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In evaluating real estate, it's essential to first understand demographic trends in Japan, particularly in rural areas, as well as changes in lifestyles in the post-COVID era.
NoiHello 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 how to evaluate older detached houses as an investment in today's market.
Ueda: thank you.
NoiStarting with this session, we will be discussing four topics related to the current social situation that will be relevant to creating future models. The first is lifestyle 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 lifestyle and demographics.
Ueda: In modern times, when it comes to real estate and how to value older detached houses, lifestyles have truly changed compared to 10, 20, or even 30 or 40 years ago. In short, the reality is that the lending attitudes of financial institutions haven't changed all 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, there's the fundamental issue that the number of people alive is decreasing. In addition to that, if we consider what kind of people are alive, the number of people in active age groups is actually steadily declining.
This is an older article from the Ministry of Health, Labour and Welfare's website, showing projections for the working-age population from around 2015 onwards. This working-age population is projected to decrease significantly in the future.
It's a place called Taketa City. I passed through it once when I went to Oita for a visit. It's a fairly ordinary rural town, but as of 2020, there are 8,675 people aged 15 to 64. With the population itself declining, and this proportion also decreasing, it will have a double impact, and it's predicted that in just 25 years, the population aged 15 to 64 will be almost halved. I think this is the reality of rural areas.
A declining population is obviously a major negative factor when it comes to utilizing properties. It's obvious, but if there are no people, even a brand-new, sparkling property won't be used, resulting in no return on investment and ultimately making it impossible to value it as collateral. So, I think everyone is concerned about demographic trends, and I believe it's something we'll continue to have to pay attention to in the future.
So, one thing we need to consider is where the population will gather, but let's put that aside for now. Let me talk a little about the lifestyles of these people. In the past, people married and lived as families of three or four. This is what is called a nuclear family, but unfortunately, divorce is commonplace these days. It's commonplace today, so in another 10 or 20 years, it will become even more common. If you look at Europe, there are cases where same-sex marriage is recognized and cases where it is not, but in any case, there are many people who enter into partnerships and live together without getting married. In addition to families with children and families without children, there are also families where people live with children from a previous marriage, and so on.
Ultimately, I think the idea of getting married once, managing your life together for 40 or 50 years, and then applying the rent from that time, will become increasingly rare in the future.
When you have a family, children, and they attend a local elementary school, you're more likely to spend a long time living in that area. However, as freedom in that area increases, so does the likelihood of moving. In that sense, it's obvious that renting is better than buying, but I think that will become even more widespread in the future.
Ueda: So, I'd like to move on to the question of how the valuation of real estate will change with this new lifestyle. In this era, Noi, in what ways do you think the attitudes of financial institutions will change compared to the past, and how will real estate be valued?
Noi: That's right. As we discussed last time, I think people are judged based on their character these days, but it's not simply a matter of lending money to someone just because they have it. You have to consider their personality, the changes in their desired lifestyle, and things like that. I think that's the kind of evaluation that's coming about, and that's what I thought after listening to what you just said.
Ueda: That's right, you're absolutely correct. First, we need to shift away from evaluating people and lending money based on the property being garbage. Second, while it used to be taken for granted that everyone bought their own home, renting is becoming increasingly the norm.
If you're renting a house, who do you think owns it?
NoiIf you're renting and living there, there's a separate owner of the building, right?
Ueda: Right. For example, who?
NoiFor example, are you someone who owns such properties, like apartments or houses, and runs a business renting them out?
Ueda: That's right. Exactly. Instead of taking out a loan to buy a property to live in themselves, they buy real estate to rent out to others, or to rent to others—these are what you might call investors. In some cases, they might already own a house, and then buy another house to live in, but their old house is used as an investment property, or a property that generates returns, and they rent it out to others. I think that kind of style will become more common.
In the future, people will buy investment properties and then ordinary people will rent those investment properties to live in, but this has been very undervalued until now.
In reality, the amount of money you'd be willing to pay when you find an older property and decide to buy it because you'll live in it is different from the amount you'd be willing to pay when you're renting it, even though you'll be living in it.
