Share house investors left high and dry

Investors in share houses have been left struggling to make loan repayments after their subleasing companies failed to make rental payments to landlords. A non-profit support center for landlords reported over 100 calls from distressed property owners over the past month.

Two different share house operators have recently reneged on their sublease agreements with landlords.

Company 1

On January 17th, a Tokyo-based share house operator held a meeting with investors informing them that they would no longer be able to pay rent to the landlords due to financial difficulties. Over 400 investors were in attendance, many of them office workers and couples in their 30s and 40s. The majority had taken out investment loans of 100 million Yen or more and were relying on the guaranteed rent to pay the mortgage repayments. This came after a notification back in October 2017 that they would be reducing the guaranteed rents. Only five days before the meeting, the company president was changed and the company announced that they had plans to expand into the short-term minpaku accommodation market.

There are cases of individuals with an annual salary of 12 million Yen taking on property loans of 200 million Yen with an interest rate of between 3.5 ~ 4.5%. These over-leveraged investors may now be stuck with mortgage repayments equal to their gross salary.

The company was established in 2012 and specializes in the development and operation of women-only share houses. In 2013, less than 12 months after the company opened, they boasted annual revenues of 445 million Yen. By 2016, their annual revenue had swelled to 31.6 billion Yen with a current profit of 40 million Yen. They manage over 11,000 rooms on behalf of 800 landlords.

The operator claimed the problem was caused by low revenues and an abrupt ban on lending on share houses by their associated bank. They were selling an average of 15 properties per month up until September, but reported no sales in October and 3 or 4 sales in December. The average occupancy rate across their managed properties was 46%, much below the anticipated level.

The Nikkei Shimbun reported on an alleged connection between the share house operator and Suruga Bank with a global securities company implying that the operator previously held an investment seminar at a Suruga Bank branch. Suruga’s share price had fallen by 10% over the 5 days following the news as investors ascertain the risk of potential bad debts from lending on share houses. Suruga was not able to comment when asked by the Nikkei Shimbun newspaper.

Company 2

In April 2017, a victim support center was set up for customers of a real estate company located in Tokyo’s Chuo ward. The company would develop share houses on behalf of clients and then sublease them, offering 30-year rental guarantees and yields of 10%. Their target buyers were office workers and doctors with annual salaries of over 8 million Yen.

Some of the complaints against the company include allegations of construction costs being double the market rate. Landlords were promised that the guaranteed rents would not decrease, only to find out from February 2017 that rental payments from the operator had ceased. Calls to the company went unanswered. By December, the victim support center had over 130 members.

The company’s website boasts a large increase in inquiries from overseas investors looking to acquire share houses in central Tokyo with half of their foreign inquiries coming from Taiwan and Hong Kong.

Sources:
The Zenkoku Chintai Jutaku Shimbun, January 29, 2018.
The Nikkei Shimbun, January 23, 2018.
The Asahi Shimbun, January 22, 2018.
Tokyo Shoko Research, January 22, 2018.
The Zenkoku Chintai Jutaku Shimbun, January 22, 2018.
The Sankei Shimbun, January 21, 2018.
The Zenkoku Chintai Jutaku Shimbun, December 11, 2017.