As a real estate asset management company within the Mitsui & Co. group keeping high ethical values at the core, Mitsui & Co., Realty Management is developing its business targeting a wide range of asset classes and focusing on the provision of superior real estate investment opportunities that match investors’ needs. When we sat down with President Takashi Oya, he shared with us his analysis regarding the attractiveness of the Japanese Real Estate market a, as well as the influence foreign investors and COVID-19 have had for their business in the past few years.
What is your general analysis of the Japanese Real Estate market?
We are a company that serves investor needs, which are more important than ever in this pandemic situation, where investors are facing the difficulty with determining a direction or a strategy they should take. Now it is more important than ever to be able to provide our clients with services that lead to high investment yields with appropriate risk profiles. We think this is a focus for all real estate management companies at this moment.
For Japanese investors, their main priority is what will reap a stable investment yield while overseas investors proactively take risks to maximize the returns. These kinds of investors come from different places, including the US, Canada and South Korea.
The types of investment opportunities overseas investors look for are varied, such as core assets and value-added assets, as well as new development projects. They like to be active in a wide range of asset classes through having experienced in investment in the Japanese market over the years. Meanwhile, Japanese investors tend to invest in limited sectors and opportunities, but they are also slowly beginning to venture into new opportunities.
We can see the same trend in our data centre project, which started as a development fund. The risk is obviously higher for development projects rather than investing in established properties, but we can see that domestic investors are showing interests in the investment for this new asset. I think it can be attributed to the experiences of the overseas investors, who may have seen various properties and markets in different countries, as opposed to Japanese investors who may have had very limited opportunities to explore different markets. Overseas investors are bringing a different level of expertise and perspectives.
I believe that there are five main factors as to why overseas investors are interested in the Japanese market, and as to why the market is stable with a high transaction volume. Japanese real estate market is a sizeable market, with certain regulations and policies in place, and with a solid track record in transparency which has led to a high growth market. There also exists an attractive yield gap, the difference between the return of real estate property investment and the long term government bond yield due to the lowest interest rate applied in Japan. Lastly, I think Japan has been able to handle the pandemic situation well. It may be something that derives from the Japanese behavioural patterns or customs, but it would have significantly deteriorated the market if the situation was much worse. The government being able to contain it relatively well would be one of the reasons why the Japanese investment market has been attractive to overseas actors even amidst the pandemic situation.
Regarding the scale, we think the Japanese real estate investment market has a potential for further growth and more asset types would be added to investment targets in the future. The investment grade real estate market as a whole was calculated to be some 170 trillion yen, while the market size for the private funds and J-REITs is still at 50 trillion yen, so there is a lot of space for further market growth.
When you look at the market for residential properties specifically, there is a certain declining trend in the population, but the population of our target areas for investment are not necessarily decreasing. In targeted areas such as Tokyo, Saitama, and Chiba, the population is stable or even growing, with population density increasing in certain areas.
How important is attracting foreign investment to your business?
There are various types of investment opportunities in the market, and I think overseas investors are more willing to go for high-risk and high return projects compared to the Japanese clientele who are on the other side of the spectrum. Japanese investors are looking for something that can provide a stable cash flow instead of higher return. Also, overseas investors look at the big picture and set their sights quite high. For example, we launched a development fund for the data centres which are becoming a major asset type in the US, but relatively a primitive investment target in Japan. Thus, overseas investors are filling in the gaps of interests between themselves and domestic investors.
What are your thoughts on the growth of Japan’s logistics sector?
The growth of the logistics industry in Japan is very interesting, and it started from manufacture-based logistics development. For example the electronics manufacturing companies owned their own logistics buildings and properties as warehouses for their products. Nowadays you see the sector of logistics as investment assets has grown rapidly, and it is starting to shift from private ownership to rental style, which has changed the nature of transactions. Compared to the residential or condominium market where the rental market had been more established, the move could be seen as a paradigm shift in the logistics market.
The entrance of major overseas players into the logistics sector has also altered the nature of the market and contributed to the growth dynamically. You can also see the changes in the tenant profiles for logistics facilities over the decades; starting from facilities owned by companies, to third party logistics companies, and the growth of e-commerce businesses has driven the demand for the spaces recently. On the development side, you can see more foreign based developers in the field, with domestic developers working in the field with them.
Could you tell us a little bit more what kind of opportunities this new influx of modern logistics properties creates for you and what expectations you have for it?
When it comes to the logistics sector, the properties are enjoying a very low vacancy rate and high demand. With the entrance of many players into this field, the competition has been getting intense. We are having benefits by having more players in the field, since we started improvement of qualities for the facilities, driven by companies’ efforts to respond to the needs of customers. We think other properties are also experiencing the fierce competition in the market.
