Business / Corporate

House-flipper takes advantage of Japan's 8 million-plus empty homes

by Keiko Ujikane and Shingo Kawamoto

Bloomberg

More than 8 million homes lie abandoned across Japan, a symptom of the declining population and people’s migration to major cities.

For one company, this isn’t just an ominous demographic signal, it is also a business opportunity.

Katitas Co. is a house-flipper, deploying a business model that would be humdrum in other countries but in Japan is considered innovative. That is because people in the country have a deep-seated aversion to second-hand homes.

Katitas buys old properties where the buildings are often considered worthless, renovates them on the cheap, and sells them to people in rural areas who don’t have the means to buy new homes. Its shares have risen more than 60 percent this year as investors bet the model will yield steadily higher profits.

“There’s big potential in this business,” Katsutoshi Arai, Katitas’ president and chief executive officer, said in an interview. “People who live in rural areas but can’t afford new houses have no choice of quality, affordable housing.”

A record 8.46 million homes were unoccupied in 2018, according to a government report in April. The number, which represents 14 percent of total residences, is only set to rise, according to Katitas. “It’s clear that the number of vacant houses will surge,” Arai said. “There’s a big pool of properties that we can buy.”

Houses in Japan traditionally haven’t been built to last like those in the U.S. or Europe. The country’s wooden homes have typically been depreciated to zero over about 20 years and often knocked down and rebuilt. Sales of pre-owned houses make up just 15 percent of the market, compared with about 83 percent in the U.S. and about 88 percent in the U.K., according to a land ministry report.

Katitas mainly buys single-family houses that are on average 30 years old in regional towns. It uses a standard renovation toolkit — such as putting in new floors, kitchens and toilets — and sells them for about half the price of a comparable new home, according to the company. Buyers are usually people in their 30s to 50s with annual incomes of ¥2 million to ¥5 million.

“The company’s business model is really good,” said Shota Watanabe, a fund manager at stock picker Rheos Capital Works Inc. in Tokyo, which holds Katitas shares. It is likely to have “stable and steady growth.”

Katitas, which is based in Gunma Prefecture, posted operating profit of ¥9.1 billion for the fiscal year ended March, more than double the level three years earlier. Analysts expect that to increase to ¥12.4 billion by the year ending March 2021, according to estimates compiled by Bloomberg.

Of 10 analysts covering the stock, nine rate it a buy while one says hold. On average, they expect shares to rise a further 14 percent over the next 12 months. The company, which has a market value of about ¥161 billion, counts Baillie Gifford & Co. and Matthews International Capital Management among its biggest shareholders, according to data compiled by Bloomberg.

Home-furnishing retailer Nitori Holdings Co. owns about 34 percent of Katitas after acquiring the stake from Advantage Partners Inc. several months before the private equity firm offloaded the rest of the company’s shares through Katitas’ December 2017 listing. Katitas has started selling second-hand houses furnished with Nitori’s sofas, tables and other items. Nitori said the company chose Katitas as a partner because the firms have similar management philosophies.

Arai joined Katitas in 2012 when it was still owned by Advantage Partners. His mission was to engineer a turnaround at the firm, which was struggling at the time. He instituted the model of buying empty homes directly from owners, rather than the previous method of purchasing houses in court auctions. The supply of housing in auctions had been drying up and becoming more expensive.

“Katitas’ strength is its ability to assess properties and the risks associated with buying them, as well as its renovation expertise,” said Shinichiro Kita, a senior partner at Advantage Partners who brought Arai to Katitas. “There are thousands of potential homebuyers.”

One analyst has turned more cautious on the stock. SMBC Nikko Securities Inc. senior analyst Junichi Tazawa lowered his rating to neutral from outperform in May, saying Katitas is looking less cheap within its sector after the rally this year. Katitas has risen 61 percent in 2019 and trades at 22 times estimated earnings, versus 14 times for the Topix Real Estate Index.

Arai has an unconventional background for a CEO. At the age of 28, he ran for the Tokyo Metropolitan Assembly, losing by a small margin. He then worked as a secretary for a member of the Diet before moving on to roles at management consultancy Bain & Co. and Recruit Holdings Co.

Arai says Katitas is targeting selling 10,000 houses per year sometime in the next 10 years, up from 5,352 homes last fiscal year. In the long run, he’s seeking to increase that to 50,000 homes.

“We aren’t just a company that buys, remodels and resells second-hand houses,” he said. “We want to provide people with a better life.”

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