Nov. 20 (Bloomberg) -- The air reeked of abandonment when architect Hiroyuki Kuroki first walked into a circa-1929 Kyoto townhouse with sunlight shining through holes in the ceiling and illuminating the dark, frost-covered floor.
After four years and millions of yen in renovations, that same house rents for as much as 84,500 yen ($1,040) a night for tourists and celebrities seeking a more-private alternative to hotels. It boasts a wooden bathtub of hinoki, or Japanese cypress, that is prized for its scent, under-floor heating, a Zen garden and entertainment by apprentice geisha -- a glimpse of tradition usually reserved for patrons of Kyoto’s private tea houses.
“The concept was to create exactly the same experience as owners from long ago,” said Kuroki, who redesigns homes for Iori Co., which manages 10 machiya, or pre-war wooden townhouses with lattice facades and baked-clay roofs that form Kyoto’s historic cityscape.
Restorations of such once-worthless homes across Japan are delivering investment returns as high as 80 percent and luring developers and entrepreneurs eager to turn a profit on resale or rental. The homes also are providing a source of tourism revenue to Japan’s shrinking villages as they seek new ways to draw visitors and create jobs.
“We kind of turned trash to gold,” said Jacob Reiner, a 41-year-old American architect, who said his Yamanashi prefecture-based development firm Eden Y.K. doubled its money on two properties before last year’s earthquake. “There is a huge innate value in the homes that are just being overlooked by the locals.”
About 200 old houses, including urban machiya, some from the 1603-1868 Edo era, and peak-roofed rural farmhouses known as minka, are being restored every year in Japan, according to Toru Kanai, who runs the Japan Minka Revival Association, a Tokyo-based nonprofit organization.
“People used to have negative attitudes toward old houses,” Kanai said. “That view has changed over the past years.”
A timber minka, restored by Reiner’s company in the town of Shojiko about two hours’ drive from Tokyo near Mount Fuji, sold last year for 18 million yen, delivering an 80 percent profit after costs, about what he expects to average on projects, he said. The deal yielded a 16 percent annualized payout to his local and foreign investors after the house was sold, with Eden taking the remainder.
Reiner has had as many as five investors, including himself, on his restoration projects, he said. So far, they have been private individuals. Eden has the capacity to take on as many as three houses a year, though it’s targeting to use capital it accumulates over time to do 10 houses annually.
Minka in Shojiko, estimated to be 150 years to 200 years old, can be purchased for around 5 million yen to 6 million yen, mainly for the land value, Reiner said. They can be restored for as little as 5 million yen, and then sold for 15 million yen to 18 million yen. Japan has no restrictions against foreigners purchasing property.
“The home buyers are usually happy,” said Reiner, an architecture graduate of Cornell University, in Ithaca, New York, who said he first visited Shojiko a decade ago and was struck by the potential of its empty old houses.
“Japan has a huge inventory of underused buildings,” said Reiner. “At first we had to prove it. Once the house is sold, investors were very eager to keep going.”
In Kyoto, Japan’s ancient capital, renovation-investment opportunities have also attracted local real estate companies. Mitsui Fudosan Co., Japan’s biggest developer by sales, announced Nov. 5 that it would restore a century-old building and incorporate it into the design of a five-story hotel it plans to construct. The building, which dates from 1903, was used as a vault, commonly known as kura in Japanese, with thick doors, used to store treasures and valuable commodities. The project will be completed by spring of 2014, the company said.
Hachise Ltd., one of at least four companies in Kyoto that rents out machiya, manages 14 houses for their owners. The firm also remakes properties for sale.
It costs around 14 million yen to buy a distressed property in central Kyoto, according to data provided by Japan’s land ministry. Renovations can cost 20 million yen and a restored machiya can sell for as much as 45 million yen, Hachise’s general manager Kazuya Matsumoto said in an interview. While Matsumoto declined to discuss profitability, his numbers show potential gains of as much as 32 percent.
Kyoto now has more than 100 machiya renovated for short-stay rentals, up from about five a decade ago, according to Kyomachiya, a machiya revitalization and research group. Still, about 115 old houses, some dating back to the early 17th century, are being torn down and turned into parking lots and apartments in Kyoto every year, data from the city show, though the pace has slowed from 132 on average a year seven years earlier.