When it comes to residential properties, we can see many different types of categories, from residential properties and homes to tower mansions and condominiums, both urban and rural. They are attractive and highly competitive, and their quality is increasing. In the end, I see all of this as a positive phenomenon when the quality of the properties continue to be improved through the market competition. We have been experienced in working with various clients on different types of services, not only the development, but also the management side thanks to a very solid network and a very steady relationship of trust that has been built over the past years.
From an investment perspective, the logistics facilities represent scalable opportunities that provide quite stable cash flow and a stable yield. We believe it maintains these enhanced qualities and continues to be quite attractive among investors.
Beginning in 2020, you began offering US healthcare assets for Japanese investors and asset management services for large foreign institutional investors like Fidelity in the data center market in Japan. Could you tell us what benefits these ventures bring foreign investors looking into Japan and Japanese investors looking overseas?
Our global businesses have been launched to increase the number of our clients and item portfolio. For example, we are providing our services for Japanese investors who invest in senior livings in Colorado, US managed by MBK Real Estate LLC., a U.S.-based wholly owned subsidiary of Mitsui & Co., Ltd. We are convinced it is unique opportunities that we can provide for our investors as a member of Mitsui & Co., Ltd. group, Sougo Shosha.
As for the data centre facilities, Japanese investors are not familiar with this asset yet and hesitant to take risks, whilst foreign investors are pursuing the asset to secure highest returns as a part of their strategy for diversifying their portfolio. Overseas investors can see beyond, broaden their horizons and go into multiple types of projects, which is also an attractive partnership for us. Overseas investors are also requiring the hight level of services, so we always need to make sure that we can provide a high return.
According to surveys that we have conducted, lack of transparency and the language barrier are seen as the biggest worries for overseas investors in Japan. What do you think needs to be done in order to further increase this transparency? And secondly, how is your company helping your client overcome these barriers?
I believe that the concern behind lack of transparency is an assumption which comes from a lack of experience in the Japanese market. It’s only natural that if you are new to the market and it’s all written in Japanese, you would feel that there is a lack of transparency. However, investors with years of experience here in Japan wouldn’t necessarily consider it to be a problem. From my perspective, it is becoming less of an issue here, and we will try our best to have our investors convinced about competitiveness of our services and investment projects by giving them all the information and creating a solid line of communication.
As early as 2018 Japanese media, especially the Nikkei started arguing for a catastrophic perspective, saying that there would be an oversupply of office space both in 2020, and in 2021 because of the number of square meters of new office buildings built before covid. However, the vacancy rate is around 6 %. How do you think the sector will evolve? Do you think these catastrophic predictions will prove true? And secondly, what will be the impact of these new work at home measures on the office sector?
In Japan, remote working style started to be implemented at an accelerated pace, nearly overnight, and ever since then we heard the pessimistic rumours that we will not need office spaces anymore. However, when it comes to Japanese business style, people still prefer to meet and communicate directly in person. Furthermore, the types of residencies in Japan do not account for enough workspace and are not adapted to the remote working style. I believe that there will always be a need for the office in our society.
In the beginning of outbreak of COVID-19, we had some large-scale cancellation of lease contracts, but people are slowly coming back to office spaces. The vacancy rates right now are decreasing because of improved balance in market conditions as demand recovers while supply remains limited. We would like to keep a close eye on the KPI for the office rent market so that we can flexibly implement the strategy reflecting the conditions.
SDGs didn’t use to be something that was high on the list of priorities for investors, but gradually we are starting to see their greater interests. So, we’ve started to venture into the energy efficient operation of buildings as a company that is in real estate and development. The industry has started to be keen on how we can monitor and control the emission of their buildings. The Japanese market is a little bit delayed compared to European counterparts in this area, but there has been a lot of progress made in this field. Also, Japanese enterprise is not generally good at promoting themselves, and we are aware that we need to overcome this point. Thus, we will continue to work on promoting ourselves well and increasing transparency to serve our clients’ needs further.
Imagine we come back to have an interview with you five years from today, what would you like to have accomplished?
We have many different goals, and there're so many things that I would like to achieve for the company. I would like to make sure that we continue to deliver a stable yield and return for our clients and that we become the company of choice to work with, while increasing transparency and reducing language barriers. Another thing we have been working on is the initiatives for our employees. We provide opportunities for capacity development to enhance their professional knowledge and abilities required in this industry as well as knowledge and understanding of sustainability and ESG. Furthermore, we support our employees by helping them create a healthy, safe and comfortable working environment and promoting work-life balance. We strongly believe those who are working in this industry really need to be able to have a solid, discerning eye. I think that having the investment professionals with sophisticated knowledges is one of our strengths, which we would like to be known for.