Reality check: Condo repair funds not enough

May 3rd, 2011 by Philip Brasor & Masako Tsubuku

Repair work on the exterior of a condominium in Urayasu, Chiba Prefecture

In mid-April, the land ministry announced the results of a study it had carried out with regards to condominium shuzenhi tsumitate-kin (reserve funds for repair costs). The ministry had never researched the matter before and found that throughout Japan money collected from condo owners by housing management companies for repairs is grossly insufficient, and called on developers to be more honest with potential buyers of new condos by outlining the true cost of potential repairs and setting fees accordingly.

When you buy a condo in Japan you take on the burden of certain running costs related to maintaining the building as a whole. This fee, called kanrihi, goes toward things like elevator maintenance and custodial staff. It can run anywhere from several thousand yen a month to almost ¥40,000 a month, depending on the building’s size, location, and amenities. However, there is another burden that owners must assume. Shuzenhi is money that goes into a savings account for future work on the building as a whole, such as exterior painting, structural repairs and replacing superannuated equipment. The land ministry found that in the majority of the 84 cases it studied the reserve fund was not enough to cover this anticipated work. The reason for this insufficiency is that developers set the monthly contribution way too low in order to sell units more easily. Because kanrihi is basically set by management companies contracted to take care of the building, the developers have little control over it. First-time homeowners may be discouraged to find that, in addition to their monthly mortgage payments, they have to cover these non-negotiable charges. Consequently, developers and realtors try to keep the shuzenhi low — ¥10,000 a month seems to be the psychological upper limit. The land ministry, however, is recommending that shuzenhi be doubled in most cases, a suggestion that, if carried out, could put a damper on the already beleaguered new condominium market.

However, the purpose of the ministry’s suggestion is to preserve whatever property value these condos may represent in the future. Without proper repairs and maintenance, the buildings will lose their value even more quickly. The ministry’s guidelines say that painting and water-proofing should be carried out once every 12 years at least. Obviously, the cost to each resident of a building with many units is less than it would be to a resident of a building with fewer units since the overall cost in larger buildings is spread out more. In a typical 14-story building comprising 50 units, the ministry found that a suitable shuzenhi would amount to about ¥218 per square meter. If the building had 100 units, that cost would drop to ¥202, and if more than 100 units it would be ¥178. However, the average shuzenhi collected in the Tokyo metropolitan area for comparable buildings is only ¥95. Matters become even more complicated with high-rise condos. Though tall buildings tend to contain more units, the special demands of maintaining such a structure means that costs are higher. Painting and cleaning require elaborate scaffolding or hoist devices. Elevators need more expensive repair work.

As an illustration of what these repairs usually entail, a friend of ours told us that the residents association of her 10-story condominium, built in the mid-1980s, recently had to replace the elevator. It cost ¥10 million to do so, which completely wiped out their reserve repair fund. If they want to do any other repairs in the future, they will have to collect more money more quickly, and, considering how old the building is, other repairs will be needed soon.

Shuzenhi will likely attract more attention in light of the earthquake of March 11. Some condominiums in the Tokyo area sustained damage; not necessarily enough to require evacuation, but enough to require repair work. If the ministry’s estimates are correct, the reserve repair funds for these buildings may not be enough. Also, in 1981 the government passed stricter anti-earthquake reinforcement regulations for buildings. About 10 percent of all condos in Japan were built before 1981, meaning they need to be earthquake-proofed if they haven’t already. Anti-earthquaking a large building involves costs that run into the hundreds or millions of yen. In many cases it may be cheaper to simply tear down the building and erect a new one. But even keeping state-of-the-art buildings in shape costs money. Right now, condos that are built with rubber dampers in their foundations (menshin) are very popular (and expensive), but potential owners have to be made aware that such a system requires that the dampers be replaced at the longest every 25 years and that such replacements would cost each tenant an extra ¥2-3 million. That may sound like a small price to pay for security, but, then again, the technology is still new and hasn’t been tested by the Big One yet.

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