AD Works president and CEO, Hideo Tanaka, gives insight into the company's real estate businesses and services such as ARISTO, and discusses its newly established investment company, Angel Torch Inc.
Traditionally, Japan’s market has been characterized as stable, profitable, and predictable. Even during the pandemic the Japanese market proved resilient, with transaction volumes falling moderately when compared to regional competitors. What is your macroanalysis of the Japanese real estate market?
Japan has been enjoying low interest rates for a long time, which partially explains why the market has maintained a good condition. All segments of the real estate market, such as commercial, logistics, and residential, are performing well - prices are continuously increasing. In the residential sector, the reason for this is that more and more people would like to have a condominium that is highly convenient, they prefer brand new and high-end condominiums. This is why prices are steadily increasing. With the increase of brand new condominiums, the prices for the second hand condominiums increase as well. Those who could not afford the brand new and high-end condominiums tend to go for second-hand options.
At AD Works, we are engaged in the business of income property and transaction services. The situation is good for individual investors for real estate as well. Since Abenomics, stock prices have been high in Japan and financial institutions are very willing to lend. I believe this trend will continue this year as well.
The coronavirus pandemic has impacted the way people live and work across the world. In the corporate world there has long been a diversification of working styles, for example through DX, and the pandemic has led to even more people adopting diverse working environments (we call them flexible offices) into their working styles, especially in Japan where housing is small, and many people prefer to work in flexible offices. Seeing this new demand for flexible offices, we have started to work on this type of business as well. In fact, we offer shared offices and set-up offices for start-ups that want to reduce the initial cost of renting office space. There is also an increasing demand for single-type housing in the remote areas around Tokyo. Since last year in 2021, just to share my personal experience, I received a lot of flyers advertising such houses, but you do not see them nowadays. The reason I believe is there is such a huge demand, especially given that people can work remotely from outside of Tokyo’s metropolitan area.
The office sector in Japan now is quite interesting to watch. Before the coronavirus pandemic the Japanese media stated that there was an oversupply of offices. However, if you look at the metropolitan area of Tokyo - the type A offices’ vacancy rate is around 6%, far away from the catastrophic predictions. We have seen that the utilization of offices has been changing as we have seen the rise of flexible and satellite offices in use. Amidst this disruption in the complex market, how do you foresee the evolution of the utilization of the offices in Japan? Do you think it will go back to normal?
To answer this question, it’s better to understand the contractual engagements that tenants and landlords take when renting offices. Japanese companies usually have a four-year fixed term lease when renting office space. During the pandemic, companies that were renting office space preferred not to pay the penalties for violating their lease agreements. Instead, they continued using their offices despite the fact that only around half of their employees came to work. This is one explanation why the vacancy rate is relatively small. The changes to the office sector post-pandemic have settled, we have already adapted to the new normal. With the pandemic we are, in a way, conducting an experiment. What I mean by this is that people are working from home partly because we have seen the rise of IT in day to day business operations. We have been conducting meetings via Zoom for example. Initially we had difficulties with this new normal but eventually we got used to it. Even though we are living this new normal, I still do not think there will be a significant decrease in the usage of offices in Japan. There is still a need for face-to-face interactions even amid the rise of information technology. The demand for office spaces in Japan’s metropolitan areas will always be there. Indeed, with redevelopment accelerating in areas around Tokyo Station and in the Toranomon, Shinagawa and Shibuya areas, new buildings with high quality facilities will continue to have tenants, customers, and users.
When looking at the total transaction volume of real estate investments in Japan, the ratio of foreign capital jumped from 21% in 2019 to 38% in 2021. Why do you think that foreign investors are coming to Japan now?
I think the reason why a lot of foreign investors are interested in the Japanese real estate market is simply because they are seeing a dire socio-political situation in other Asian markets, including Hong Kong and mainland China, and would like to keep strong ownership of their properties. I suspect the majority of these foreign investors are from Asia, the rest being from the US and Europe. We had two clients who directly bought properties through us, one from Singapore and the other from Hong Kong. In Japan, the high degree of information asymmetry in the real estate industry and the difficulty in obtaining information on rent trends and sales prices can be a hurdle for overseas customers. We sell properties for which we have carried out our own due diligence, explaining our investigations in detail, so that overseas customers can buy with confidence.
In addition, we are actively trying to form our own private REIT. As such, we plan to source funds and are open to attracting investments from both domestic and foreign entities. We are now entering that phase in order to better cater to the demands of foreign investors. We would like to achieve this in one or two years from now.
