Valuation of old detached houses for investment in the modern era (2) The nuclear family era is over! – Lifestyles and demographics

Articles published in Akiya Lab | Roopt (Makigumi)

Makigumi, which operates Roopt, constantly researches cases and other information regarding the revitalization of vacant houses and publishes them as columns.

When evaluating real estate, it is first necessary to understand the demographic trends in Japan and its regions, as well as changes in lifestyles after the COVID-19 pandemic.

Introduction

Noi: Hello everyone, I'm Noi, the host of this channel. In this video, we will be talking with Mr. Ueda, President and CEO of Gaiax, about the valuation of old detached houses for investment in the modern era.

Ueda: Thank you for having me.

Noi: This time, over several sessions, we will be discussing the current social situation 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 be discussing lifestyles and demographics.

What kind of lifestyle?

Ueda: Regarding how to evaluate real estate, especially 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 lending attitude of financial institutions hasn't changed that much, which is the reality. I'd like to talk a little about how lifestyles have changed, which is really a matter of course.

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

This is from the Ministry of Health, Labour and Welfare's website, an older article, but it's a forecast 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 then this composition ratio also decreases, there's a double impact, and in just 25 years, the population aged 15 to 64 is projected to almost halve. I think this is the reality of rural areas.

A decrease in population is a very negative factor 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, resulting in no yield and ultimately no collateral value. So, while everyone is probably concerned about demographic trends, 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, first, 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, so in another 10 or 20 years, it will become even more so. If you look at Europe, there are cases where same-sex marriage is recognized and cases where it is not, but in any case, many people live together without forming a partnership or getting married, just cohabiting. In addition to families with children and families without children, there are various patterns of families emerging, such as living with children from a previous marriage.

As a result, the old pattern of getting married once, managing life together 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, the probability of living in that area for a long time is higher. However, as that freedom increases, I think the likelihood of moving also increases. 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 Valuation

Ueda: So, with such lifestyles, how will the evaluation of real estate change? I'd like to move on to that. In such an 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 saying, "This person has money, so it's safe to lend to them." I think it will become an evaluation that takes into account their personality, changes in their desired lifestyle, and so on. That's what I thought after hearing your story.

Ueda: Yes, that's exactly right. The first point is that we need to shift from evaluating people, where the property is junk and money is lent based on that, to a different form. The second point is that it used to be common for everyone to buy their own home, but it's becoming increasingly common to rent and live.

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, someone who owns such properties, like apartments or detached houses, and makes a business out of renting them out?

Ueda: Yes, exactly. It's not about taking out a loan to buy a house to live in yourself, but rather buying real estate to rent it out to others, or for others to rent it. These are so-called investors. In some cases, you might have bought a house, then bought another house for yourself to live in, but the old house becomes an investment property, or a property that generates a yield, which you rent out to others. I think such styles 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 because I'll live in it, the amount I'd pay is different from the amount I'd consider if I were to rent it as a tenant, even if I were to live in it. The degree of willingness to pay is different.

When buying versus renting, to put it simply, the tolerance for shabbiness is different.

For example, when Noi thinks about buying a bicycle, she might buy a new one for 100, but she wouldn't want to buy a shabby one like this. Honestly, it's too shabby, so while a new one would be 100, she might be willing to buy a used one for 20, even if she doesn't really want to. Let's say that's the vibe. On the other hand, what if you were to rent it for a month? For example, if you'd pay 10 to rent a new car, how much would you 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 become my own, so as long as it fulfills its purpose of getting me there faster than walking for that month, there won't be a huge difference in the amount I pay, whether it's new or old. I don't really care if it's new or old, even if it's a bit more expensive or cheaper.

Ueda: That's right. People tend to have those kinds of feelings. When buying and selling buildings, especially for personal use, new ones are very expensive, and as they get older, the price drops sharply. However, when it comes to renting them out, of course, older ones have lower prices, but do they drop sharply? Not really. The vibe is that if a new building is 100, it might be valued at 20 for sale, but for rent, it might be valued at around 40. I think that kind of vibe 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, and so on.

Are there 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. They can be valued much higher. However, it's important to note that when living in them, if the water facilities, such as the kitchen, toilet, and bath, are very old, people might still be reluctant to rent, even if they say they will. I think that's a common feeling.

Realistically, what about the renovation costs for those parts? For water facilities that are 30 to 50 years old, it would probably be in the range of 5 million yen, wouldn't it? I think 5 million yen would be enough, but it's necessary to factor in those costs. However, if those costs are factored in, I think it should be fine.

Actually, 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 how much will it actually cost, between 3 million and 5 million yen? The amount after deducting that estimated cost definitely has value for that property.

Even for properties that people say, "No one would buy this building," it's definitely okay to recognize at least that much value, for example, 9 million yen (12 million minus 3 million for renovation costs), starting right now.

Noi: You mentioned that the points to be considered in evaluation change due to changes in lifestyle. How can those who evaluate 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 isn't 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 when you resell it? It'll probably only be 2 million." And so, they end up buying it with their own savings, without borrowing a single yen from the bank, which is the current situation.

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

: I see. Thank you, Mr. Ueda, for your talk. This time, we discussed lifestyles and demographics from the current social situation in order to create future models. Next time, Mr. Ueda will talk about workation and remote work. Please watch that video as well. Thank you for watching this time.Noi

Ueda: Thank you very much.

First published: Akiya Lab (2024 - now integrated into this site)