The company’s main Pre-owned Condominium business is unique for a large listed real estate company: it buys pre-owned, tenant-occupied individual condominium units, renovates these apartments when the tenants move out, and sells them for a profit.
Real Estate Management & Development
Executive summary
Buys pre-owned condominiums, earns rental income and profits from sales
Star Mica’s mainstay, the Renovated Condominium business, generates profits by renting or selling pre-owned condominiums and accounted for 98.2% of sales and 87.0% of operating profit (before adjustments and deductions) in FY11/20. The business is unique for a large listed real estate company: it buys pre-owned, tenant-occupied individual condominium units, renovates these apartments when the tenants move out, and sells them for a profit.
In Japan, purchasers of pre-owned condominiums with tenants are limited because these properties cannot be sold immediately after purchase and because, according to local convention, the buyer cannot inspect the inside. As a result, such condominiums tend to be cheaper than vacant pre-owned properties. Star Mica acquires such individual tenant-occupied condominiums that are being rented. The company first earns rental income and then makes a profit from the fact that there are always price differences between properties that are being rented and those that are vacant.
The downside of this method is that acquiring a single condominium unit can be inefficient and cumbersome compared to buying entire buildings. However, there is little competition to acquire such properties, allowing the company to buy them cheaply. Instead of acquiring entire buildings, the company buys individual pre-owned condominiums of different age and locations. This approach allows the company to spread associated risks (accidents, natural disasters, price fluctuations, and the tenant’s length of stay).
According to the company, it quickly assesses the value of properties and makes swift purchase decisions. The company also has the ability to raise funds and enjoys a track record of successful transactions. As a result, the company is in a strong position to gather information from real estate agents on pre-owned condominiums that have been put up for sale. The company says it also has its own information network that sets it apart from competitors and gives it the ability to assess the value of a large number of properties and execute many transactions. Star Mica also has access to short-term funds that are not tied to any specific properties, allowing the company to quickly sign a purchase agreement.
The company’s growth strategy focuses on an expansion of existing operations and the development of new businesses. The company plans to expand its Renovated Condominium business and increase the number of pre-owned properties it acquires and holds, and borrow money until its capital-to-asset ratio reaches 25%. The company will at the same time expand its property rental and brokerage services involving renovated condominiums.
Trends and outlook
In FY11/20, Star Mica reported sales of JPY39.6bn (+23.0% YoY), operating profit of JPY3.3bn (-9.5% YoY), recurring profit of JPY2.5bn (-14.7% YoY), and net income attributable to owners of the parent of JPY1.7bn (-14.5% YoY). In order to concentrate management resources on the Renovated Condominium business, the company focused on improving the product appeal of its renovated condominiums and increasing supply. As a result, sales and profits in the Renovated Condominium business increased YoY. On a consolidated basis, however, sales and profits declined YoY due to a falloff of property sales in the Investment business recorded in FY11/19.
In August 2021, the company revised its full-year forecast of FY11/21. The revised company forecasts call for sales of JPY37.4bn (-5.4% YoY), operating profit of JPY4.0bn (+22.1% YoY), recurring profit of JPY3.2bn (+27.5% YoY), and net income attributable to owners of the parent of JPY2.2bn (+28.1% YoY). Versus the previous forecast, the figures were revised upward by JPY2.6bn for sales, JPY1.0bn for operating profit, JPY915mn for recurring profit, and JPY644mn for net income attributable to owners of the parent. While the market for condominium renovation has boomed, the company's sales strategy has been highly successful, and Star Mica expects its profit margin to exceed its initial expectations.
In January 2021, the company decided to withdraw the targets for FY11/22 in its five-year management plan (FY11/18–FY11/22) announced in January 2018. Since March 2020, in response to the COVID-19 pandemic, the company has set preparation for possible changes in the business environment as its highest priority. To maintain and increase the equity ratio and cash on hand, the company is aiming for a balance between the number of units purchased and sold in the Renovated Condominium business in FY11/21, rather than aggressively acquiring properties to increase the balance of real estate for sale.
