‘Helping our Client’s Ideal become a Reality’

In 2012, Prime Minister Shinzo Abe launched his ambitious “Abenomics” program, which was composed of three arrows: monetary easing, fiscal stimulus and structural reforms. All of these reforms have had a great impact on the Japanese real estate sector. Could you give us a global overview of the real estate sector here in Japan, and the impact that “Abenomics” has had.

Since 2012 and the various policies the Abe government put in place, we can quite frankly say that the times are promising. However, things have not always been easy, especially when the Democratic Party of Japan (DPJ) was here. We suffered many traumatic experiences, such as the Tohoku earthquake in 2011, the Lehman shock in 2009, and even before that when the bubble burst in 1989. In that sense, Japan has had many difficult times that we have been able to overcome. Presently, in 2019, with the last year of the Heisei period, things are picking up, and we can notice that the Japanese economy has picked up thanks to these great long term policies that Prime Minister Abe has put in place. We are very much looking forward to what comes next for Japan, especially in the Real Estate sector.

Looking to the future, we need to try and analyse the various weak points of Japan. Firstly, the problem of the shrinking population, and especially the shrinking workforce. This will become extremely problematic for Japans future. Secondly, we can notice that there is not as much transparency in the Japanese real estate sector as there may be in the European or American market. This is something we need to greatly improve. It is very important for Japan to learn to manage assets, something that Europeans or Americans are very good at. Here at ES-CON, we hope that our J-REIT, that has been publicly listed February of this year, and which boasts a 10 trillion-yen market capital, will be able to breach those issues and will help the Japanese public to get more involved into Japan real estate, while also increasing the awareness and the transparency of the Japanese market as a whole. Finally, we hope that this will increase the productivity of our workforce, which will undeniably help to tackle the problems of the shrinking population.

To tackle this shrinking population, the Abe administration has implemented many reforms. The most emblematic one was to invest massively in tourism. This has been extremely successful, with 30 million tourists visiting Japan last year. Looking towards the 2019 Rugby world cup, and the 2020 Olympics, can you explain to us what effects these large sporting events and the increasing tourism in Japan, have on the hospitality real estate sector here in Japan.

Abe’s administration has really been pushing to attract tourists from all around the planet to Japan. This has lead to many hotels being built all around the country in order to cater for this massive influx of tourists. I personally believe that with the booming media traction promoting Japan worldwide, it is important to communicate to the world how clean Japan is, how safe our cities are, how delicious our cuisine is, how easy it is travel and how friendly the people are here in Japan!

Japan has so much to offer to the world, and we look forward to showing this to the world during the Olympics, but also after 2020. 

Last year, there was a media outburst with many national and international medias claiming that in the hotel sector, there were too many projects being developed in Japan and that supply would overshadow demand in the years leading to the Olympics. I would like to ask you what is the current situation concerning the offer and demand of the hotel sector?

 My opinion is that it comes down to hotels that are able to deliver high quality services, as they are the ones that will remain in the business. It is extremely important for Japan that hotels continuously improve their services. The need for high quality hotels are still in extremely high demand. There are many projects that are being undertaken in order to renovate existing hotels, in order for them to match international standards. Japan’s objective is to have 60 million tourists visiting the country by 2025, so we still have a long way to go, and therefore hotels play a central role in the achievement of this objective. One key strongpoint of Japanese hotels is their price, as when we compare them to Paris or New York, they are still relatively affordable. As Real Estate prices are directly linked to the prices of accommodation, once hotels manage to improve their services, they will be able to increase their prices, leading to an increase in the real estate price. With the upcoming Kansai exposition in 2025, the future casino’s that are said to open in Osaka soon, and the upcoming sporting events, we believe we have a golden future ahead of us.

We have noticed that in recent years, cities such as Sapporo and Fukuoka have been attracting great investment opportunities, because of the redevelopment of the airport in Sapporo or the Tenjin Big Bang project in Fukuoka for example. Could you expand on the new facilities you offer in these regions, and why they are interesting for international investors.

It is undeniable that Fukuoka has a fantastic growth opportunity. When we take an overlook at the major cities in Japan in terms of real estate market they would be: Tokyo, Osaka, Nagoya, Fukuoka and Sapporo. If we were to rate them in terms of size, we could say that Tokyo would be outstandingly in the lead with 100, followed by Osaka with 50, Fukuoka and Nagoya with 25 each and Sapporo with around 20. You can notice that if you can have a strong foothold in these cities, you are able to provide a solid and successful business in terms of real estate. Fukuoka is a clear gateway for Asian tourists, as it is very close to Korea. Also, the population is growing, as the Kyushu youth is heading towards Fukuoka. If you combine all these factors with the Tenjin redevelopment, we can definitely say that Fukuoka will be a major actor in the Japanese real estate market.

