What Are Seismic Standards and Why Are They Important
In real estate investment, the terms "old seismic standard" and "new seismic standard" appear frequently, yet surprisingly few investors fully understand their specific differences or their impact on investment decisions. Seismic standards affect not only property safety but also financing conditions, asset values, tenant demand, and sale-ability. This is fundamental knowledge that every investor, from beginners to intermediate, must grasp.
Japan's Building Standard Law seismic standards have been repeatedly strengthened following major earthquake damage. The most critical turning point in current real estate investment is the major revision in June 1981. Before and after this revision, standards are called "old seismic standards" and "new seismic standards" respectively.
Differences Between Old and New Seismic Standards
Old seismic standards (for buildings that received building permits before May 1981) were designed on the premise that "buildings would not be destroyed even in earthquakes around magnitude 5 strong." The 1995 Kobe earthquake (Great Hanshin-Awaji Earthquake) caused severe damage predominantly to buildings meeting old standards, leading to widespread recognition of the standards' limitations.
New seismic standards require that "buildings will not collapse even in major earthquakes around magnitude 6-7 strong." Specifically, regulations concerning the quantity (shear walls) and placement balance of walls were dramatically tightened. Buildings that received building permits from June 1981 onwards comply with these new standards.
Further, the Building Standard Law was revised again in 2000, adding mandatory soil surveys and strengthened specifications for joint fasteners. Properties complying with this 2000 revision are considered to have particularly high seismic performance, especially wooden structures.
Impact of Seismic Performance on Financing
Properties meeting old seismic standards face significant disadvantages in financing.
Many financial institutions adopt policies of either not providing loans to old seismic buildings, or limiting loan periods and LTV ratios (loan-to-value). Particularly for home loans (secured loans) from major banks and regional banks, old seismic properties are often rejected in principle.
While some non-bank lenders and certain credit unions provide loans for old seismic properties, interest rates and terms are generally unfavorable. Properties difficult to finance have limited buyer options when sold in the future, potentially becoming a fatal weakness in exit strategy.
Risks When Holding or Acquiring Old Seismic Properties
Old seismic properties carry risks beyond financing.
Exit risk at time of sale is the primary concern. Old seismic properties can only be sold to cash-buying investors or investors able to obtain non-bank financing. With an absolute shortage of potential buyers in the market, there is risk of suppressed sale prices or extended sale periods.
Tenant demand issues also exist. In recent years, more tenants check seismic performance when selecting rental properties. Each major earthquake strengthens the mindset that "I don't want to live in old seismic buildings," particularly among younger generations and families with children.
Insurance terms are also affected. Old seismic properties may face higher fire and earthquake insurance premiums, becoming a factor in increased operating costs.
Seismic Retrofitting (Seismic Reinforcement)
Seismic retrofitting or seismic reinforcement refers to work performed to raise old seismic standard buildings to seismic performance near current standards.
For wooden buildings, seismic retrofitting primarily involves adding shear walls, reinforcing metal connections, and strengthening foundations. For reinforced concrete or steel structures, reinforcement work to columns, beams, and walls is necessary. In all cases, construction costs vary significantly based on building size and structure, making it essential to first receive a seismic diagnosis from an expert (architect) and develop a retrofitting plan.
Some municipalities offer subsidies and assistance programs for seismic diagnoses and retrofitting work. Contacting the municipality where your property is located may reveal available programs.
Should Investment in Old Seismic Properties Be Pursued?
Old seismic properties are not categorically inappropriate as investment targets. What matters is accurately recognizing risks and determining whether price and profitability are justified.
From a land value investment perspective, the building's seismic performance takes secondary importance to the land's value and ease of reconstruction. For properties in good locations with expected capital gains from future redevelopment or sales, even old seismic buildings can be investment candidates.
For short-term holding targeting high yields, old seismic properties' low acquisition prices and high surface yields can be leveraged to maximize cash flow over several years, with exit through sale to cash buyers or investors. However, this strategy requires careful prior verification of exit feasibility.
Conversely, for strategies premised on long-term holding and financing utilization, old seismic properties should be avoided. The triple risk of worsened financing conditions, difficult refinancing, and limited exit options can significantly reduce long-term investment efficiency.
Confirmation Points Even for New Seismic Properties
If a property complies with new seismic standards, is it completely safe? Actually, additional checks are needed.
Building permit acquisition dates after June 1981 may still have actual completion and delivery dates before that. Be careful not to confuse property age indicators (completion month/year) with building permit acquisition dates.
Status of seismic diagnoses and retrofitting should also be confirmed. Particularly for properties 20-30+ years old, ask the seller or property management company whether seismic diagnoses have been performed previously and whether retrofitting has been conducted.
For condominiums, management association records are also confirmation sources. You can verify through management association minutes whether long-term maintenance plans include seismic reinforcement and whether they have been implemented.
Summary of Investment Judgment
Seismic standards are a frequently overlooked yet significantly impactful element in real estate investment over the long term.
While choosing new or post-new seismic standard properties is the basic principle, investment in old seismic properties is not categorically rejected. What matters is accurately understanding risk locations and making investment decisions that incorporate risk across all aspects—acquisition price, profitability plans, and exit strategy.
Before purchasing properties, always confirm construction dates, building permit acquisition dates, and seismic diagnosis status, incorporating expert opinions as needed.