Strengths and weaknesses
Shared Research believes that the three main strengths of Star Mica are its experience, stable revenue, and borrowing method. Weaknesses include its difficulties to increase asset turnover ratio, limited scope to lift profitability, and limited financial leverage (see Strengths and weaknesses).
Key financial data
Figures may differ from company materials due to differences in rounding methods.
The company conducted a 100-for-1 stock split on December 1, 2012 and a 2-for-1 stock split on October 1, 2017.
The company transitioned to a holding company structure in June 2019. YoY comparisons in FY11/19 were made with pre-transition FY11/18 results for reference.
Recent updates
Announced upward revision to dividend forecast
On November 18, 2021, Star Mica Holdings Co., Ltd. has announced an upward revision to its year-end dividend forecast.
Based on its recent performance and financial conditions, the company has decided to raise its year-end dividend forecast for FY11/21 to JPY20.0 per share, up JPY7.0 from its previous forecast. As a result, the company now projects annual dividends of JPY33.0 per share, up from its previous forecast of JPY26.0 per share.
Revision of full-year earnings forecast and announcement on treasury stock acquisition
Star Mica Holdings Co., Ltd. announced a revision of its full-year earnings forecast.
Revision of FY11/21 full-year earnings forecast
The market for condominium renovation has boomed during the pandemic and the company's sales strategy has been highly successful. Profit margins have exceeded company expectations in 1H (December 2020-May 2021) and have remained strong since June 2021. In light of the current market environment, the company has upgraded its full-year earnings forecast on the assumption that margins will continue to outperform.
Star Mica Holdings Co., Ltd. has announced a resolution concerning the acquisition of treasury stock.
Transaction details
Trends and outlook
Quarterly trends and results
Figures may differ from company materials due to differences in rounding methods.
The company transitioned to a holding company structure in June 2019. YoY comparisons in FY11/19 were made with pre-transition FY11/18 results for reference.
Figures may differ from company materials due to differences in rounding methods.
Quarterly data (for reference)
Figures may differ from company materials due to differences in rounding methods.
Figures may differ from company data due to differences in rounding methods.
Figures for gross profit are Shared Research’s calculations based on the company’s published GPM.
Figures may differ from company data due to differences in rounding methods.
Figures may differ from company data due to differences in rounding methods.
Cumulative Q3 FY11/21 results
*Net income attributable to owners of the parent
According to the Real Estate Information Network for East Japan, the number of pre-owned condominiums sold in the Tokyo metropolitan area dropped by 14.3% YoY to 2,615 in August 2021, continuing the trend of YoY decrease from July. The average price per square meter for a pre-owned condominium sold in the Tokyo metropolitan area was JPY592,000 (+7.9% YoY) and the average purchase price was JPY37.7mn (+3.5% YoY), equating to YoY increases for the 16th and 15th consecutive months, respectively. The inventory of pre-owned condominiums in August 2021 was 34,594, and has been recovering since June 2021 (33,641). However, this remains below pre-COVID-19 levels, and the market continues to feel a shortage of supply.
The company continued to concentrate its business resources on the Renovated Condominium business. At the same time, it looked to achieve growth by maintaining and increasing its equity ratio and cash on hand while ensuring a balance between real estate purchases and sales. In cumulative Q3, the company focused on increasing supply and improving the product appeal of its renovated condominiums in response to strong demand for renovated condominiums. Because the company had prioritized accumulating property sales in cumulative Q3 FY11/20 in order to secure cash on hand, the company experienced a YoY decline in sales in cumulative Q3 FY11/21, but operating profit, recurring profit, and net income all rose YoY.
Progress versus the company forecast
In August 2021, the company announced revisions to its full-year FY11/21 forecast. In the revised forecast, the company lowered its sales target by JPY2.6bn while raising its projections for operating profit by JPY1.0bn, recurring profit by JPY915mn, and net income attributable to owners of the parent by JPY644mn versus its previous forecast. The revisions were made to reflect greater-than-expected sales per unit sold due primarily to steady market demand for renovated condominiums. Meanwhile, the number of units sold is expected to fall below previous expectations, as the company adopted a sales strategy prioritizing profit per unit sold over the number of units sold from Q3 FY11/21 (June–August), and as it worked to build up inventory to enhance its product lineup with an eye toward FY11/22.