 Finally, I also want to add Okinawa in this list, as I personally believe that it can become the “Cannes” of Japan. There are fantastic temperatures year round, a beautiful ocean, and great money being invested into the airport.

Could you explain the role that international investors will play in the future development of ES-CON Japan, and do you have any services that cater specifically to the needs of foreign entities?

ES-CON Japan is here to cater for inbound needs, as much as outbound needs. Of course, we are always willing to help international investors continue to invest in Japan. With regards to our hotels, we have Ascendas in a Singapore, invested in one of our hotels, and we are developing assets in this way in order to provide foreign investors with a gateway to the Japanese market. In March this year, a Korean group have already purchased one of our hotels in Osaka, and this is because of the cheap initial cost here in Japan combined with a stable government and a stable economy.

Many experts have claimed that it is quite difficult to invest in the Japanese market because of the low supply (the market is quite saturated), combined with the domestic players which beneficiate from low interest rates. Nevertheless, we can also notice that Japan is one of the only Asian countries where you can have free-holding rather than lease-holding and also that J-REITs have greatly diversified their portfolio to cater to all the needs of international investors. My question to you is: how would you convince an international investor to invest their money here in Japan?

The first strength of Japan is undoubtedly the people. Japanese people are extremely honest, trustworthy, and always hold their promises. Secondly, I believe that investing in Japan is more profitable than other countries because of the high investment yield. An example of this would be that in Seattle, if you would like to invest in rental apartments, the yield on investment is of about 4.5%, but the interest rate is at 5%. Your strategy would therefore be to wait for the rent to increase, and at the maximum possible rent, you would exit your investment, which would allow you to get your yield on investment. However, in Japan, the yield of 4.5%, with an interest of 0.5%, meaning that it is very interesting to invest in Japan. When it comes to cash flow, it is an attractive country. Of course, when it comes to offices in central Tokyo, the cap rate is less than 3%, meaning it is very challenging, but if you were to look more into residential buildings, and further out of Tokyo, you can most definitely guarantee a 4.5% investment on yield.

Today, ES-CON Japan has diversified its portfolio, and you have become an integrated group. You have also articulated a medium term management plan “Ideal to Real”, ending this year. Could you please expand on this management plan, elaborate on the results and talk to us about the future for Es-CON Japan.

In terms of results, I am very happy and proud to say that they exceeded our hopes, and estimations. We have also been able to set new goals and targets that also exceed our initial target. In these past years, we have had some fantastic accomplishments and achievements, such as our partnership with Chubu Electric, which is now one of our group companies. In addition, our J-REIT has been publicly listed, which is a huge accomplishment. We hope that our next mid term strategy will show our ambition, and our objectives will reflect all that we wish to accomplish.

In recent years, because of the corporate governance code, a lot of companies in Japan are starting to develop pro-active management strategies whereas before, many companies where on the defensive when it came to pro-active management strategies. Today, even old-fashioned Japanese companies are starting to change their management strategy to grow, and modernise their way of thinking.

One of your company’s philosophy is to be a “life developer”, rather than a simple real estate company. Could you please explain you company’s vision to our audience?

One of our company’s corporate message is “Ideal to Real”, as we believe we help our client’s ideal become a reality. We want to be a “life developer”, which means that we do not only provide a building, but rather a lifestyle. We want to enhance people’s quality of life, by offering support which is much more than just a condominium. Whether it is by managing a coffee shop on the first floor, offering room service for our apartment’s, as well as cooking classes for the community, our objective is to enhance the quality of life in neighbourhoods.

In the distant future, you will leave your presidency and leave your chair of president to the new generation. When this happens, what legacy would you like to leave behind, and what objectives would you like to have accomplished as the president of ES-Con Japan?

I really hope to contribute to the betterment of Japan as a country. I want my grandchildren to be happy to have been born in this fantastic country. Japan has gone through so much, from the end of the war to now. I hope that my work can honour our predecessors, as well as help to overcome the many issues that lie ahead of us, such as social security and pension systems. We have many challenges ahead, but by becoming more independent, I believe we can all contribute to a better Japan.

ES-CON Japan REIT was listed on February 13, 2019. Its portfolio consists mainly of retail facilities for everyday life as well as land with leasehold interest, a rarity among J-REITs. What benefits do you think ES-CON Japan REIT offers to overseas investors looking to invest?

ES-CON Japan REIT prioritizes investment in retail facilities developed by ES-CON Japan as well as the land underneath them. Japan is a country of leaseholds and has long placed great emphasis on land ownership. Therefore, land is a suitable asset for a J-REIT because investing in it means gaining the right to receive long-term land rent from the building owners, producing steady quality and profitability. While J-REITs have already expanded into diverse assets, ES-CON Japan REIT is the only one to prioritize investment in land with leasehold interest. We wish to see continuous growth in tandem with ES-CON Japan as a distinct J-REIT in Japan’s legally mature market.

Satoshi Omori ,

Representative Director and President of Escon Japan REIT