When you're buying something, compared to renting it, your tolerance for wear and tear is different, to put it simply.
For example, let's say Noi is thinking about buying a bicycle. She might think, "I'll buy a new one for 100, but I don't want to buy this beat-up one." Honestly, it's too beat up, so while a new one would cost 100, she might be willing to buy a used one like this for 20, but she doesn't really want to buy it, but maybe she should. That's the kind of mindset she has. On the other hand, what if she were to rent one for a month? For example, if renting a new bike costs 10, how much would you be willing to pay to rent an old bike for a month?
NoiWhen you rent an old bicycle, it's not like it becomes yours, so as long as it gets you there faster than walking for a month, and fulfills that purpose, whether it's new or old, the amount you pay doesn't make that much of a difference. Whether it's a little more expensive or cheap, I don't really care whether it's new or old.
Ueda: That's right. People tend to feel that way. When you buy or sell buildings, especially if you're buying or selling one to live in, new ones are very expensive, and as they get older, the price drops sharply. But when you're renting it out, of course the price goes down for older buildings, but it doesn't drop as drastically. In a sense, if a new building is worth 100, you might value it at 20 for sale, but you could value it at around 40 for rental. I think there's a certain kind of feeling about that.
The problem is that if an investor buys a property and rents it out, they can easily make a profit of 40. But if they buy it outright, it's only valued at 20, so they can only rent it out for 20, and so on.
You might be wondering if there are people who rent indefinitely. Well, as I mentioned earlier, this is a result of changing lifestyles. More and more people are renting as a family and spending about 10 years in rented accommodation.
To summarize, older properties, whether 30 years old or 50 years old, are losing value far too quickly these days. They deserve a much higher valuation. However, one thing to be careful about when considering living there is the plumbing—the kitchen, toilet, and bathroom—and if they're very old, people tend to be hesitant to rent them.
Realistically speaking, how much would the renovation cost for that part be? For renovating plumbing fixtures that are 30 to 50 years old, I'd say it would be in the range of 5 million yen or so. I think 5 million yen would be enough to do it, but you need to factor in that cost. If you factor in that cost, I think it should be fine.
In fact, if you look at the rental market, for example, if a 3LDK apartment rents for 100,000 yen, that's 1.2 million yen over 12 months. You then calculate the yield, and if it's 20%, that's 6 million yen over 5 years, and if it's 10%, that's 12 million yen. However, renovation costs can be up to 5 million yen, so it's estimated to be around 3 to 5 million yen. The amount after deducting that estimated cost is the amount that makes the property undoubtedly valuable.
Even for properties where people say, "Nobody wants to buy this building," I think it's perfectly fine to at least give it some kind of valuation—for example, valuing it at 9 million yen after deducting 3 million yen for renovations from 12 million yen—and do that right now.
NoiEarlier, you mentioned that changes in lifestyle can alter the factors that should be considered in evaluations. But how can those doing the evaluating actually verify these changes?
UedaHonestly, if an investor thinks something is worth 9 million yen, they'll go and buy it for 9 million yen. In some cases, buying it for the full 9 million yen wouldn't be profitable, so if they think it's worth 9 million yen, they might go and buy it for 5 million or 6 million yen. But then when they take it to the bank, they're told, "No, this is worth zero. Do you think you can resell it for 9 million yen? At best, you'll get 2 million yen." And so, without borrowing a single yen from the bank, they reluctantly end up buying it with their own savings. That's the reality.
Regarding Noi's question, "Is this really worth 9 million yen?", that's something that can only be determined after running the business for 5 or 10 years, but I think the possibility is becoming increasingly high in today's world.
Noi: I see. I understand. Thank you for your presentation, Mr. Ueda. This time, you spoke to us about lifestyles and demographics from the perspective of current social conditions, which will be important when creating future models. Next time, Mr. Ueda will speak to us again about workation and remote work. Please be sure to watch that video as well. Thank you for watching today.
Ueda: thank you very much.
source: Vacant House Lab
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