Tokyo Landlords Lose Century-Old `Gift Money' as Rents Slump
After viewing almost 100 Tokyo apartments, banker Damien Cambon was happy to discover that a Japanese tradition dating back more than a century is dying: the payment of up to two months’ rent extra as a gift to the landlord.
“Reikin,” or “gift money,” a non-refundable fee on top of a deposit and any broker fees that has helped boost landlords’ earnings since at least 1897, is the latest victim of a slump in the market in the world’s second-most expensive city. Rents in Tokyo’s five central wards fell to an average 4,165 yen per square meter in June, the lowest since the Japan Real Estate Institute started tracking prices in 1998.
“My broker would say, ‘forget about the gift money,’ and the landlords would all say, ‘OK,’” said Cambon, 29, who works for a U.S.-based bank he declined to name. “This was a very good surprise.”
As Prime Minister Naoto Kan considers injecting as much as 4.6 trillion yen ($55 billion) into the economy to create jobs, boost consumption and stem 12 years of deflation, Tokyo landlords are also trying to stimulate the rental market by scrapping reikin and waiving as much as five months’ rent for new leases.
“The rental property business is changing,” said Yoshiya Watanabe, a real estate agent at Atland co. in Tokyo. “If you eliminate reikin, you get better turnaround” for vacant units.
While landlords of luxury Tokyo apartments rented for 500,000 yen or more have waived reikin in the past, as many as 65 percent of units below that tier now don’t require gift money, compared with about 25 percent two years ago, Watanabe said.
Cambon said his previous landlord lowered his rent 13 percent at the end of his two-year lease and waived the contract renewal fee of one-month rent. Even so, he opted for a new apartment with a terrace and rooftop access.
The September 2008 bankruptcy of Lehman Brothers Holdings Inc. and the recession that followed prompted a drop in occupancy rates, said Hirotaka Uruma, chief financial officer at Daiwa House Morimoto Asset Management Co. The company oversees BLife Investment Corp., a residential real-estate investment trust that manages 8,116 apartments in Tokyo.
“Waiving reikin has become the norm,” he said. “When your competitors are also waiving it, it doesn’t make sense for us to keep demanding it.”
BLife’s residential occupancy rates in Tokyo’s five central wards dropped to 85 percent in November from 94 percent a year earlier, he said. In the same period, gift-money income as a proportion of total revenue for BLife dropped to 0.3 percent from 1.65 percent, Uruma said.
‘Doesn’t Make Sense’
“In the long run, reikin will completely disappear because this is a system that doesn’t make sense,” said Yoji Otani, a real estate analyst at Deutsche Bank AG in Tokyo. Eliminating the fee “will make it easier for tenants to move around, which is good for brokerage companies, but bad for residential REITs.”
Gift money dates back to as early as 1897 when it was documented in a contract for a property in Tokyo’s Chiyoda ward, according to “Japan’s Rental Property (1995),” a book by Nobuhisa Segawa, a law professor at Hokkaido University. The practice originated to offset rising land prices while ensuring rents for new tenants weren’t substantially different from what their neighbors were paying, according to Segawa. Reikin income is typically split between the broker and owner.
Landlords who are holding on to the practice, also known as “key money,” include those who have inherited their property and are less concerned about vacancy, Watanabe said.
Not in New York
Demanding key money is illegal in New York, according to the New York City Rent Guidelines Board. The practice is no longer prohibited in England, though landlords typically don’t charge a “premium,” which gives tenants the right to assign tenancy to a third party, according to Tessa Shepperson, a lawyer in Norwich.
Tokyo Governor Shintaro Ishihara said in a 2004 policy statement that reikin as well as contract renewal fees should be eliminated. While the city’s position has not changed, it can’t legally force landlords to abolish the fee, said Kazuo Onoda, who works on the city’s efforts to improve housing policies. The decline of reikin “is a result of market forces,” he said.
Even after Japan’s land prices tumbled the most in 13 years in 2009, Tokyo is still the second-most expensive city in the world for expatriates behind Luanda, Angola, based on Mercer LLC’s Cost of Living Survey released in June that compares housing, food, gasoline, movie and other prices. Rent for a mid- range two-bedroom unfurnished apartment in Japan’s capital averaged $4,436 a month, compared with $3,906 in London and $4,000 in New York, according to the study.
Some landlords say reikin payments may return once Japan’s property market recovers.
“At the moment, new supply is very limited,” said Atsushi Ogata, chief executive officer of Nomura Real Estate Asset Management Co. which manages a residential and an office REIT. “In a couple of years, we may face another good market, with demand outpacing supply, in which case we can probably charge as much reikin as before.”
Total gift-money income dropped by about half on average in March and April, when the majority of new tenants move in, from a year earlier, Ogata said.
Meanwhile, it’s a tenants’ market in Tokyo, as rent has dropped by as much as 15 percent since 2007, said Mikihisa Hirai, president of Tokyo-based Atlas Partners Japan Ltd., which owns more than 2,000 apartments in Nagoya, Osaka and Tokyo.
“In order to attract new tenants, owners would rather forget the gift money, especially when properties are owned by funds,” he said. “Investors can no longer count on reikin.”