Versus full-year FY11/21 forecast, cumulative Q3 sales reached 80.3% (78.1% of the full-year results in cumulative Q3 FY11/20), operating profit 86.6% (85.0%), recurring profit 94.7% (88.4%), and net income attributable to owners of the parent 95.0% (89.4%).
Renovated Condominium business
Sales fell YoY due to declines in both renovated condominium sales and rentals. Operating profit rose owing to an increase in gross profit to JPY5.4bn (+22.7% YoY). SG&A expenses grew 15.1% YoY to JPY1.9bn due mainly to higher taxes and dues accompanying an increase in the number of units purchased and the revision of the consumption tax law.
Through the end of FY11/17, the company generally purchased condominiums that were currently being rented, collected rent from the existing tenants, and renovated and sold them after these tenants departed. Starting in FY11/18, the company has also been concentrating on buying and selling vacant condominiums to expand its earnings opportunities. In cumulative Q3 FY11/21, vacant condominiums accounted for about 40% of purchased properties and about 60% of properties sold.
Star Mica performs renovations on vacant condominiums three to four months following their purchase and sells these properties about nine months after they are acquired, while condominiums acquired under rent are not sold until about two and a half years after they are purchased. The company’s intensified buying and selling of vacant condominiums will have an impact on earnings of both the rental and sale businesses. Rental earnings will be affected by the lack of rent revenue generated through these properties while associated maintenance fees are incurred. In Renovated Condominium (sale), vacant condominiums are subject to more intense competition at the time of purchase than units that are being leased at the time of purchase (owner-change properties) are. The company's GPM projection at the time of purchase for owner-change properties is 14–16%, versus 8–10% for vacant condominiums.
Renovated Condominium (rental) business
Star Mica focused on purchasing properties in the Tokyo metropolitan area and in major regional cities, leading to a YoY increase in its inventory of real estate for sale in Q3 (June–August). However, the inventory of real estate for sale was below year-ago levels in 1H (December 2020–May 2021), causing a YoY decline in the rental business sales.
Gross profit fell along with the sales decline, but the GPM in the Renovated Condominium (rental) business rose 0.5pp YoY to 62.1%.
Renovated Condominium (sale) business
Sales decreased despite higher sales per unit sold, owing to a decline in the number of units sold. In cumulative Q3 FY11/20, the company focused on expanding the number of units sold due to higher price elasticity of demand, but in Q3 FY11/21, the company shifted to a sales strategy that prioritized securing profit per unit sold over the number of units sold against the backdrop of favorable market conditions. As a result, the company sold a total of 920 units (-5.5% YoY), and posted sales per unit of 28.9mn (+3.1% YoY).
On the profit front, gross profit rose thanks to growth in GPM resulting from the higher sales per unit sold. GPM amounted to 13.7% (+3.5pp YoY) in cumulative Q3. In Q3 (June–August), GPM was 17.6% (+9.2pp YoY), reaching a quarterly record high. GPM increased YoY on the success of the abovementioned sales strategy focused on securing profit. Further, in Q3 FY11/20, the company lowered sale prices for some of its properties in light of market changes brought about by the COVID-19 pandemic. However, the company did not make similar price cuts in Q3 FY11/21, which also contributed to the rise in GPM.
Real estate for sale
The monetary value of Star Mica’s real estate for sale amounted to JPY68.4bn (+1.8bn, or +2.7%, compared to end-FY11/20). At the end of Q3, the company had 3,349 units in inventory (+21 units, or +0.7%). Star Mica purchased 941 units in Q3 (+2.8% YoY) and sold 920 (-5.5% YoY).
In Q4 as well, Star Mica plans to step up property purchasing and accumulate real estate for sale in anticipation of future sales opportunities in FY11/22 and later. The company maintains that it will limit its purchase of properties to units that are highly convenient and have market prices that are resistant to decline.
Investment business
In cumulative Q3, the company looked into resuming investments into income-generating real estate, and sold a portion of its operational investment securities.
