House-flipper reaps big profits from Japan's empty homes

Tokyo

MORE than eight million homes lie abandoned across Japan, a symptom of the declining population and its migration to major cities. For one company, this is not just an ominous demographic signal: it's also a business opportunity.

Katitas is a house-flipper, deploying a business model that would be humdrum in other countries but considered innovative in Japan, because people in the country have a deep-seated aversion to second-hand homes.

Katitas buys old properties which are often considered worthless, renovates them on the cheap, and sells them to people in rural areas who do not have the means to buy new homes.

Its shares have risen more than 60 per cent this year as investors bet the model will yield steadily higher profits.

Katsutoshi Arai, the company's president and chief executive officer, said in an interview: "There's big potential in this business. People who live in rural areas but can't afford new houses have no choice of quality, affordable housing."

A record 8.46 million homes were unoccupied last year, according to a government report in April. The number, which represents 14 per cent of total residences, is only set to rise, said Katitas.

Mr Arai said: "It's clear that the number of vacant houses will surge. There's a big pool of properties that we can buy."

Houses in Japan traditionally haven't been built to last like in the US or Europe. The country's wooden homes typically depreciate to zero over about 20 years and are often knocked down and rebuilt.

Sales of pre-owned houses make up just 15 per cent of the market, compared with about 83 per cent in the US and about 88 per cent in the UK, said the Japanese land ministry.

Katitas mainly buys single-family houses that are on average 30 years old in regional towns. It uses a standard renovation tool kit - such as putting in new floors, kitchens and toilets - and sells them for about half the price of a comparable new home.

Buyers are usually people in their 30s to 50s, with annual incomes of between two and five million yen (between S$25,240 and S$65,100).

Shota Watanabe, a fund manager at stock picker Rheos Capital Works in Tokyo, which holds Katitas shares, said: "The company's business model is really good. It's likely to have stable and steady growth."

Katitas, which is based in Gunma, a prefecture north of Tokyo, posted operating profits of 9.1 billion yen for the fiscal year ended March, more than double the level three years earlier; analysts expect its profits to rise to 12.4 billion yen by the year ending March 2021.

Of 10 analysts covering the stock, nine rate it a "buy", and one, a "hold". On average, they expect shares to rise a further 14 per cent over the next 12 months.

The company, which has a market value of about US$1.5 billion, counts Baillie Gifford & Co and Matthews International Capital Management among its biggest shareholders.

Home-furnishing retailer Nitori Holdings owns about 34 per cent of Katitas after having acquired the stake from Advantage Partners several months before the Japanese private equity firm offloaded the rest of the company's shares through Katitas' December 2017 listing.

Katitas has started selling second-hand houses furnished with Nitori's sofas, tables and other items. Nitori said the company chose Katitas as a partner because the firms have similar management philosophies.

Mr Arai joined Katitas in 2012, when it was still owned by Advantage Partners. His mission was to engineer a turnaround at the firm, which was struggling at the time.

He instituted the model of buying empty homes directly from owners, rather than from court auctions, as was done previously. The supply of housing in auctions had been drying up and becoming more expensive.

Shinichiro Kita, a senior partner at Advantage Partners who had brought Mr Arai to Katitas, said: "Katitas' strength is its ability to assess properties and the risks associated with buying them, as well as its renovation expertise. There are thousands of potential home-buyers."

At least one analyst has turned more cautious on the stock. SMBC Nikko Securities senior analyst Junichi Tazawa lowered his rating to "neutral" from "outperform" in May, saying Katitas is looking less cheap within its sector after the rally this year.

Katitas has risen 61 per cent this year, and trades at 22 times estimated earnings, versus 14 times for the Topix Real Estate Index.

Mr Arai has an unconventional background for a CEO. At 28, he ran for the Tokyo Metropolitan Assembly, losing by a small margin. He worked next as a secretary for a member of Japan's parliament, and then moved on to roles at management consultancy Bain & Co and Recruit Holdings.

He said Katitas is targeting selling 10,000 houses a year sometime in the next 10 years, up from 5,352 homes last fiscal year. In the long run, he's seeking to increase that to 50,000 homes.

"We are not just a company that buys, remodels and resells second-hand houses. We want to provide people with a better life," he said. BLOOMBERG