Wednesday, Mar 20, 2019
Real Estate | Asia-Pacific | Japan

Real Estate, Japan

High-rising opportunities in Japanese real estate


2 weeks ago

Mr. Toshiyuki Sonobe, President of DAIBIRU CORPORATION
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Mr. Toshiyuki Sonobe

President of DAIBIRU CORPORATION

In this interview with The Worldfolio, Toshiyuki Sonobe of Daibiru Corporation discusses the outlook for Japan's booming real estate market, the impact of growing tourism on the industry, and Daibiru's overseas operations in Vietnam and Australia.

 

In Q1 2018, Tokyo became the world’s most traded real estate destination. What is your analysis of Japan’s real estate market today? What are the reasons for this boom?

Let us begin by giving you a general picture of the real estate industry in Japan. During the bubble period of the 1990s, a lot of investment was going into real estate. This huge bubble burst in the early 90s and the sector hit rock bottom. New building developments dramatically decreased and everyone was burned and scared to invest further. It happened nationally throughout Japan but especially in Tokyo. Thanks to various economic policies and Abenomics’ three pillars for revitalization, which started in late 2012, fresh momentum has been brought into the real estate market.

Of course, many Japanese entities now invest capital into real estate but you can also see that there's an increase in foreign investment into Tokyo. While the number of foreign investors may seem low, representing around 17% of all transactions, it shows immense growth compared to before. Towards the 2020 Olympics, that number will increase and I do feel that it will climax at that point in time. Although Tokyo is a huge metropolis, it has its limits.

Moving forward, investment will slowly move onto other main cities, such as Osaka. Osaka is second to Tokyo as a candidate for real estate development. Although it's about 25% the size of Tokyo, I believe it is a viable candidate. Looking back in the past, 100 years ago it was on equal footing with Tokyo. Gradually, the disparity with Tokyo was accentuated and the capital became four times as large. Despite such circumstances, we have continued to keep our home ground in Osaka and continued to grow for the past 95 years.

 

Can you tell us more about the long history of Daibiru?

Tracing back our history and giving you an overview of our firm, we started as the subsidiary of a shipping firm. We had our own building and we were one of the first to offer leasing spaces for businesses. If we were able to venture in that direction, it is because when the shipping company’s staff travelled to London and New York, they saw how commercial real estate businesses worked over there. They would have their own buildings that they would lease out to other companies. We then imported such business model here.

With the advent of World War 2, we went through a decline that continued for a few decades. After the war, as Japan's economy began to rebuild itself, we saw an opportunity to construct new buildings. Now, we boast 12 buildings in both Tokyo and Osaka respectively. In each of those 24 buildings, what's very unique to our firm is that we basically continue to do management in-house. We provide all of the building management services in-house, including building maintenance, cleaning and security. Throughout the years, we have remained true to the Japanese spirit of hospitality, known as “omotenashi.”

Our commitment to providing such services is something that was acknowledged by our clients. As a result, most of our clients have been built through long-term partnerships. Thanks to that, I think we have an array of trustworthy, good quality tenants. This includes large, as well as smaller office tenants. In order to expand upon the model that we already had, we started to be more adventurous and began managing buildings specifically designed for retails tenants. We also own a building leased out to a hotel i.e. the ANA Crown Plaza Hotel in Osaka.

 

In September 2017 to September 2018, tourism increased by 22% year-on-year; 75% of the tourists take the Golden Route; that is, Tokyo-Kyoto-Osaka. What have been the effects of all this booming tourism on the Japanese real estate market?

Nowadays, we see that larger real estate firms are expanding with accelerated momentum. They are investing not only into office buildings, but also into other types of properties, such as hotels, residences, their complexes, and even resorts. Railway companies have also joined this momentum, especially in terms of expanding their hotel assets to reap the fruits from growing demand from inbound tourists.

However, Daibiru is different. While our peers have moved on to non-office sectors, we decided to focus our efforts on office premises as our main line of business. We challenged ourselves to geographically expand our office leasing activities, namely to overseas.

In 2012 and 2014, we bought the Saigon Tower in Ho Chi Minh City and the Corner Stone Building in Hanoi. We became the first Japanese real estate company to own office buildings in Vietnam. We added some Japanese style essences to these buildings, for example by installing washlets. They started to be highly appraised by the local business society. Thanks to that, all the spaces are now occupied. About one fourth of those occupants are retained by Japanese-based firms, but the rest of them are occupied by global and local companies. Of course, we were able to acquire the building when prices were affordable. Beyond that, it matched the motto and principle with which we operate: to provide services and facilities that can support society.