Advisory Services business
In cumulative Q3, brokerage operations grew steadily for renovated condominiums sold by the company, but brokerage commissions from the sale of properties held by external companies decreased. As a result, sales grew YoY, but profit fell.
For details on previous quarterly and annual results, please refer to the Historical performance section.
Full-year company forecast
Figures may differ from company materials due to differences in rounding methods
In August 2021, the company revised its full-year forecast of FY11/21. The revised company forecasts call for sales of JPY37.4bn (-5.4% YoY), operating profit of JPY4.0bn (+22.1% YoY), recurring profit of JPY3.2bn (+27.5% YoY), and net income attributable to owners of the parent of JPY2.2bn (+28.1% YoY).
Versus the previous forecast, the figures were revised upward by JPY2.6bn for sales, JPY1.0bn for operating profit, JPY915mn for recurring profit, and JPY644mn for net income attributable to owners of the parent.
The market for condominium renovation has boomed during the pandemic and the company's sales strategy has been highly successful. Profit margins have exceeded company expectations in 1H (December 2020–May 2021) and have remained strong since June 2021. In light of the current market environment, the company upgraded its full-year earnings forecast on the assumption that margins per condominium unit sold will continue to outperform. Meanwhile, the company expects the number of units sold to fall below its previous projections as it plans to prioritize profit per unit sold against the backdrop of favorable market conditions, rather than focusing on growing the number of units sold.
Figures may differ from company materials due to differences in rounding methods.
As of November 2020, sales of pre-owned condominiums in the Tokyo metropolitan area were on the rise, resulting in a declining inventory of pre-owned condominiums in the area, and the company expects the renovated condominium market to remain firm.
The company expects sales to decline YoY due to lower sales in the Renovated Condominium business. On the profit front, it expects gross profit to rise to JPY7.2bn (+21.3% YoY) on an increase in GPM. It also expects profit categories from the operating profit line down to increase YoY on the back of higher gross profit, but the rate of growth in operating profit to be smaller than that of gross profit due to higher SG&A expenses. SG&A expenses are forecast to come in at JPY3.2bn (+20.1%, +JPY540mn YoY) due to revisions to the consumption tax law (accounting for about JPY300mn of the increase) and increased headcount.
Renovated Condominium business
For FY11/21, the company forecasts sales of JPY36.8bn (-5.4% YoY) and gross profit of JPY6.9bn (+23.4% YoY), with GPM rising 4.4pp YoY to 18.7%. The anticipated growth in GPM is attributed to the company's strategy of prioritizing profit per unit sold over the number of units sold in light of favorable market conditions. Further, in FY11/20, it lowered the price of some of its properties and took other measures to promote sales in order to secure cash on hand as the spread of COVID-19 continued and market trends remained uncertain. However, the company has no plans to carry out such sales promotions in FY11/21, and expects valuation loss on real estate for sale to decline to JPY200mn (versus JPY504mn in FY11/20), boosting GPM.
The company expects sales in the Renovated Condominium (rental) business to fall YoY. This is mainly driven by a decrease in properties for sale at end-November 2020 to JPY66.5bn (-3.5% YoY), although it expects to increase the number of pre-owned properties held during FY11/21. In addition, the company plans to acquire properties in regional cities where the ratio of rent income to purchase price is relatively low in order to diversify its portfolio, which will also contribute to lower sales. The company expects gross profit to come in at JPY2.4bn (-3.0% YoY) reflecting lower sales and an increase in the ratio of properties in regional cities with relatively low GPM. Properties in regional cities have comparatively lower rents than those in Tokyo Metropolis, while fixed expenses such as management and repair costs are on a comparable level. The result is a tendency for properties outside Tokyo Metropolis to have lower GPMs.
The company expects sales in the Renovated Condominium (sale) business to fall YoY. It expects growth in sales per unit supported by the abovementioned sales strategy, but projects the number of units sold to fall below the year-ago level of 1,236 units. Gross profit is expected to rise to JPY4.5bn (+27.9% YoY) on higher GPM per unit sold.
Investment business
The company expects sales of JPY20mn (no sales booked in FY11/20) and gross profit of JPY10mn (no gross profit booked).
