Monday, Dec 18, 2017
Real Estate | Asia-Pacific | Japan

Japanese Real Estate

Local expertise in urban management opens up prime opportunities in real estate


2 years ago

Akira Mori, President and CEO of Mori Trust
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Akira Mori

President and CEO of Mori Trust

Founded 45 years ago, Mori Trust is today one of Japan’s largest private developer by sales. Sitting firmly at the forefront of architectural and urban design, it has an outstanding track record of realizations, including 94 buildings with 1.28 million m2 of space throughout major cities in Japan. President and CEO Akira Mori discusses a variety of elements in the real estate sector, including the impact of Abenomics, investment opportunities, Japan’s growing tourism sector, and the need for structural reforms to avoid recession post Olympics.

 

What would you say makes Mori Trust a unique success story in Japan today?

Taikichiro Mori, my now deceased father, was the founder of the Mori Building Group. My father founded Mori Building, aspiring to “take valuable land and further enhance the value by developing urban assets, managing and operating business over the long term.” Rather than merely developing buildings, he conducted business with the philosophy of “urban management,” creating the added value that is vital to the city, both in hard and soft terms.

While my father was alive, my father, my now deceased older brother, Minoru Mori, and I managed the Mori Building Group, and we determined that from the time that we inherited the business, each of the brothers was the president of our respective companies. After our father passed away, my older brother took over as president of Mori Building, and I took over as president of Mori Trust.

As the first factor of success upon starting business, I believe it is essential to strive for first-class business content and companies from the onset.

I strive for “urban management” at Mori Trust, which I currently manage, as well. Furthermore, I run the company with the philosophy of not only pursuing the interests of our own company, but rather to, “create added value that will benefit society, resolve the company on this basis, and share the profits that are generated in the process.”

The second factor is developing a business model in the optimal form to develop the new products that are needed for the next generation.

I founded Laforet Club, which was the first corporate membership resort club in Japan. Up to then, each company had owned and operated its respective welfare facilities, which I thought was inefficient from the perspective of society as a whole. I therefore developed user-friendly welfare facilities and devised a business model through which corporate members could share these facilities.

In addition, we are committed to establishing the REIT market in Japan. In our own group we listed Mori Trust Sogo REIT, Inc., and we are currently aiming toward listing the new Hotel REIT as well.

The third point is how to predict changes in the economic climate early on and lay a management foundation that can achieve stable growth in any climate. Rather than managing in pursuit of maximum profits at a certain point, we will continue to expand our business within the scope of a financial structure that can achieve sustainable growth.

I believe that this was possible because Mori Trust is an unlisted owner company. I have experienced economic change from the perspective of a manager over the long term, and I have gained expertise through this business management. In addition, because there are no shareholders pursuing short-term profits such as dividends—unlike listed companies—we can aim for long-term interests.

 

You stated that you aim to develop you business in directions that positively contribute to society. How would you assess Mori Trust’s contribution and impact on the Japanese society so far?

In urban development of land with value, such as in the city center, we are developing attractive buildings that can comfortably support the vital needs of Tokyo, including, for example, buildings that combine luxury foreign hotels with functional buildings that are suitable for the business activities of leading corporate tenants. We have developed buildings with high seismic performance and disaster prevention performance, incorporating facilities and mechanisms that would allow workers and displaced people in the surrounding area to survive for a week inside the building in the event of a disaster.

In fact, during the Tohoku earthquake disaster of 2011, the building complex that Mori Trust developed in Sendai, which had become a landmark of the region, was the only one that maintained power through its emergency generator, and tenants were able to continue doing business with minimal damage. In addition, many displaced people in the surrounding areas were taken in, which they greatly appreciated.

In resort development, we develop hotels that lead to positive results in the region for hotel guests as well as member companies, contributing to regional revitalization.

With respect to establishing the REIT market, we have made efforts to bridge personal financial assets of Japanese individuals and the real estate market, intending to lead to economic stimulation, and we have achieved success.

I always aim to measure the growth of the company by developing new products that contribute to the Japanese economy and the local community and devising new business models.

 

How would you evaluate the climate of the Japanese real estate sector today and for outside investors, what would you point out as the best opportunities?

The national politics and public order are stable in Japan, with a secure and stable contract established under the rule of law. It is positioned among the safest assets in the world. As real estate prices are undervalued compared to other Asian countries, investment is highly efficient for foreign investors, with the effect of yen depreciation. In addition, since Japan continues to have low interest rates, additional yields can be expected through funding in Japan.

Because Tokyo is an international city and a world-class economic center, constant demand can be expected for office buildings and buildings that serve as bases in Asia for foreign companies. The transportation infrastructure is developing towards the Tokyo Olympics in 2020, and there are plans for a great deal of attractive large-scale urban development in special national strategic wards.