Your ARISTO service is a small lot investment module that allows investors to place their money in high quality properties but with a low barrier to entry. What are the advantages of ARISTO in comparison to other investment modules of similar types (such as J-REITs)?
ARISTO is one of a diverse range of financial instruments, but it is unique in that it allows individuals to own rare, well-located properties. But in a J-REIT, investors do not own the real properties. Let’s say that the value of a property increases by 50%. J-REIT investors cannot enjoy the increase because benefits are not directly allocated to the stakeholders. The profit will be divided into the total REITs performance before the profit is distributed. But ARISTO is different, it is an association to own real properties. If you invest in ARISTO you can benefit from the rent of the buildings as well. After you see capital gains, you can immediately share in the capital gain. This is one of the advantages ARISTO has over traditional REITs.
Your firm also launched “L.A. Breezing,’’ a series of properties purchased entirely on the US market. Do you have further plans to develop your overseas business? If yes, which markets or regions will you be prioritizing?
The reason we invested in the US is to diversify our property business. The Japanese property business is basically a domestic business. If the economic situation in Japan goes down, real estate properties will go down as well. Only relying on the Japanese market would be taking a pretty big risk. We chose the US because the real estate market there is stable. Additionally, we are expecting the population to grow, which will result in economic growth in the US as well. Los Angeles, where we are based, is the second largest metropolitan area after New York, and is a particularly promising area with low vacancy rates and stable rent growth. The US also has well-established tax laws, a very important criteria for us when selecting a foreign country in which to expand. As part of our future business development, we are working on a rental housing development in Hawaii in 2018. As the lack of affordable housing for middle- and low-income groups is a social problem in Hawaii, we believe that our business development in Hawaii contributes to the SDGs and has a high social significance. Lastly, we are also looking into Canada, New Zealand, and Australia as future potential target markets.
AD WORKS also created the “Royal Torch Owner’s Club,” a long term financial consulting service that tailors assistance to the needs of each individual client. How is Royal Torch different from other kinds of one-to-one portfolio consulting services?
The distinctive feature of the Royal Torch Owner’s Club is that while there are plenty of consulting firms that can advise a client regarding taxes or investment efficiency, we actually own the properties for which we provide consulting services. People in consulting firms talk a lot about strategy, but often lack the insight to back up their suggestions. In our case, we own the properties that we offer our investors. We also understand the situations, assets, as well as the members of the Royal Torch. As such, we can tailor our advice to each of our customers based on their conditions and background, and we can give them support when it comes to inheritance. For our clients who bought around ¥300 or ¥500 million worth of property, we offer them small lot services so they may fully enjoy the benefits of our Royal Torch service. At the same time, we can offer our customers who bought a small lot worth ¥10 to ¥20 million a whole building if they are interested.
You recently established Angel Torch, a venture capital firm that invests in start-ups both here in Japan and in foreign countries. In reviewing your IR documents we saw that diversification is one of the top priorities of your mid-term strategy. How exactly do you plan to diversify, and what role does Angel Torch play in this diversification?
With the new normal caused by COVID-19, we are seeing the emergence of a lot of new concepts for how to sell real estate properties. With new cutting edge and digitally transformative technology, I believe the world will change. I think it is nearly impossible to look into certain fields and try to catch up with the big tech giants of Silicon Valley. However, there are plenty of start-ups that are interested in developing new and innovative technologies. I believe it would be a good idea to work with them in order for us to learn their perspectives so we might catch up with these changes and innovations. For example, we are currently analysing how the technology created for the Metaverse and the blockchain infrastructure for digital securities can be used in our business.
As for our midterm strategy, we have three directions moving forward. First is related to real estate. Second is to set up a new business for high net worth individuals. The third one is to offer more financial solutions. Actually we are doing the same thing in the US - that is, we can now lend money to real estate companies there so they can take advantage of the low interest rates of Japan.
Another point I would like to add is related to the Royal Torch. The number of members using our ARISTO service is much larger than that of our Royal Torch service. Our plan is to offer the ARISTO’s members a membership into the Royal Torch Club. This will allow us to better understand our clients and enhance our ability to offer new products.
Imagine we come back to interview you again on the last day of your presidency, what would you like to tell us? What are your dreams for the company and what would you like to have accomplished by then?
I would like this company to contribute to society. This is something I emphasize to our staff to a great extent. I would like to contribute to society, not only to our clients and stakeholders, but to the world as a whole.