Star Mica had been taking advantage of rising prices in the real estate market since FY11/15, using strength in the market as an opportunity to reduce the tangible fixed assets carried on its balance sheet, and completed selling its assets in FY11/19. As of October 2021, the company had no plans to invest in income-generating real estate during FY11/21, but noted that it would consider resuming investments in the medium-to-long term.
Advisory Services business
The company expects sales of JPY660mn (-7.0% YoY) and gross profit of JPY350mn (-12.5% YoY).
Sales and profits are expected to fall YoY as the company does not expect to book brokerage commissions on the sale of non-company-held properties to external clients as it did in FY11/20 for one property.
Outlook
In January 2021, the company announced the withdrawal of targets in its five-year management plan (FY11/18–FY11/22).
As a leading company in the renovated condominium industry, Star Mica formulated a five-year management plan starting from FY11/18 with the aim of maintaining its position as an industry leader and continuing to create value for customers. Under the plan, the company aimed to reach JPY50.0bn in sales and JPY8.5bn in operating profit in the final year of the plan (FY11/22) by expanding its Renovated Condominium, Investment, and Advisory Services businesses. From FY11/18 to 1H FY11/20, the company saw success in aggressive property acquisition and sales, such that sales, profits, and the balance of real estate for sale generally trended according to plan.
From March 2020 onward, in response to the COVID-19 pandemic, Star Mica set preparing for possible changes in the business environment as its highest priority. It accordingly shifted its policy in FY11/20 and FY11/21 to emphasize balance in the number of properties acquired and sold rather than growth in the balance of real estate for sale in an attempt to maintain and increase the equity ratio and cash on hand. In addition, the company reviewed a part of the Investment business’s investment plan and decided against including the sale of income-generating real estate into the plan for FY11/22. As a result, it expects to achieve the management plan targets in or after FY11/22.
Uncertainty persists in the business environment even after January 2021 as the state of emergency declarations have been reissued in various areas. The company has thus decided that it was difficult to predict when it could achieve the targets set forth in the medium-term management plan and to reasonably estimate targets for FY11/22. In consideration of these factors, the company has decided to withdraw the FY11/22 targets. However, the company noted that there is no change in its basic policy.
Basic plan
Initiatives by segment
Renovated Condominium business
Star Mica looks to expand the portfolio of properties for sale by boosting personnel and improving efficiency through its geographic strategy and utilization of IT to ramp up property acquisitions. As of end-FY11/20, 60.5% of all properties were in metropolitan areas (versus 68.8% in FY11/19), so in addition to increasing sales staff, management looks to expand properties in regional cities as a means of increasing supply and diversifying the portfolio. The company also plans to revamp the core system to raise operational efficiency.
Initiatives in the Renovated Condominium business
One measure aimed at increasing its inventory of properties held for sale was the startup of a “no-worries” leaseback service in December 2017. As a rule, the company buys condominium units that are occupied at the time of the purchase. The new leaseback service buys condominiums from owners who are living in the unit they want to sell. Following the sale, the former owner can remain in the unit as a tenant and pay rent to Star Mica. The new leaseback service is designed to help people cash out the value of their property for whatever reason. The reasons vary; for some it is inheritance-related issues, others might want to liquidate assets to cash for financing business interests or other purposes.
To help increase property sales, in January 2018 the company launched its new “Rent Clip” service. Rent Clip offers pre-owned condominium buyers the option of renting out their property to Star Mica in the future. By applying for Rent Clip and paying a fee, pre-owned condominium buyers can at any point during the specified period exercise their option to rent out their unit to Star Mica at the rate specified when the contract was signed. This arrangement allows potential condominium buyers to make a purchase even if there is a chance they may have to move due to changes in family situation, their work, or other circumstances.