In addition, with a significant increase of foreign tourists in recent years, there are increasing investment opportunities not only in the city center, but in the rural areas as well. Foreign tourists tend to gather in local resorts outside of Tokyo and Kyoto, and there is already a problem with the shortage of hotels. Hotel investment is currently active in the city center and resort areas, and that is expected to continue going forward as well. Because hotels have a great ripple effect on the local economy, I believe investment in hotels will be increasingly appealing going forward.

Against this backdrop, investment has been stimulated in Japanese real estate recently among sovereign wealth funds.

 

What is your view on the success of Abenomics regarding its effect on the property market?

Abenomics created a system of special national strategic wards in areas of high value in central Tokyo, a policy promoting large-scale development. This allowed for the creation of advanced, high-value, large-scale buildings in high-value locations, enhancing the appeal and investment efficiency in the city center.

Listed real estate companies enjoy the benefits of rising stock prices and low interest rates through Abenomics, allowing for active investment. These companies have expanded their performance, renewed the highest profits, and increased stock prices.

At the same time, with the original aim of urban development with high disaster prevention performance in the wake of the Tohoku Earthquake of 2011, we encouraged redevelopment. Then, with the overlapping new development of infrastructure for the Tokyo Olympics, construction costs are soaring. This becomes a drag on redevelopment, resulting in successive postponements and cancellations of redevelopment plans.

Since interest rates and rent are interrelated, significant increases in rent are not expected, as low interest rates have continued.

The real estate market is highly dependent on the economy. If we do not proceed with vital structural reforms within the strong economy of Abenomics, there is a risk of a major recession after the Olympics. This would create a severe climate for the real estate market, and therefore calls for management with perspective.

 

Rising construction costs are major concern amongst developers, with costs having risen between 10-15% since 2013 – how is this likely to affect your expansion prospects?

Construction costs have soared to nearly double today, as compared, for example, with those of projects completed five years ago. For those who invested at the time, therefore, the value of their assets has increased as a result of these soaring construction costs.

There are many cases of delays in large-scale development due to the steep rise in construction costs, which is interfering with the stable supply of office buildings. It is very likely that the supply of high-grade buildings will be concentrated in areas with excellent locations such as Marunouchi, Yaesu, and Toranomon before and after the Olympics. We are paying close attention to how the balance in the supply of offices will be at that time.

 

What are your plans to capitalize on Japan’s increasing amount of visitors, and growing tourism infrastructure needs?

The government initially set a goal of 20 million foreign tourist visitors per year by 2020, but we now expect to achieve that goal within fiscal 2015. Compared with 80 million visitors per year in Paris, I think that a reasonable estimate would be potentially 50 to 60 million visitors.

As I myself founded Laforet Hotels & Resorts, the Mori Trust Group has management expertise in Japanese resort hotels and city hotels in major resort areas and city centers. In addition, we have managed the development of complexes incorporating a great many luxury foreign hotels with large-scale complex developments in city centers (Conrad Tokyo, Shangri-la Hotel Tokyo, Tokyo Marriott Hotel, The Westin Sendai, Courtyard by Marriott Tokyo Station, and Courtyard by Marriott Shin-Osaka Station).

We have developed each of these hotels with the optimal form of involvement, including direct management, management contracts, and franchise leases.

In terms of the number of foreign hotels in Japan, when we attracted each hotel, there were many who said that, “there are too many foreign hotels, compared to the market.” But I thought, compared with the major cities of the world, there are still too few, and continued to attract these foreign hotels. In fact, there is an increase in foreign tourists, and the current lack of international level hotels is evident.

In the Mori Trust Group too, hotels are expected to develop into a growth industry in Japan, and we plan to actively invest going forward as well.

 

One of the groups many business activities is the attraction of major international chains many of which are American including Marriott, Conrad and Westin to name a few, how do you market yourself to these major groups?

We didn’t need to sell ourselves. This is because our development was in prime locations downtown, where hotel chains wanted to get established by all means. On the contrary, it was up to us to determine which hotel chain and which brand would be optimal for each area. This is against the backdrop of Japan’s tourism industry being attractive to international hotel chains.

 

What know-how and expertise can you offer with regard to the management of international brands in Japan?

What allows me to work in cooperation with a broad range of global hotel chains is, firstly, my expertise in local Japanese real estate and local rules in my own real estate business, and secondly, because I know how to establish a hotel and do both management and operations. Further, through relationships with a great variety of hotel chains, I have accumulated expertise on the features of each chain as well as the features of each hotel brand.

