Vacancy rates in Tokyo and Kanagawa have been steadily climbing due to an oversupply of ‘apaato’-type rental buildings (low-rise blocks of rental flats usually built from wood or light-weight steel) in recent years.

According to TAS Corp, vacancy rates for wood-frame or light-steel-frame apartment buildings are over 30% in the greater Toyo area, and as high as 37% in Kanagawa Prefecture. In other words, 1 in 3 units in ‘apaato’-type rental buildings are vacant.

Over the past few years, there has been a surge in the construction of apaato buildings spurred on by changes to inheritance taxes that went into effect on January 1, 2015. These tax changes reduced deductions and made it more appealing to convert assets, such as cash, into real estate, particularly rental properties, which has a tax value that is much lower than actual market prices. The introduction of negative interest rates by the Bank of Japan in early 2016 put additional pressure on banks to lend out money to borrowers, further encouraging investors to take out loans for investment properties.

Apartment construction companies are also aggressively targeting landowners in order to improve revenues, often advising landowners to build investment properties in locations that might not have any actual rental demand. These sales tactics often involve special tie-ups with banks as well as rental guarantees offered by rental management companies.

Building with no regard for actual demand

The high vacancy rate in the Tokyo area comes down to one simple reason – an oversupply of apartments built in areas with no demand or buildings not built to meet actual tenant needs.

The success or failure of a rental property is largely based on location. Landowners are building blocks of small studio apartments on land in areas with a declining population, over 10 minutes from the nearest station and where there is no demand from potential tenants.

Construction companies and rental management companies are also somewhat responsible for high vacancy rates. Competition between companies is fierce, causing some to oversimplify or overestimate potential rental yields in order to secure a deal with a landowner.

Landlords left with heavy burden

At the end of the day, the landlords are the ones left to suffer from a poor investment.

It’s not just studio apartments that are flooding the market – some landlords are building family-type rental apartments without adequately considering the needs of tenants. Kitchen cooktops, for example, may be too small for families, while storage closets may also be severely lacking. These poorly designed buildings are overlooked by tenants and end up suffering from high vacancy rates.

Sources:
Toyo Keizai, December 26, 2016.
The Sankei Shimbun, December 25, 2016.
TAS Corp Residential Market Report, December 2016.