In December 2019, the company’s subsidiaries Star Mica Co., Ltd. and Star Mica Residence Co., Ltd. entered into a business alliance agreement with Tsukuruba Inc. (TSE Mothers: 2978) in relation to the business of selling renovated condominiums. Through this alliance, Star Mica and Tsukuruba will jointly create a new sales system that allows buyers to select renovation design patterns from “cowcamo,” one of Japan’s largest renovation property media. Tsukuruba will utilize the market data of cowcamo’s 120,000 registered users to develop design patterns based on consumer preferences. This will enable purchasers of (pre-renovated) Star Mica properties to select their favorite renovation designs from multiple patterns. In the medium to long term, the company will consider making this sales scheme available to outside contractors and promoting the spread of renovated condominiums in the real estate industry.
In January 2019, the company reached a basic agreement with Connehito Inc., which operates an information app for women, “Mamari,” regarding joint development and provision of an online community dedicated to providing housing-related information. Mamari is an information app for pregnant women and women with children two years of age or younger. As of January 2020, one out of three women who gave birth in 2018 was reported to be using it. The user base, composed overwhelmingly of pregnant women, those who have recently given birth, or those who are raising young children, happens to overlap with the demographic of people who are purchasing a home for the first time. By collaborating with Connehito, the company aims to target this user base and allay their concerns about purchasing a home to promote the option of purchasing a renovated condominium. The collaboration will consist of Connehito adding a “Residence” category to the Mamari app and Star Mica responding to questions and concerns from users over housing and renovations from a specialist perspective.
Investment business
The company completed selling off tangible fixed assets in the Investment business in FY11/19. At end-FY11/20, it held JPY44mn in tangible fixed assets (-11.9% YoY). As of January 2021, the company has no plans to invest in income-generating properties, but will watch market trends and consider when to resume investment.
Advisory Services business
Star Mica targets new businesses by combining real estate and IT, including the application of VR technology in property viewing, using smartphones for entrance access, matching needs through utilization of the cloud (real estate and remodeling-related needs), and use of tablets for (paperless) contracts.
Return to shareholders
Organizational structure
Business
Description
Star Mica’s mainstay, the Renovated Condominium business, generates profits by renting or selling pre-owned condominiums. This business comprised 98.2% of the company’s overall sales and 87.0% of operating profit in FY11/20 (before adjustments and deductions, calculated as percent of total operating profit generated by all segments).
The company’s growth strategy focuses on an expansion of its existing operations and the development of new businesses. The company plans to expand its Renovated Condominium business and increase the number of such properties by borrowing money until its capital-to-asset ratio reaches around 25%. The company will at the same time expand its property rental, brokerage, and renovation businesses involving pre-owned condominiums, and will also move into Real Estate Tech, developing businesses that combine real estate with modern information technology.
Operations
The company’s main Renovated Condominium business is fairly unique for a large listed real estate company: it buys pre-owned individual condominium units that are being rented, renovates these apartments when the tenants move out, and sells them for a profit.
In Japan, purchasers of pre-owned condominiums with tenants are limited because these properties cannot be sold immediately after purchase and, according to local convention, the buyer cannot inspect the inside. As a result, such condominiums tend to be cheaper than vacant pre-owned properties. Star Mica acquires these individual tenant-occupied condominiums and initially earns rental income from the existing tenant; then when the tenant leaves, it refurbishes the unit before putting it on the market as a vacant unit.
The downside of this method is that acquiring a single condominium unit can be inefficient and cumbersome compared to buying the entire condominium. However, there is little competition to acquire such properties, allowing the company to buy them cheaply. By focusing on individual pre-owned condominiums, it is able to acquire units of differing ages and locations. This approach allows the company to spread associated risks (accidents, natural disasters, price fluctuations, and the tenant’s length of stay).
According to the company, when it is acquiring pre-owned condos, it quickly assesses the value of properties and makes swift purchase decisions. The company also has the ability to raise funds and enjoys a track record of successful transactions. As a result, the company is in a strong position to gather information from real estate agents on pre-owned condominiums that have been put up for sale. The company says it also has its own information network that sets it apart from competitors and gives it the ability to assess the value of a large number of properties and execute many transactions. Star Mica also has access to short-term funds that are not tied to any specific properties, allowing the company to quickly sign a purchase agreement.
Main business segments
The company’s business segments comprise Renovated Condominium, Investment, and Advisory services.
