Article published on Vacant House Lab | Roopt (Makigumi)
Makigumi, the company that operates Roopt, is constantly researching case studies and other information on revitalizing vacant houses and publishing them as columns.
In this first video in the series, we will provide an overview of how older detached houses have been evaluated up until now, and what perspectives will be necessary going forward.
NoiHello everyone, this is Noi, who helps with projects at GaiaX and Makigumi. In this video, we'll be talking to Mr. Ueda, President and CEO of GaiaX, about the valuation of older detached houses for investment purposes in the modern era. Currently, vacant houses and older properties are not valued by financial institutions, but it is thought that the number of vacant houses and older properties will continue to increase in the future. What measures can be taken to ensure that such properties are valued by financial institutions? In this video, Mr. Ueda, the representative of GaiaX, which invests in properties that cannot be rebuilt, will talk about valuation models in light of the current social situation. Mr. Ueda, thank you for joining us.
Ueda: Thank you very much. GaiaX itself does some real estate investment, but as Noi just mentioned, we also invest in companies that invest in older properties, and I also personally look at various real estate investments, so I would like to share my opinions as an investor based on that experience, and I would be happy if financial institutions would take this into consideration.
NoiOkay, so let's get straight to the scope of this session.
UedaBasically, we don't deal with commercial buildings or anything like that. We mainly deal with properties that are priced at around 20 to 30 million yen at most, and in some cases, properties that are considered "negative assets"—not that they are assets that will lose money—where people ask us to dispose of them for a sum of money, like 5 million or 10 million yen. I think most of these properties are in that price range, around 5 million or 10 million yen. They are older buildings, detached houses, wooden buildings, and we tend to focus on properties in rural areas rather than in Tokyo. One important point is that we often deal with properties that have unfavorable conditions, such as properties that cannot be rebuilt. I would like to focus on these kinds of cases.
Noi: Now, regarding the outline of what the ideal situation should be, Mr. Ueda, could you please share your thoughts on how you think we should approach this?
Ueda: I'd like to talk about this in several videos, but first I'd like to give you an overview. Up until now, you've probably looked at real estate simply as real estate, thinking about how much this property is worth, or how much money you should lend because this property is worth this much. However, Makigumi, GaiaX, and other companies that GaiaX invests in don't simply look at real estate as real estate, but rather as a cornerstone for running their business. Specifically, they are involved in things like shared housing and short-term rentals.
When we evaluate real estate, our evaluation method is similar to what we've done before, in that we look at the basic value, or we look at how much value it could generate if used for a business, and we consider both of these factors comprehensively to make an evaluation. In practice, we adopt the higher of the two.
When we look at the amount of money circulating in the market, if the amount circulating in the market is higher, then it's not really something we need to get involved in. In fact, that's not really the theme of today's discussion, but when we look at it from a business perspective, if it's actually a treasure, then we adopt that value.
I'd like to briefly explain these two aspects of value—basic values used on a daily basis and how to assess business value—beforehand. Basic values are essentially the same as previous ways of thinking, so there's not much to comment on. However, even when it comes to basic values, existing thinking tends to underestimate the value of rentals. To put it another way, there's too much emphasis on building new properties, or buying land and building new properties. Nowadays, we should consider that properties can be used for rental purposes more often. In other words, if a property is suitable for rental, it doesn't need to be new; older properties are fine, and I think we should value the buying and selling of older properties in their current condition more.
In addition to the valuation of individual properties, I believe we should be thinking more about the overall business of a company or individual, not just the individual properties. This is also a problem, because valuing real estate is quite difficult, or rather, it's often based solely on the valuation of individual properties, which is problematic. When we look at it as a business, for example, if a company owns 10 properties and uses them to run a shared house or short-term rental business, or even if it's just rentals, we should be thinking more about what the overall balance sheet and profit and loss statement look like for the company.
NoiThank you. When evaluating a building, or an older detached house, you can't just look at the building itself. You also need to consider what kind of business is being conducted there, or is likely to be conducted there. Earlier, we talked about how the flow of money changes depending on who rents it, which creates another difficult problem. So, you have to look at various aspects such as the business, the local community, and who is running it, and evaluate it from all of these perspectives. I think it's a very difficult problem because you can't give a simple answer.
