popular than Smart Days made them out to be.

A real estate investment consultant who runs the blog Invest in Life found that vacancy rates for share houses are quite high. In Tokyo it’s about 55 percent. As with all rental properties in Japan, occupancy rates go up the closer the residence is to a train station, but the blogger discovered that even share houses located within five minutes of transportation had, on average, only a 53 percent occupancy rate. If the distance was 15 minutes, the rate dropped to 32 percent.

What Invest in Life found curious was that older share houses with higher rents had better occupancy rates than new share houses with lower rents. Share houses that were built in 2014 averaged a 47 percent vacancy rate and rents of about ¥57,000. Those built in 2017, however, had a 79 percent vacancy rate and average rents of ¥48,000. The reason, the blogger concluded, is that older buildings were situated in better locations, which could justify higher rents.

Share houses just don’t seem to be that popular and, again, that’s because they were built as investment properties, not as living spaces. For the amount of rent paid for a share house in Tokyo, a person can probably find a studio or one-bedroom apartment with its own bath and kitchen. In fact, individual condo units are a more reliable real estate investment than share houses or whole apartment buildings.

An October 2016 article in the business magazine Toyo Keizai explains that investing in a condominium will have slight returns, but it’s also more manageable. And while interest rates for investment properties are higher than those for properties in which the buyer will live, they’re still quite low. As with share houses, the investor can buy a condominium through a realtor who will manage the unit through a sublease arrangement. If the location is good, the vacancy rate should be very low. If the investor has a 25- or 30-year mortgage, the monthly payments would be relatively small and thus manageable if the unit becomes occasionally vacant.

The young people these kinds of deals target likely won’t see much of a return, but after 25 or 30 years they will own the condo and can rent it for income, live in it or sell it. What realtors don’t always mention, however, is that owners have to maintain the units, which adds costs. And after 30 years, they may have to renovate if other owners in the same building decide to do so.

As Toyo Keizai points out, people with high incomes often buy several properties with the idea of multiplying their investment return, but that multiplies risk as well. In cases where a property is not performing as anticipated, the investor may opt to sell it, but it follows that if the property is not popular with renters it probably isn’t going to be popular with buyers, so it may sell for a price lower than what the investor bought it for.

At the end of the day, in a real estate environment as unsettled as Japan, all investment properties, whether share houses or rental condos, come with risks that need to be carefully considered.

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

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