As the number one specialist investor in Japanese property under the ¥1 billion mark, the Tosei Corporation has not only created a well-earned and deserved respect across the industry but also holds a very bright future for foreign and domestic investors alike. President and CEO Seiichiro Yamaguchi explains why the company’s track record and unique assets make it the ideal partner for anyone considering investing in such a potentially lucrative sector, as well as its new venture into hospitality.
What potential do you believe there is within the small to mid-sized asset class in Tokyo’s real estate segment at the moment?
Tosei is specialized in the investment in small to mid-sized assets under ¥1 billion (approx. $9 million). Our real estate stock in Japan is approximately of ¥2,500 trillion, including the private sector that accounts for ¥470 trillion. The total real estate transaction volume, as we analyzed it, is of approximately ¥10 trillion in the Tokyo metropolitan area. Our revenue was about ¥50 billion, so that means that if we increase our market share by just 1%, we can increase our revenues by ¥100 billion.
We call this strategy the ‘Blue Ocean Strategy’ because we believe that the market is so large that we feel as if we were swimming in a vast ocean. There are quite a number of large competitors of course; however Tosei also has a very strong track record and a solid experience in this field, which is certainly one of our competitive advantages.
Where do you believe Japan’s real estate market stands in comparison with the rest of Asia?
The Chinese economic decline recently has affected many countries in Southeast Asia, but Japan boasts of a very strong economic base with solid fundamentals. The safety, transparency, sustainability, low risk and growth as an advanced country will attract investments and investors to Japanese real estate and to the Tokyo area in particular.
One of the results of Abenomics has been the depreciation of the yen, which contributed to attracting more foreign investors. Prime Minister Abe, in cooperation with the Bank of Japan and Governor Haruhiko Kuroda, has taken additional monetary easing measures, which made the yield gap the highest in the world, and helped to boost real estate investment. That is why foreign investors come to Japan to invest in real estate assets. Stable business fundamentals, currency depreciation and high yield gap – these three parameters have encouraged high numbers of investors to come to Tokyo/Japan.
CBRE, the world’s largest property services company, forecasts that Japanese property transactions will rise 15% this year to about ¥4 trillion ($35.6 billion) after a 59% drop in the final quarter of last year, when deals in excess of ¥100 billion declined. How do you forecast the climate and growth prospects across the real estate sector this year?
There are two kinds of real estate markets in Japan and in Tokyo. One is the end-user or buyer market, and the other is the investor market.
Regarding the end-buyer market, Abenomics has stimulated good economic conditions in Japan through salary rises, which led to an increase in consumption and private sector investment expansion. I believe that this salary rise will induce a rent rise. Mr Abe is also planning to introduce government subsidies to boost consumption in general and the real estate sector in particular.
In the investor market, investors and developers are enjoying the negative interest rate, which is used as a high leverage by them. Also the REIT market is invigorated; Tokyo Stock Exchange REIT Index declined to 1620 in January from 1900 and recovered to 1900 after the introduction of negative interest.
The conditions in both sectors will remain favorable for the rest of 2016 due to the financial stability of Japan and negative interest.
The consolidated fiscal results for the fiscal year ended November 30, released on January 13 this year, show profit for the year at a little over ¥4.1 billion, an increase of just less than 44% yoy. What do you attribute this impressive growth to and how do you hope to sustain it?
First of all, as a leading real estate investment fund manager, Tosei is involved in five key sectors or fields of expertise, which we have classified as: revitalization business, development, rental, fund and consulting, and property management. This mutually complementary combination of five business fields enables Tosei to grow, and provide also a flexible portfolio and strong basis that enables us to deal properly and flexibly with any crises. We have invested in a very wide range of assets, ranging from condos, detached houses and offices to commercial spaces.
Secondly, as I mentioned before, the small to mid-sized assets field we are specialized in is a blue ocean to us. There is limitless growth potential for Tosei.
Thirdly, we have already set up 32 measures, “Value Up 32”, as a part of our corporate action scheme, in order to tackle key concerns and focus areas, such as security, design, eco-friendliness, etc. In our revitalization business for instance, we significantly differentiate ourselves from our competitors, as we have an in-house architecture office with appropriate licenses, which enables us to create attractive products.
Last but not least, thanks to Tosei’s long experience in this industry over the past 20 years, we have been able to build strong relations with the domestic vendors, brokers and consulting firms, so that we can come by profitable asset information exclusively. We can get quick answers and gain the trust from all organizations in our industry.
Another strength lies in our added value-up strategy. It is certainly true that in the active markets, every investor is aiming for capital gain, but naturally it is difficult to survive through the tough times like the Lehman shock or GFC (global financial crisis). However Tosei’s value-up actions and measures have been appreciated by investors and buyers even for the hard times.
From these reasons Tosei managed to produce an impressive result in FY2016.
For further growth, we recently decided to enter the hotel business.
Can you tell us more about this new addition—what are your plans and expectations alongside what is a very fast-growing tourism sector in Japan?
