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

Articles on Akiya Lab | Roopt (Makigumi)

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

Regarding real estate valuation, we will first discuss the changes in demographics in Japan and its regions, and changes in lifestyles after COVID-19, which are essential to understand.

Introduction

Noi: Hello everyone, I'm Noi, the host of this channel. In this video, we will be interviewing 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 obvious.

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, showing the projected productive-age population from around 2015 onwards. This productive-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 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 decreasing population is a significant negative for property utilization. Naturally, 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 now. Given the people who are there, what kind of lifestyles do they have? To talk a little about that, first, in the past, people married and lived 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 isn't, but in any case, many people live together without forming a partnership or getting married, in a cohabitation-like arrangement. In addition to families with children and those without, there are various patterns of families emerging, such as living with children from a previous marriage.

As a result, I think that the old way of getting married once, living together for 40 or 50 years while managing life, and then applying that rent to the situation, will become rather rare in the future.

If you have a family and children, and they go to elementary school there, I think there's a higher probability of living in that area for a long time. However, as that degree of freedom increases, I also think the likelihood of moving will 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 Valuation

Ueda: So, with such lifestyles, how will the valuation of real estate change? I'd like to move on to that. In such an era, Noi, in what ways do you think the valuation 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 that their personality, changes in their desired lifestyle, and such factors will also need to be considered in the evaluation. That's what I thought after hearing your explanation.

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 increasingly, renting will become 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, 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, someone might have bought a house, then bought another house for themselves to live in, but the old house becomes an investment property, or a property that generates yield, and is rented out to others. I think such cases 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 valuation 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 instead of buying it, even if I'd still live in it. That's the difference.

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 this shabby bicycle. Honestly, it's too shabby, so while a new one would be 100, she might be willing to buy this used one for 20, even though she doesn't really want to buy it. That's the kind of feeling. On the other hand, what if you were to rent it for a month? For example, if renting a new car costs 10, 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 won't become my own, so as long as it fulfills its purpose of getting me around faster than walking for that month, there wouldn'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 kinds of feelings. When selling or buying 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, while older properties certainly have lower prices, they don't plummet. The feeling is that if a new property is valued at 100, it might be valued at 20 for sale, but it could be valued at around 40 for rent. I think 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, and so on.

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 they are 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 sentiment.

Realistically, what about the renovation cost for that part? 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 sufficient, but that cost needs to be factored in. However, once that cost is 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 it could be around 3 to 5 million yen. The amount after deducting the estimated renovation cost definitely means that the property has value.

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) starting right now.

Noi: You mentioned earlier that the points to be considered in valuation change due to changes in lifestyle. 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 they think it's worth 9 million yen but won't profit by buying it for the full 9 million, they might go buy it for 5 or 6 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 insights. This time, we discussed lifestyles and demographics as part of the current social situation for creating 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)