Evaluating Investment in Old Detached Houses in the Modern Era (2) The Nuclear Family Era is Over! – Lifestyles and Demographics

Akiya Lab Articles | Roopt (Makigumi)

Makigumi, which operates Roopt, regularly researches and publishes columns on case studies and other information related to the revitalization of vacant houses.

Regarding real estate valuation, we will first discuss the changes in demographics in Japan and rural areas, and lifestyle changes in the post-COVID era, which are essential to understand.

Introduction

Noi: Hello everyone, I'm Noi, the host of this channel. In this video, we'll be talking to Mr. Ueda, President and CEO of Gaiax, about evaluating investments in old detached houses in the modern era.

Ueda: Thank you for having me.

Noi: This time, over several sessions, we will discuss the current social conditions in four topics to create future models. The first is lifestyles and demographics, the second is workation and remote work, the third is the sharing economy, and the fourth is the evolution of technology. This time, we will talk about lifestyles and demographics.

What kind of lifestyle?

Ueda: Regarding how to evaluate real estate, and old detached houses, in the modern era, lifestyles have truly changed compared to 10, 20, or even 30 or 40 years ago. To put it simply, the reality is that financial institutions' lending attitudes haven't changed that much. I'd like to talk a little about how lifestyles have changed, which is really quite obvious.

First of all, before even considering lifestyles, the number of people living is decreasing, and in addition to that, considering who those people are, the active age demographic is steadily declining.

This is from the Ministry of Health, Labour and Welfare's website, a slightly older article, showing the projection of the working-age population from around 2015 onwards. This working-age segment will continue to decrease.

This is the city of Taketa. I passed through it once when I visited Oita. It's a pretty ordinary rural town, but as of 2020, the population aged 15 to 64 is 8,675 people. As the population itself decreases, and this proportion also decreases, there's a double impact, and in just 25 years, the population aged 15 to 64 is projected to almost halve. I believe this is the reality of rural areas.

Indeed, a decreasing population is a significant negative for property utilization. It's obvious that if there are no people, even a brand new, sparkling property will have no one to use it, ultimately leading to no yield and no collateral value. So, while everyone is probably concerned about demographics, I believe it's something we must continue to pay attention to in the future.

Therefore, we also need to consider where the population will gather, but let's put that aside for a moment. Given the people who are there, what kind of lifestyles do they have? To talk a little about that, in the past, people would marry and live as a family of three or four. This was the so-called nuclear family. Unfortunately, divorce is now commonplace in society. It's commonplace today, and in another 10 or 20 years, it will become even more so. If we look at Europe, there are cases where same-sex marriage is recognized and cases where it isn't, but in any case, many people live together without forming a partnership or getting married, simply cohabiting. In addition to families with children and those without, there are also various patterns of families emerging, such as living with children from a previous marriage.

As a result, the old pattern of marrying once, managing life as a couple for 40 or 50 years, and then applying that rent to the situation, will likely become rarer in the future.

If you have a family and children, and they go to elementary school there, it's highly probable that you'll live in that area for a long time. However, as the degree of freedom increases, I believe the likelihood of moving will also increase. In that sense, it's a given that renting is better than buying, but I think this will become even more widespread in the future.

Regarding Evaluation

Ueda: So, with such lifestyle changes, how will real estate be evaluated? I'd like to move on to that. In this era, Noi, how do you think the evaluation will change from the previous stance of financial institutions?

Noi: That's right. As we discussed last time, I think there's a tendency to evaluate people now. However, it's not simply a matter of lending to someone because they have money. I think we need to consider their personality, their changing lifestyle preferences, and so on. Listening to you now, I feel that evaluations will need to take these factors into account.

Ueda: Yes, exactly. The first point is that we must shift from evaluating people and lending money based on a property being worthless, to a different approach. The second point is that it used to be common for everyone to buy their own home, but increasingly, renting is becoming the norm.

If you rent, who do you think owns the house?

Noi: If you rent, there's a separate building owner, right?

Ueda: That's right. For example, who?

Noi: For example, people who own such properties, like apartments or detached houses, and run it as a business by renting them out?