UedaFirst of all, I'd like to clarify how this has been evaluated in society so far. Noi, how do you evaluate this property, or to put it more precisely, taking out a loan for real estate is something that happens often in society, but in your daily life so far, Noi, where have you encountered discussions about financial institutions lending money for housing or real estate, whether or not they lend money, or how much money they lend? What kind of image do you have of it?
NoiI recall having some experience with this when my parents built their house, as they had borrowed money for it. I remember that they were quite strict about things like whether the loan would be approved unless there was a guarantee that it could be repaid, how the money would be used, and whether all the conditions for building the property were met.
UedaBy the way, how old was Noi at the time?
NoiThat was when I was about to enter high school.
UedaAre there 3 or 4 people in your family?
NoiThere are three of us.
Ueda: For three people. It's actually a very common sight in the world, a family of three taking out a mortgage, and then there's the discussion about how many years they should take to repay the mortgage, and I wonder if they'll be able to pay it off by the time the father is old enough.
NoiThat's right. I don't know if my father is joking or serious, but he always tells me that it's a two-generation loan, so I have to be the one to earn the money.
Ueda: That's right. I don't think it's strange at all to any of you, but I think this is just how the world is. What do you think financial institutions actually believe when they lend money?
NoiThe most important thing to look at is whether or not you can pay it back, right?
Ueda: That's right. Whether or not you can repay it depends on the case, but it often comes down to where your father works and whether he plans to continue working there permanently. That's the strange part.
Certainly, in the past in Japan, families like that were common, and it was common practice to lend money to such families through long-term loans to build new houses. It's certainly completely different now, but I wonder if financial institutions are still operating the same way? In fact, they're often still operating the same way.
In other words, what this means is that they are not lending money based on trust in the land or building, but rather based on trust in the working father. And it is based on the premise that they will not move. Obviously, it is based on the idea of using it for a long period of time without moving, and obviously, this is also related to the fact that it is a new construction, and when it comes to new construction, the world is valuing the land as land for building new construction.
When there's a 40-year-old building on the land, how do you value it? Well, is it for sale? In that case, we'll clear the land and build a new one, so the building on top will be valued at zero. Yes, it's the land. How much is the land valued at? There are so many cases where new buildings are constructed that we end up valuing the land.
Next, regarding properties that cannot be rebuilt, there are two types of land: land where a building can be constructed again, and land where, once a building is demolished, no further buildings can be constructed. This is because if a building is constructed again on land that does not have road access, for example, in the event of a fire, it would be a major problem. Therefore, there is a policy that encourages land to be merged with land that does have road access, and then a building can be constructed on the merged land. As a result, land that does not have much road access often becomes a property where rebuilding is not permitted.
Up until now, buildings have been evaluated because everyone was accustomed to a culture of building new structures, so they didn't really evaluate them.
Up until now, there have been Japanese people who serve as a model, and the loan scheme has been based on that premise. One more thing I want to say is that loans are not given based on the land or buildings, but on the person, so if the borrower cannot repay the loan, that person is responsible for repaying it.
Actually, in America, when you buy property, it's common to get a loan using the property as collateral, and the loan isn't tied to the borrower. For example, let's say Noi buys a plot of land for 20 million. She goes to a financial institution. They say, "Well, it's currently on the market for 20 million, but... the price of real estate land goes up and down, and as a bank, we can't take on that risk, so we'll lend you 15 million. Please let us use this building as collateral for the 15 million loan." So Noi puts in 5 million, and together with the 15 million she borrowed, she buys the property for 20 million.
For example, after five years, if you've repaid 2 to 3 million yen and then decide to sell the building, and you've repaid 3 million yen of the remaining loan, that would leave you with 12 million yen. If you sell it for more than 12 million yen, you repay 12 million yen, but even if you sell it for less than 12 million yen, you don't have to take responsibility, right?
In America, no matter how prestigious the company someone works for, it's not tied to them. So even if they say, "I work for a top-tier company," the response is, "No, no, buying this rubbish land for 20 million dollars is a mistake." They'll lend you the money, but because the land is rubbish, they can only lend you 5 million dollars.
In the US, the amount you can borrow depends on the condition of the land and building. That's why financial institutions are so keen to evaluate land and buildings. They consider things like, "How much would this actually sell for?" Obviously, it's more efficient overall to pass on usable buildings to the next generation rather than tearing down and rebuilding houses that are still usable.
NoiThank you. Based on your past experiences, what are the current social conditions like when creating future models?
