How one Japan condo HOA is investing repair reserves

On May 19th, the Nikkei Shimbun reported that some condominium Homeowner’s Associations (HOA) in Japan are beginning to move repair reserve (aka body corporate) funds out of bank accounts and into government bonds, seeking modest returns on money traditionally left untouched until repair work is needed.

Repair reserve funds are monthly contributions collected from condominium owners to pay for future building repairs, from smaller periodic works to major large-scale renovations.

In Japan, these funds are tied to formal long-term repair plans that usually stretch decades into the future, often around 35 years, making the real value of accumulated reserves especially important as inflation pushes construction costs higher.

But as inflation erodes the real value of those savings, owners with financial expertise are taking the lead in finding ways to better prepare for future repair costs.

The HOA of The Parkhouse Hon-Atsugi Tower, a 22-story, 163-unit condominium completed in 2021 in Atsugi, Kanagawa Prefecture, purchased 30 million yen in Japanese government bonds in February using part of its repair reserve fund. The purchase was made through a major securities company.

The bonds are 10-year Japanese government bonds with a coupon rate of 0.1 percent, and the HOA expects to hold them for about one year. Including interest income and gains from redemption, the investment is expected to generate about 300,000 yen annually.

Although the building had already accumulated about 180 million yen in reserves by its fifth year, the original long-term repair plan showed the fund would still fall short by 29 million yen in year 20 and by about 400 million yen by year 34, after the second major repair cycle.

Rising Repair Costs Force Earlier Action

“Leaving the reserve fund untouched until the next major repair is not a good strategy,” said Akira Momoi, former chair of the HOA to the Nikkei Shimbun. Momoi said rising construction costs caused by inflation created a growing sense of urgency.

Momoi encouraged the HOA board to act, and in November 2024 the building established an asset management committee. As a first step, it purchased one JPY 500,000 unit of the Japan Housing Finance Agency’s Mansion Sumai-ru Bonds, a relatively conservative bond product used by condominium HOAs to invest repair reserve funds over the long term.

“Sumai” means residence in Japanese and adding “ru” to the end sounds like “smile” in English. “Mansion” is the katakana English word referring to condos.

The HOA then invited representatives from a securities company to hold several study sessions for owners. In January this year, owners approved the use of government bonds for reserve fund investment. Discussion at the general meeting lasted about 15 minutes.

“Rising long-term interest rates created a favourable environment for government bonds, making it easier to gain owners’ understanding,” Momoi told the Nikkei.

The board also reviewed the building’s long-term repair plan and raised monthly reserve contributions. When the building was newly completed, the monthly contribution was set at 100 yen per square meter per unit.

From April this year, it was increased to 214 yen.

Although owners’ monthly burden more than doubled, some at the general meeting said they would rather see fees raised properly than face one-time charges or be unable to carry out necessary repairs.

The proposal passed with 98 percent approval.

The change also moved the building away from a system in which reserve contributions rise gradually over time, replacing it with a flat contribution model designed to collect the necessary funds more steadily.

Developers often favour gradual increases because they keep advertised monthly costs low when units are first sold. But each increase requires owner approval, creating a risk that funds will not accumulate as planned.

For buyers, the case highlights a common risk in Japan’s condominium market: monthly reserve contributions that appear affordable at purchase may later need to rise sharply if the original repair plan was underfunded.

“People considering a condominium purchase tend to focus on how inexpensive the monthly costs look,” Fumiko Watanabe, associate senior researcher at NLI Research Institute said to the Nikkei. “But they need to check whether repair reserve contributions are set at a sufficient level with future repairs in mind.”

Part of the surplus generated by the increase in reserve contributions will continue to be invested to prepare for further rises in repair costs. The HOA is considering two additional purchases of government bonds, each worth 30 million yen, bringing total investment to about 90 million yen.

The board is also considering extending the period covered by its long-term repair plan from the current 30 years to 60 years, as well as reducing costs by lengthening repair cycles.

“If the system is put in place while the building is still relatively new, repairs can be carried out in a planned way,” Momoi said. “The more time passes after completion, the busier the board becomes dealing with day-to-day repair issues.”

Most Reserve Funds Still Sit in Bank Accounts

Still, investing repair reserve funds is not simple for condominium HOAs. Momoi first became interested in investing after using a first part-time paycheque n high school to buy government bonds and has since built experience in asset formation.

The presence in the HOA of a key person with this kind of financial knowledge helped the building reach consensus.

In practice, most repair reserve funds are kept in bank accounts. In a fiscal 2023 survey by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), condominium management associations with repair reserve fund systems were asked to identify where they placed their funds. Multiple answers were allowed.

Among 1,522 associations, only 0.1 percent said they used government bonds.

Ordinary (Futsu) bank deposits accounted for about 80 percent.

According to the Nikkei, in 202, Japanese government bonds for individual investors are expected to become available to condominium management associations.

The “new OTC sales government bonds” currently available carry price fluctuation risk if sold before maturity.

Government bonds for individual investors cannot be redeemed for one year after issuance, but they do not carry the same principal-loss risk as market-traded bonds when redeemed under the program’s rules.

The challenge, specialists say, is not simply to chase returns, but to balance safety, liquidity and timing.

“In a rising interest rate environment, it is important to reduce risk by staggering investment timing while capturing interest income,” said Hiroaki Komatsu, professor at Meikai University. “It is also important to keep cash on hand for unexpected repairs while investing a portion of available funds.”

Sources:

Nikkei Shimbun (Japanese only; paywalled)

MLIT FY2023 Homeowner’s Association Survey Results (Japanese only)