Right now, for example, we are planning the construction of a luxury foreign hotel in Nara, but we first need to know the potential for tourism in the area of Nara. I believe that this area is very attractive and has great potential in development for future tourism because, as the end point of the Silk Road, it has great rarity value due to the heritage that remains from that period. For a location with such high value, the finest brand hotel group would be appropriate, whether it be the Marriot Group, the Hilton Group, or the Starwood Group. We will select a hotel chain that shares the same value from among these, and we will decide how we will interact with these hotels.

 

How do you see the Tokyo Olympics in 2020 as a platform for Japan to rebrand itself and show a vibrant, dynamic face again to the world?

In concluding successful monetary policy with Abenomics, we have been able to plan for servicing urban infrastructure and attractive urban development toward the Tokyo Olympics. While there is the problem of soaring construction costs, an economic boom is expected to continue for several years.

In many countries hosting the Olympics, however, there is a tendency to fall into a recession after the booming economy leading up to the Olympics. At the time of the 1964 Olympics, too, Japan had the potential for a 10% growth rate, but nevertheless fell into recession. The current economic growth rate in Japan is very weak, at 1%, and there is concern that a subsequent recession would be very serious.

To begin with, with its aging society, the economy will continue to shrink in Japan if circumstances are left as they are. I believe that it is essential to Japanese economic development after the Olympics that bold structural reforms for the future are carried out during the current economic boom with highly productive social and economic systems.

Among these, the growth of the tourism industry resulting from the increase in foreign tourists will be a positive factor. We hope that this will be one major challenge that accelerates the flow of effective investment.

 

President Mori is one of the most successful real estate developers in Japan – you recorded an impressive 82% growth in revenues this year. To what extent do you feel also a responsibility to use your success and actively promote Japan and Tokyo as business hub?

The Mori Trust Group has three main pillars of real estate, hotels and resorts, and investment business. In the real estate business right now, we have three development plans underway for premium areas with great development potential in the Tokyo city center. These three have a total area of 5.4 million to 6.5 million square feet, and construction costs are on the scale of 2,500 to 2,900 million dollars, when I calculate at an exchange rate as of November, 2015. Because this is a high-value area, we are proceeding with plans that incorporate the features for working styles and lifestyles of the next generation, in addition to high-grade buildings using advanced techniques. By creating high-value urban assets in high-value locations, we will increase the value of cities in Japan. Further, we will continue to provide highly productive business environments through the supply of high-performance buildings for the advanced tenant companies and workers who will lead the next generation.

In the hotel and resort business, we are actively engaging in hotel investment and development including plans for hotels and residences with hotel services in the city center, expanded development in rural areas, additional investment in attractive areas, and the like. By providing attractive facilities to domestic and foreign tourists, we increase the appeal of travel for tourists, create a base of foreign tourists, and continue to contribute to local creation.

In the investment business, we are planning to newly establish hotel REIT listing, and we aim to contribute to stimulating the hotel market.

We also want to expand business for foreign funds that are considering real estate investment in Japan, by serving as a bridge with our thorough knowledge of real estate in Japan. We will continue to draw on and promote our strengths, because the people, goods, and money that we gather are essential for economic stimulation.

As a group, we will consider investment in overseas real estate, such as in New York and London, from the perspective of our portfolio and risk diversification.

The business that the group engages in will remain as an asset to the city for the long term, and we need to manage and administer it responsibly. Toward that end, I believe that strengthening the management foundation of our group and continuing to manage lasting city assets is our mission.

 

In 2015 your group celebrated its 45th anniversary with a myriad of stunning projects. What kind of legacy would you like to leave behind?

For us developers, buildings are our works. We will create good works to meet the needs of society, providing the foundation for economic development, and protecting people and businesses in times of disaster. That is the legacy that we leave to future generations as a result.

I have always devised new products and business models that are needed in society. I made them lasting, to the best of my ability, but the optimal form changes along with the changes of the era. There is no need to adhere to such conventions. I believe that the most important thing is the enterprising spirit of the Mori Trust Group, which embraces, “creating new products and business models that are needed by society in keeping with the changes in the era.” That is the spirit that I want to hand down to future generations.

 

What would you like to say as a final message?

Japan has clean air and water, delicious food, the striking landscapes of the four seasons, and remarkable service in the “hospitality” that epitomizes this safe country. Going forward, a great variety of urban assets will increase in resorts as well as in the city center. We welcome a great many people to come visit Japan to experience these changes and positive developments.

The experience that visitors gain in Japan is sure to enrich their lives and deepen their ties with their loved ones. Further, they can surely gain experience that influences their philosophy of life, a source of new creative ideas, both in public and in private. 



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