In Vietnam, we were blessed to procure prime assets. If there are good opportunities, we’d like to invest further. However an influx of foreign investment is intensifying competition in Vietnam as well, and it is now becoming harder to increase our assets in the market than it was before. We've really been looking into different regions with our pioneering spirit and we were recently able to find a prime asset in Australia – that is 275 George St. in Sydney.

Although the building can be categorized as something in the range of medium size, its location is one of the best in Sydney CBD (Central Business District). Together with its high quality specs as a ‘Grade A’ building and its environmental friendliness, we believe the facility can attract strong support from customers.

 

Talking about your overseas investment, we found from our research in an interview from your general manager that you plan to invest 400 million USD in overseas markets. Can you tell us more about this?

Before I assumed this role, the Japanese market was already too heated and we weren't in a situation where we could fully invest. There was a period where you could say that for any firm, there was no growth without investment, and that was the situation for us. We therefore decided to invest 0.4 billion USD in overseas markets. Combined to our domestic investments, our total budget is of 1.1 billion USD.

We look overseas because we can expect relatively higher returns. Moreover, we became one of the first Japanese real estate companies to invest in Australian office buildings and we expect to reap the advantages of being a front runner, as was exactly the case in our investment in Vietnam. With regards to taking risks, we're not looking to do anything foolish but rather take risks by understanding fully our strengths and means. In Australia as well, we are ready to provide high-quality office leasing services utilizing “Daibiru Excellence,” which is the know-how we have accumulated since 1923.

Nevertheless, we still plan to allocate the remaining 0.7 billion USD to the domestic market. Although the market is heated and it is difficult to pursue higher returns, we will continue to seek out prime locations to invest in. As Japan is our home ground, it involves relatively limited risks.

The expansion of inbound tourism to Japan has created an indirect positive momentum in Osaka. The many projects to build hotels have somehow offset the supply of office spaces, logically tightening the office leasing market. Moreover, the election of Osaka as the city receiving the World EXPO 2025 will surely boost this advantageous momentum.

 

When looking at Japan, the high risk of natural disasters is often cited as what scares potential investors. What would be your message to reassure our audience as to this point?

Regarding the risk of earthquakes, I do understand why people would avoid investing into countries prone to natural disasters. However, I want to stress that the quality of our buildings is designed to sustain big earthquakes and strong typhoons. For example, there was a huge earthquake in Osaka last June but our main buildings were not affected at all. In fact, because we have such secure management services in place, there are sensor systems that, in case of earthquakes, shut down the elevators to ensure the facility’s safety. With regards to the building itself, you can rest assured that they are built with the highest level of durability and resistance to earthquake.

Currently, you can see a trend in rebuilding. The average longevity of a building here is 50 years and after such a period of time, you can see these buildings being rebuilt.

We also have to put into consideration the eventuality of a crisis. This includes not only natural disasters, but any crisis situation. We must therefore consider whether we can provide a solid backup strategy. We must also move forward with environmental issues and match the high standards of eco-friendliness recognized by society at large. Regarding our strategy for rebuilding, we're now working on rebuilding two facilities that have gone beyond the 50-year mark; these are the Midosuji Daibiru Building and Yaesu Daibiru Building.

 

You became the president of Daibiru in April last year. If we were to come back in 10 years to have this interview all over again, what do you wish to have  accomplish by then?

First of all, I really feel the weight of our 95-year history. Having that on my shoulders I can share that as a firm, we've shared challenging circumstances on many fronts. We've also been a company that has continued to challenge itself and dared to expand. Examples could be in terms of how we were the first to provide office buildings or how we ventured abroad. We've always had the spirit of challenging ourselves. But at some point in our long history, it started to become about defending what we already had instead of being more proactive. I do feel that moving forward, there is an opportunity for us to strengthen our spirit to challenge and our spirit to venture out. As a listed company, we have to make sure we are performing and providing high investment yields. But when it comes to real estate, it's an industry where you need patience and perseverance. You need to look at things from the long-term strategy, and 10 years is one mark when we can see whether we succeeded or failed with our efforts.

 


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