The Renovated Condominium business is the company’s main business. In FY11/20, the sales of this business accounted for 98.2% of total sales and its operating profit accounted for 87.0% of total operating profit (calculated as percent of total operating profit before adjustments generated by all segments).
(FY11/20)
(before adjustments; FY11/20)
Figures may differ from company data due to differences in rounding methods.
Operating profit composition percentages are calculated using the sum of segment operating profit before eliminations.
Renovated Condominium (in FY11/20: 98.2% of sales, 87.0% of operating profit)
Business model
The company makes profits from price differences between pre-owned occupied condominiums and vacant ones. The company purchases pre-owned family-size apartments with tenants and earns rental income until the tenant leaves. Then, it renovates the apartments and sells the vacant pre-owned units for a profit.
Process:
The exact cost varies according to the property in question, but in a typical case a pre-owned, family-size condominium located in or around Tokyo costs Star Mica about JPY20mn (the average purchase price for the company’s properties in FY11/20 was JPY19.4mn). The company earns about JPY120,000 per month in rent until the tenant leaves (the average rent in FY11/20 was JPY121,000). Then, the company spends about JPY3.5mn to renovate the units and sells them for about JPY30mn (the average sales price in FY11/20 was JPY30.0mn).
The company’s renovation of pre-owned condominiums includes new wallpaper, wooden flooring, doors, bath units, sinks, and restrooms. The company pursues comfort and seeks to offer environments that make childrearing easier.
Investment targets
The company buys single condominium units with the following features:
In November 2020, the company held about 3,328 pre-owned condominiums for families (versus 3,384 units at end-FY11/19). According to the company, at end-FY11/20, the average size of these family apartments was 66.70sqm, the average age was 29.8 years, and the average acquisition price was JPY19.4mn.
When purchasing an apartment, the company considers how easy it will be to sell, and is particularly conscious of liquidity and convenience. The company receives property information on about 3,000 units each month from real estate brokers, but purchases only about 100 units after careful inspection of the properties.
Pre-owned condominiums by area and age
As of November 2018, over 40% of the company’s properties are in Tokyo Metropolis, but only 6.7% were located in Tokyo’s five major wards (Shibuya, Shinjuku, Chuo, Chiyoda, and Minato). Those located in other wards of Tokyo comprise 29.7% of the total. Those located in Kanagawa Prefecture comprise 14.7%, followed by Saitama Prefecture at 6.2%, Chiba Prefecture at 2.9%, and the Kansai area (the prefectures of Osaka, Hyogo, Kyoto, and Hiroshima) at 21.1%. About 60% of the properties were built since 1989; about 20% were built between 1980 and 1988.
The proportion of the company’s condominium property holdings located in the Tokyo metropolitan area is on the decline, especially the proportion of condominiums located in the main five wards of Tokyo and other areas of Tokyo. That may be because the company selects its properties based on liquidity and convenience, and focuses on family-type condominiums that are in high demand (i.e., units that people want to buy and live in themselves). Of all of the company’s properties, the proportion of units located in the Osaka area, which had declined until FY11/13, has been rising since FY11/14 following the opening of its Osaka branch in January 2014. A similar pattern emerged in FY11/17 as the weighting of Saitama Prefecture properties increased following establishment of a branch office in Saitama from June 2016.
Shared Research believes that the company’s portfolio has been improved both in terms of liquidity and profitability.
Price differences in rented pre-owned condominium and vacant ones
A major source of profit after selling pre-owned condominiums is that pre-owned condominiums that are being rented are cheaper to buy than those that are vacant. According to the company, this is due to the following reasons:
As a result, apartments that are being rented are usually sold about 30% cheaper than vacant properties.
Liquidity and uncertainty vary widely between properties when purchasing pre-owned condominiums with tenants. Thus, the value and profitability of small property portfolios are heavily affected by the characteristics of each property. However, the company owned 3,328 properties at end-FY11/20 (3,384 at end-FY11/19), and is therefore able to reduce investment risk through diversification.