Ueda: Yes, exactly. Instead of taking out a loan to buy a house to live in yourself, people are buying real estate to rent out to others, or for others to rent. These are investors. In some cases, someone might have bought a house they live in, and then bought another house for themselves, but the old house becomes an investment property, or a property that generates yield, which they rent out to others. I think this kind of style will increase.

In the future, people will buy investment properties in this way, and ordinary people will rent those investment properties to live in. However, the evaluation of these properties has been very low until now.

Actually, when there's an old property and I think about buying it to live in, the amount I'd pay is different from the amount I'd consider spending if I were to rent it instead of buying it, even if I'd still live in it. That's the difference.

When buying versus renting, for example, the tolerance for dilapidation is different.

For example, if Noi were thinking of buying a bicycle, she'd buy a new one for 100, but she wouldn't want to buy this old, beat-up bicycle. Honestly, it's too old. She might buy it for 20 if it were used, but she wouldn't really want to. That's the kind of feeling. On the other hand, what if she were to rent it for a month? For example, if renting a new car costs 10, how much would she be willing to pay to rent an old bicycle for a month?

Noi: If I'm renting an old bicycle, it's not going to be mine, so as long as it fulfills its purpose of getting me around faster than walking for that month, there won't be a huge difference in the amount I'd pay, whether it's new or old. I wouldn't really care if it's new or old, even if the price is slightly higher or lower.

Ueda: That's right. People tend to have those feelings. When buying and selling buildings, especially for personal residence, new ones are very expensive, and as they get older, the price drops sharply. However, when it comes to renting, while older properties do have lower prices, they don't plummet as drastically. The feeling is, if a new property is 100, it might be valued at 20 for sale, but perhaps 40 for rent. That kind of sentiment exists.

The problem is that if an investor buys a property and rents it out, it can generate a sufficient return of 40. But if it's only valued at 20 for sale, then only 20 can be lent.

As for whether there are people who rent continuously, as I mentioned earlier, this is emerging due to changes in lifestyle. The number of people who rent as a family and live in a rental for about 10 years is steadily increasing.

To summarize the above, the current depreciation of old properties, whether 30 or 50 years old, is too severe. A higher valuation is acceptable. However, it's important to note that when living in a property, if the plumbing, kitchen, toilet, and bath are very old, even if someone is renting, they might still be reluctant. I think that's a common feeling.

Realistically, what about the renovation costs for those parts? For a 30 to 50-year-old plumbing renovation, it might be in the range of 5 million yen, perhaps. I think 5 million yen would be sufficient, but it's necessary to factor in those costs. However, once those costs are factored in, I think it should be fine.

In fact, if you look at the rental market, for example, if a 3LDK rents for 100,000 yen, that's 1.2 million yen over 12 months. Then you calculate the yield. What do you think? If it's 20%, that's 6 million yen for 5 years. If it's 10%, that's 12 million yen. However, the renovation cost is a maximum of 5 million yen, but it could be around 3 to 5 million yen. The amount discounted for that estimated cost definitely means the property has value.

Even for a property that people say, "No one would want to buy this," it's perfectly fine to recognize that value, for example, 9 million yen (12 million minus 3 million for renovation costs), starting today.

Noi: You mentioned that due to changes in lifestyle, the points considered in evaluation will change. How can those on the evaluation side actually verify this?

Ueda: Honestly, if an investor thinks it's worth 9 million yen, they'll go buy it for 9 million yen. In some cases, if buying it for the full 9 million yen wouldn't be profitable, they might go buy it for 5 or 6 million yen if they think it's worth 9 million. But when they take it to the bank, the bank says, "No, this has zero value. Do you think it will be worth 9 million if you resell it? Well, at most 2 million yen." And so, they end up buying it with their own savings, reluctantly, without borrowing a single yen from the bank. That's the current situation.

Noi's question, "Is it really worth 9 million yen?" is something that will only become clear after 5 or 10 years of management, but I think we are moving towards a society where the possibility is high.

Noi: I see. Understood. Mr. Ueda, thank you for your talk. This time, you spoke about lifestyles and demographics from the current social conditions for creating future models. Next time, Mr. Ueda will talk about workation and remote work. Please be sure to watch that video as well. Thank you for watching this time.

Ueda: Thank you.

Source: Akiya Lab