Rising construction costs are starting to affect building maintenance

Apartment RepairsThe steep increase in construction costs is not only affecting the price of new apartments, but is also starting to have an impact on the maintenance of existing residential buildings in Japan.

Whether you are an investor or home buyer, it is essential to take care when choosing a property to make sure it has been properly cared for and will be maintained in the future. This is something that many buyers overlook.

A poorly maintained building is more likely to lose value over time, and deteriorating equipment could have a negative impact on your day-to-day life. While you will have direct control over the maintenance of the interior of your apartment, the common areas fall under the management of the owners association.

There have been several cases now where condominiums have not had enough money set aside in their repair fund to cover scheduled building maintenance. In some cases the owners associations had no choice but to delay any repair and maintenance work not deemed to be absolutely necessary.

The owners association of a 10-year old, 150-unit condominium in Tokyo were planning to conduct the scheduled large-scale building repair and maintenance to their building in the next two years. However, the quote from the contractor was much higher than originally expected and the building’s repair fund can only cover 80% of the costs. The increased cost of labour, scaffolding and raw materials, was not budgeted for in the original building repair schedule. The owners are considering delaying the work that requires scaffolding (eg. repairs to exterior tiles) for another three years when it is hoped that construction costs are cheaper following the 2020 Olympics – a time when construction demand is expected to slow down.

The Nakagin Capsule Tower Building – a 44-year old condominium in Ginza – has suffered from deterioration over the years as owners argue over repair bills and possible redevelopment. As a result, the original air-conditioning systems in the units are out-of-service, while hot water to one of the towers has been switched off, forcing residents to either install their own hot-water heaters or use a communal shower in the building’s garage.

Nakagin Capsule Tower Building 2
The Nakagin Capsule Tower Building in Ginza

Construction demand is high due to reconstruction in the Tohoku area, developments for the 2020 Olympics, and an improving property market. Construction costs have risen by around 30% since the 2011 Tohoku disaster.

Most buildings require large-scale repairs and maintenance to be carried out every 10 ~ 15 years. The work may include re-sealing, waterproofing, repairing exterior tiles and cracks, and other maintenance to the building. To pay for these repairs, each apartment owner pays a monthly fee towards the building’s repair fund. Insufficient funds is not exactly a new problem for residential buildings in Japan. Developers will typically set low building fees when selling a project, with the expectation that owners will gradually increase the fees over time. The decision to increase repair fund fees is up to the owners association, and obtaining agreement can be difficult.

A survey by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) in 2008 and 2013 found that 20% of the apartment buildings across Japan did not have enough money set aside in their repair funds.

If there are insufficient funds, the owners association can either borrow additional funds from a bank, or have each apartment owner pay an additional lump sum fee. However, not all owners are keen to pay a lump sum fee, which can be several hundred thousand to several million Yen, and may also be against borrowing from a bank because it would require the monthly building fees to increase in order to pay back the loan.

The Japan Housing Finance Agency lent a total of 4.8 billion Yen to 178 building associations in 2011. In 2014 they lent a total of 7.2 billion Yen to 278 associations. The average loan to each apartment owner was 530,000 Yen in 2014, up 15% from 2013.

The cost of building repairs and maintenance will vary depending on the degradation of the building and the scale. It is not unusual to see a repair bill of several hundred million Yen. In 2013, the approximate cost of repairs and maintenance amounted to around 800,000 ~ 1,000,000 Yen per unit in an apartment complex. By October 2015, the average cost had increased to around 1,200,000 ~ 1,400,000 Yen (approx 10,000 ~ 12,000 USD) per unit. A building that estimated a repair bill of 100 million Yen when the repair schedule was first drawn up by the developer several years ago, might now be looking at a bill of 140 million Yen for the same work.

Repairs for high-rises can be even higher. Earlier last year, large-scale repair work and maintenance began on a 55-storey condominium tower in Saitama. The 650-unit building has a repair bill of around 1.2 billion Yen (10.2 million USD), which is about 1.8 million Yen (16,000 USD) per apartment. Luckily there was enough money saved up in the building’s repair fund so apartment owners have not had to pay any additional costs. The building is 17 years old, so repairs have been scheduled later than normal (the MLIT suggests 12 years as a guide).

Possible options for when a building has insufficient funds:

  • Delay any repairs and maintenance until adequate funds are saved up.
  • Split the repairs into two parts, with the more expensive repairs to be done at a later date.
  • Delay part of the repairs until the next scheduled repair date.
  • Only do the repairs that are absolutely necessary and that can be afforded.
  • Borrow from a financial institution.
  • Collect a lump sum from apartment owners.
  • Increase repair fund fees temporarily until funds are saved up.

Sources:
J Cast, December 27, 2015.
The Mainichi Shimbun, November 26, 2015.
The Yomiuri Shimbun, December 4, 2015.

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