There is an increased tourist inbound flux in Japan—which reached almost 20 million last year—and which also caused a shortage of hotels in Tokyo, and this is why we have decided to enter this new market. This increase will continue. Hotel occupancy rates are around 80-90% currently, and with the upcoming 2020 Olympics and Paralympics games in Tokyo, these figures will only increase.
I also believe that tourism will sustain after the Olympics, like what happened after the London and Seoul Olympics, for instance. It is my view that many foreign visitors and businesses will be able to discover Japan and appreciate the country’s merits and benefits: our safe, clean and secure environment, our food, culture, punctual transportation systems, high level of education, etc. Japan also has sound and solid regulations, a straightforward rule-of-law system, and a well-regulated real estate sector, with a very stable and sound market. All these factors will make the market very attractive for foreign investors.
For our hotel business, we are aiming to fill the inbound and domestic business demands. In order to respond to these demands, we are currently planning to create hotels based on modern Japanese themes (what is called “wa-modern”) with unique service and hospitality only we could provide. We are going to examine options for converting existing buildings into hotels and offering contracted hotel management for third-party facilities, not just planning the new hotels and operating them by ourselves.
The Japanese construction market makes up approximately 10% of GDP, and by number of employed persons is one of the country’s principal industries. What do you believe has been the economic impact on the real estate sector since the implementation of Abenomics approximately four years ago? Which areas do you think need further deregulation?
Abenomics has been fairly successful, especially in the first stage of its implementation. The highest yield gap, the reduction in the JGB (Japan Government Bond) rate. Abenomics has stimulated many economic sectors, and in regards to the property market, every developer made much of this period.
Another positive outcome of Abenomics is the ‘Visit Japan’ campaign that was launched under Mr Abe, as well as the visa relaxation measures and implementation of duty-free shops, which helped to attract nearly 20 million tourists and visitors to Japan in 2015, in comparison to 6.2 million in 2011. This increase had a huge impact on hotel business.
In my view, the Building Standards Act related to energy-saving houses and houses for nursing care could see further deregulation. I also believe appropriate legislation for vacation rentals is necessary and important.
Can you take us through the ‘Heart into the City’ initiative and how you believe it aids the company with its social responsibility and reduction in environmental impact?
Tosei Corporation announced its ‘eco declaration’, under which the group undertakes to minimize its environmental impact and footprint through a series of various actions. In my opinion, our revitalization business itself is our own message of eco and social contribution. Indeed, as part of our revitalization business, Tosei acquires existing office buildings and condominiums, and resells them as revitalized real estate after improving their equipment facilities and designs, installing eco-friendly facilities and undertaking other such renovation works. In office developing, the environmental performance of the buildings has been assessed and received rank “A” several times in the CASBEE (Comprehensive Assessment System for Built Environment Efficiency) from an organization under the Ministry of Land, Infrastructure, Transport and Tourism. The CASBEE is a system for evaluating and rating buildings with environment efficiency. We will continue to vigorously promote environmental activities through our business.
On the January 16, 2016, Tosei announced an exciting new large-scale AUM (assets under management) agreement with Blackstone Real Estate Partners; the portfolio consists of 57 properties over half of which are in Tokyo with a total value of around ¥50 billion. What are the hopes for this relationship and how do you believe these types of partnerships can enhance the company’s profile and presence on the market?
The Singapore Stock Exchange is the financial hub of Asia, and prior to Tosei Corporation’s listing there we weren’t very well known in South Asia; now people know our name, and our brand recognition has significantly improved.
We will continue building our track record with investors like Blackstone to expand our AUM.
What further opportunities and potential are you currently highlighting to interested investors – what is most in demand at the moment?
Many foreign investors come to Tosei, including many American and other foreign investors, in particular investors from Southeast Asia, who are in fear now with the Chinese market’s decline and feel reassured by the stable and safe Tokyo market with high liquidity of properties. With the current negative interest rates policies, Japan now has the highest yield gap in the world, which makes the country a very attractive market.
As per Tosei Corporation, we are currently focused on our REIT business expansion. Unit holders for our REIT are mostly domestic for now, but we intend to open it to foreign investors as well.
Finally having guided the group to where it is now over these last 22 years what are your future growth ambitions for Tosei?
This year is the second year of our mid-term plan that runs till 2017. Our business is going really well. We have set up our growth vision to achieve ¥100 billion by 2020. We will achieve this through the expansion of our existing business and the further improvement in our corporate governance and management, which will enhance both our employees’ and clients’ satisfaction, and our brand overall. Our company philosophy is to “create new values and inspiration in all aspect of real estate as a global minded group of experts”, and under this philosophy Tosei will maintain a long-term competitive advantage and further heighten its corporate value.
As final message what would you like to share?
Japan is a very safe country and has a stable market, and I believe it’s a great opportunity to invest in a Tokyo asset, in which case, Tosei will be your partner. Visitors to Japan should also visit Tosei on the way.