The following is a summary of the recent information that has come out since the share house and whole-building investment scam scandal has been exposed in Japan.
Inflated rental projections
Guaranteed or estimated market rents were set much higher than actual market rents in order to inflate yields and sale prices. Share houses were perfect for this since it can be difficult to gauge appropriate market rent, making it easy to inflate figures. Share houses operated by one defunct operator were running at occupancy ratios of just 20%.
In some cases, the real estate sales company would install curtains and turn on the lights in empty apartments to give the appearance of a high-occupancy building from the outside, while haranguing local rental agents to scrub any active rental listings from the internet. Rent rolls and rental agreements were, naturally, faked in order to give the appearance of a healthy and high-yielding investment.
The real estate companies and other investment spruikers involved in this scheme would target salaried employees, doctors, lawyers, expats, and even professional athletes. Investment spruiking seminars would tout high yielding properties with guaranteed rents and no cash down, promising immediate positive cash flow and income security in retirement.
The properties in question were often in regional or inconvenient locations or a mis-match for the neighborhood. In other words, they were junk with little resale potential. Yields and occupancy ratios were grossly inflated, rent rolls and rental agreements were falsified, and prices were well above market values, often with various companies in the middle skimming off a sizable portion of the sale price.
Faked income documents
To get a loan for an otherwise uncreditworthy buyer, the common tactic was to photoshop copies of their bank book or bank statement, add a few digits to their balance and add an entry showing payment of a 10% deposit to the seller. The falsification was done by the dodgy real estate agents, in many cases under the instruction of the loan officer. A borrower might have only had 200,000 Yen in savings at the time, but their loan application to the bank showed a false balance of 30 million Yen along with a false deposit payment of 20 million Yen. Despite having very few savings and not being in a position to meet loan repayments in the event that the property was vacant, investors would receive an average loan of around 100 million Yen per property.
Not only were income documents forged, but the recent inquiry into Suruga Bank found cases of falsified building construction certificates and borrower medical reports.
On August 31, TATERU, Inc, a real estate brokerage, rental management and tech-based company admitted that one of their employees had falsified a customer’s bank balance to show a higher balance in order to obtain a loan for an investment property. The customer discovered the falsification before settlement of the property and TATERU agreed to cancel the contract, refund their deposit and pay the customer an equivalent amount as compensation. TATERU’s share price has plummeted by as much as 77% in the two weeks following the announcement.
In many cases the properties sold to investors were at highly inflated prices. This was largely how the company running the scam would make money. In some situations, the property was flipped multiple times through various companies, selling at a higher price each time before it was sold to the investor. The various companies along the chain do not need to be recorded on the property register, with only the sale from the original seller to the end buyer being reported.
At a press conference held by the law firm representing investors of a share house scam, the firm alleges that the share house company had flipped parcels of land several times through various real estate companies before the land was finally sold to the share house investor at a much higher price. As many as 10 different interim companies were identified. The law firm’s clients are stuck with highly leveraged loans on overpriced properties.
An investigation by ANN News on September 2 alleged that another of TATERU’s customers reportedly paid more than triple the market value for a parcel of land.
Forged contracts and no-money-down loans
Banks rarely, if ever, provide 100% loans for investment properties to individual buyers with poor credit. In the best case scenario, they would provide up to a 90% loan-to-value for a good client. The dodgy real estate companies came up with an illegal way to get around this. In order to get a ‘no money down loan’ or even an over-loan that covers closing costs as well, two sale contracts would be drawn up – a fake one for the bank that showed a higher sale price, and the real one showing the true price that the buyer and seller agreed to. The bank would lend based on the inflated sale price, giving what they thought was a 90% loan, but which turned out to be 100% or more.
Misappropriation of customer funds
In the case of the share house scam, the company at the heart of the scandal was using the sale proceeds from purchases made by other investors to pay the guaranteed rents to earlier investors. The share houses were suffering from high vacancy rates and were largely operating in the red. Their only way to keep paying promised rents was to siphon funds from money collected from new investors. The wheels of the ponzi scheme fell off when Suruga Bank abruptly stopped providing new loans to their customers, effectively ending the only source of revenue for the share house company.
Suruga’s slow-down in lending in late 2017 affected other real estate companies operating similar whole-building investment schemes. As the source of funding dried up, several of these companies shut their doors.
Loans provided to individuals in Japan are typically recourse loans. If the borrower defaults, the bank can go after not just the secure property itself, but has recourse to the borrower’s assets in order to pay back the debt. Simply handing over the keys and title to the bank does not clear the borrower.
Since many of these investors have purchased and financed properties at highly over-inflated prices, they may be facing personal bankruptcy if they cannot meet mortgage repayments or have other assets they can sell to pay off their loan.
The effect on investment lending
A 300+ page report issued by a third-party panel investigating Suruga Bank’s practices was released on September 7. As much as 1 trillion Yen (approx. 9 billion USD), or a third of the bank’s total loans, has allegedly been approved based on falsified information or other improper lending criteria. The bank president indicated during a September 13 interview with the Nikkei Shimbun newspaper that the bank had currently stopped all lending on investment properties.
Lending to provide individuals for investment properties has tightened across all banks. According to the Bank of Japan, domestic banks lent 560 billion Yen between April and June in 2018, a 50% drop from the peak seen in July to September 2016.
More and more credit unions have withdrawn from offering investment loans to private individuals. One large credit union in the Tokai region will cease any new lending to properties with sub-lease agreements from November 2018 onwards. Another bank in the greater Tokyo area will stop lending to certain real estate-related companies from December after dealing with numerous troubles from borrowers. In Kitakyushu, a credit union said they will now only consider properties within a certain distance from train stations.
Business Journal, September 15, 2018.
The Nikkei Shimbun, September 14, 2018.
Sankei Digital, September 12, 2018.
TATERU, Inc. Press Release, August 31, 2018.
Tokyo Shoko Research, August 30, 2018.
The Nikkei Shimbun, August 22, 2018.