The prices of some properties—such as studio apartments for investors, new family condominiums, and expensive units in desirable urban locations—fluctuate depending on conditions in the real estate market. However, price fluctuations are small for the pre-owned, family-oriented condominiums that Star Mica specializes in.
The reason, according to the company, is that demand for apartments catering to families (i.e., units which people would like to buy to live in themselves) provides downside price support. If property prices were to fall, demand for properties would rise among those who live in rental houses—since the difference between what they currently pay in rent and potential loan payments would become smaller. Therefore, pre-owned condominium prices should not fall below the level where monthly loan payments would undercut condo rent costs.
During FY11/20, the company’s average pre-owned condominium was 71.48sqm, and sold for JPY30.0mn. The monthly rent for a similar condominium would be JPY121,000. Since the monthly housing loan payment (total loan of JPY30mn, 35-year amortizing mortgage with an interest rate of 1.0%) for this condominium would be JPY84,000 as of November 2020, the buyer would spend less money on monthly mortgage repayments.
Differentiating factors
According to the company, it quickly assesses the value of properties and makes swift purchase decisions. It also has the ability to raise funds and a track record of successful transactions, so it is in a strong position to gather information from real estate brokers on pre-owned condominiums for sale.
When assessing the value of properties, the company uses its own database with detailed information on the apartments that it acquired or considered acquiring in the past. According to the company, it uses a sales comparison approach (a method to determine the value of a property based on the transaction prices and list prices of neighboring properties) to provide appropriate and swift price assessments.
It is important to make swift purchase decisions. Real estate brokers are reluctant to disclose property information to other brokers because they want to maximize their earnings by representing both the seller and the buyer and receiving commissions from both sides. However, when a broker signs a contract with a property owner and agrees to find a buyer for the property, the broker is required by the Building Lots and Buildings Transactions Business Act to disclose information on the property. This information is disclosed through the Real Estate Information Network System, which is accessible to other brokers. These brokers then may come forward with their own buy offers, depriving the first broker of a chance to earn commissions from the buyer of its own. Shared Research understands that the broker would be able to avoid sharing the information if a buyer is found before the five-day period ends. Then, the broker would be able to earn commissions from both the seller and the buyer. That means a buyer who can make a quick purchase decision is an important customer for brokers. Such a buyer would receive property information before anyone else does.
Brokers are also eager to introduce properties to Star Mica because of its ability to raise funds. That is why the company receives property information more quickly than other potential buyers.
Barriers to entry
When it comes to acquiring single units and renovating pre-owned condominiums, Shared Research believes that new market entrants will face difficulty competing with Star Mica, which makes diversified investments based on statistical analysis and its own history of transactions. The company has the financial resources to acquire a large number of pre-owned condominiums. It also has knowledge on apartment renovation and expertise in handling a variety of tasks associated with this business.
As it is unknown when tenants will leave, it is impossible to tell when revenue from the sale of an individual pre-owned condominium that is being rented will come in. Further, there is no way to tell whether or not there are flaws with the property before purchase, because purchasers cannot see inside the property (given that someone lives there). Thus, new market entrants with no track record of purchasing pre-owned condominiums that are being rented are unlikely to purchase these types of properties thanks to uncertainty over their liquidity and the condition of the interior. Also, buyers with small portfolios are exposed to the pros and cons of individual properties. Star Mica purchases a large number of pre-owned condominiums to spread this risk. Some individual properties could be problematic. However, profits from these properties tend to converge at a statistical mean. When taken as a whole, these apartments generate a certain level of income for the company. As a result, the buying and selling of pre-owned condominiums that are being rented can be a viable business.
Product, service lineup
The company is seeking to improve the value of its pre-owned condominiums through renovation. The company, for example, offers condominiums that have been renovated from the standpoint of women and condominiums that come with recycled furniture to respond to the diverse needs of consumers. In June 2017, the company began to offer Jibun Reno, a renovation service that lets customers select a renovation plan of their choice.
Condominiums renovated from women’s perspective, with recycled furniture
The company created Shiawase Renove Kenkyujo, a product planning organization made up mostly of female employees, to renovate condominiums from women’s perspective. The goal is to create condominiums with plenty of space to provide comfort and ease of living for women.