Avi Lugasi, a 48-year-old Israeli who founded Windows to Japan Inc. with his Chinese wife, Wendy Li, spent about $180,000 four years ago to buy and renovate a machiya in Kyoto, their first project. Renters have allowed them to earn back almost all of their investment, with the property now generating as much as 8 million yen in rental revenue a year, a 20 percent return, Lugasi said.
The deal gave the couple the means to acquire six more homes for rentals.
“We calculated the numbers and they made sense to us,” Lugasi said.
In Iya Valley in western Japan, known for its dramatic mountain valleys, a newly renovated 300-year-old house is expected to bring in 5 million yen in rental income annually, according to Alex Kerr, an American who has restored more than 20 houses throughout the nation. Kerr co-founded Iori in Kyoto in 2004 before leaving in 2010 and setting up the nonprofit Chiiori Trust.
The thatched-roof house, estimated to have been built during Japan’s Genroku period from 1688-1704, brought in 600,000 yen in rental revenue in August, the first month it was open, Kerr said.
“People see that these are the base for a new industry that actually can make money,” he said. “Old houses, old towns and beautiful nature, all of that was viewed as uneconomical -- something that was to be disapproved of because it didn’t lead to economic advances. Suddenly there was a wake-up call.”
Rural areas that have been suffering from declines in Japan’s population, as people of working-age shift to cities, are also waking up to old-home renovation.
Ojika, a group of islands off the coast of Nagasaki prefecture in western Japan, hired Kerr in 2005 as a home-restoration adviser in a bid to attract tourists and create jobs after one in three people died or moved away in the past 15 years, said Hiroaki Hashimoto, who’s in charge of town planning.
Kerr provided the design for six restored houses and a restaurant on the island. The houses, decorated with tatami mats and wooden furniture, offer a view of jade-green ocean and farmland. Some houses, dating from more than a century ago, cost as much as 18,900 yen a night for two people. The average daily rate for hotels in Tokyo in September was 14,527 yen, according to data compiled by STR Global, a hotel industry researcher.
Tourism spending in the main town in the group of islands, with a population of 2,841 people, grew 14 percent in two years to 332 million yen after four houses and the restaurant were restored, Hashimoto said. He estimates an additional 30 percent increase by the year ending March 2014.
“We hope that with the increase of tourists, we can establish a tourism industry within the island so that people wouldn’t have to leave to find a job,” said Hashimoto.
About 280 miles east of Ojika, Miyoshi City started a project to restore historic houses to attract tourists in 2007, said Katsunori Ohzakai, an official at the local tourism department. The city provided the funding to restore nine houses in Iya, including Kerr’s, and has hired Kerr’s Chiiori Trust to manage the project.
“Chatting, reading and drinking -- ordinary things you can’t always seem to find time to do” is the slogan for three recently restored, thatched-roof farmhouses, which rent for 14,000 yen a night for two. Visitors are asked to “co-exist” with the natural environment, where water is taken directly from the mountain. Monkeys, deer, pit vipers and boar are among wild animals in the valley, according to the website.
Life or Death
Japan’s population of 127 million will shrink by one-fifth by 2050, according to an estimate by Tokyo-based National Institute of Population and Social Security Research. A fifth of 1,805 municipalities in Japan will have fewer than 5,000 people by 2035, the report showed. About 13 percent had less than 5,000 people as of 2005 and that figure will almost double to 20.4 percent by 2035.
For some municipalities in rural areas where the majority of residents are elderly, towns may disappear altogether, Kerr said.
“Beauty is now not some kind of romantic luxury, it’s life or death,” said Kerr. “If you live in Tokyo, life feels good. What population problem? If you go into the country side, it’s desperate.”
Kerr, who is working on two other projects in Kagawa and Nara prefectures, said there’s room for private investment in restoration projects.
“You can get 200-to-300-year-old houses built with timber from a wood that is almost extinct and they will give them to you almost for free,” said Kerr. “Once we get this thing going, we will soon have a lot of competition.”
In Kyoto, Iori’s machiya are decorated with antiques, including folding screens from the Edo period. Duvets in some bedrooms are wrapped with sash made originally for maiko, or apprentice geisha.
“Some of the old houses will continue to be destroyed -- that’s an unstoppable trend,” Iori’s Kuroki said. “We want to preserve those that we can save and so that our next generation will be able to experience what we have experienced.”
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