Ueda: That's right. This is so obvious that it's not really something I need to talk about, but if you think about it, lifestyles are changing, aren't they? I'll explain this in more detail later, but one thing is that lifestyles are changing, and another thing is that demographics are changing quite a bit as well.
Secondly, and this is also quite important, work-cations and remote work are becoming more widespread as ways of working. This means that the idea that your workplace is also your place of residence is becoming less relevant.
Thirdly, the sharing economy is becoming widespread. The idea is to share various things, and then use those shared items to do various things, specifically things like short-term rentals or shared housing. Services that combine these, such as ADDress and many others, are becoming popular in the sharing economy.
The fourth change is, without a doubt, technology. In the construction industry, for example, things that used to only last 20 years can now last 50 or even 100 years. And there's also financial technology and various other technologies that are advancing, and these are changing the world.
These changes are natural, but the lending style that was created 50 years ago to suit the lifestyle of the Japanese people has changed in many ways over the past 50 years, as I have just mentioned. That is the current state of society.
Ueda: Now, building on that, I'd like to talk about one more thing. There's the issue of financial institutions not recognizing the value of something and therefore not lending money using it as collateral, and the fact that it has no value when actually bought and sold. The relationship between these two is quite complicated, and many people think that financial institutions don't set it as collateral because it has no value, but in reality, the opposite is also true in many cases: financial institutions recognize its collateral value and therefore don't lend money, which is why the market price is low.
For example, the land that Noi owns would have been worth only 1 million yen according to the way society has been thinking until now. However, considering the current times, it is actually worth 10 million yen. Let's say I go to buy that land. I say, "Noi, please sell me that land," and Noi says, "Okay." Then I say, "Okay, I'll consult with a financial institution, and after looking at the sum of the money I have on hand and the amount I can borrow, I'll make an offer to buy it for that price." When I take it to the financial institution, they might say, "Well, that land? We can only lend you 1 million yen to buy it," or they might say, "That land? Considering the current situation, it's worth about 10 million yen, we'll lend you as much as you want. We can lend you up to 10 million yen." In either case, the amount I offer Noi will change.
I could rate them higher, but I don't have a lot of cash on hand, so realistically I end up buying them saying, "It's just too much trouble." It's the same with renovations; there are many old buildings that could be used much more if they were renovated, but if you go to a bank and say, "I want to renovate a 1 million yen property, please lend me money, I'll use the property as collateral," they won't even talk to you.
The reason there are so many vacant houses in the world today, in a hopeless situation, is because they aren't being valued. From the perspective of today's new lifestyles, it's understandable that they can't be valued. They're in such a hopeless situation that it's impossible to value them, and it can't be helped. But considering today's lifestyles, they really do deserve to be valued, and it's such a waste that they're not being valued.
The root cause of this situation is what I mentioned earlier: lending money based on a person's attributes. Property valuation, loans not tied to a person, which are called non-recourse loans, and the fact that used properties aren't moving or being refurbished are fundamentally connected issues.
Finally, there's something I'd like to say to everyone: In the real estate industry, there seems to be a general impression that the world is a clean field where high-profile individuals who build new properties and take out 30-year loans, people with high-profile jobs working for top companies, are given low-interest loans. On the other hand, there's the impression that real estate investors, who buy low and sell high, or buy low and renovate to make them usable, are pulling money from financial institutions through various presentations and schemes to secure investments that financial institutions are reluctant to deal with, and are making money through leverage. I feel like there's a general impression that this isn't such a clean field, but I want to say that this is really not the case.
To give another example, I think many people feel the same way about the car industry. They might think that buying a new car is a clean industry, but the used car industry seems kind of complicated. But if everyone started scrapping their used cars and buying new ones, would that be good for society? Of course not. It's definitely better to keep using used cars for as long as possible.
The point is, problems exist everywhere. It's crucial to make things cleaner, more transparent, and to utilize them as effectively as possible. In fact, developing the used housing industry is more important for society than developing new construction. I hope everyone will understand this point in order to have a positive impact on society in the future.
Noi: Thank you, Mr. Ueda, for your presentation. Today, you spoke about the evaluation of older detached houses for investment purposes in the modern era, taking into account past evaluation models and current social conditions. Next time, we plan to upload a video that delves deeper into the topics Mr. Ueda discussed earlier, such as lifestyles, demographics, workation, remote work, and the sharing economy. Please be sure to watch the next video as well. Thank you.
Ueda: thank you very much.
source: Vacant House Lab
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