Daiwa opening a window of opportunity for foreign real-estate investors

Traditionally, Japan's real estate market has been regarded as stable and profitable. It has enjoyed 6 consecutive years of land price increases leading up to COVID, but even after the virus, the market proved resilient, with transaction volume only falling slightly, especially compared to regional Asian real estate markets. As a comprehensive real estate consulting and appraisal firm based in Japan, can you give us your macro analysis of the Japanese real estate market?

I was worried when the state of emergency was declared across the country two years ago, and our sales temporarily decreased significantly. However, they quickly recovered to almost the same level as before the pandemic, and we received various inquiries on acquiring real estate. Our company performed well with stable sales and revenue throughout 2021. This time, the panic is not from a financial crisis like the one that occurred in 2008 caused by the Lehman brothers. Coronavirus has considerably affected industries related to transport and tourism, but in some industries, its impact has been somewhat limited. On that note, when financial institutions suffer the effects, such as increased bad debt or company bankruptcy, it may eventually reach the real estate industry. That will be one of the worst-case scenarios, which, fortunately, has not yet happened. The Bank of Japan's policy of low-interest rates and Quantitative Easing (QE) has greatly contributed to the real estate industry's good performance. I think the financial institutions hold the key, and the real estate industry is greatly affected by them. Unless financial institutions suffer an extensive blow, no significant impact as at the time of the global financial crisis will occur 

What are your thoughts on the recent interest rate increase in the US? 

Since 20% to 30% of real estate properties in Japan are invested by foreign investors, I am concerned that the increase in the interest rate may compel foreign investors to stop investing. At the same time, it is not easy for Japan to change its financial or monetary policy because it has deficit-covering bonds. They need to keep to the low-interest rate for the policy to work. From that perspective, we do not foresee the situation changing soon, and we do not think that there will be a sudden drop in the market.

The ratio of foreign investors in Japan has nearly doubled in the last two years, from around 20% in 2019 to approximately 38% in 2021 fiscal year. Why do you think that foreigners are coming to Japan now? What is the importance of attracting foreign investors to your business?

There are many reasons, one of which is Japan being able to relatively contain and slow down the spread of the virus because of the willingness of its citizens to wear masks, frequently wash their hands, and work collectively to avoid inconveniencing others. I think the foreign investors have a favourable impression that such a nationality that cares for others, which leads to domestic security and political stability. Thanks to those situation, I also believe that the reliable policies and stable investment environment make the Japanese market more attractive. Moreover, there are a lot of professionals in Japan that are deemed advantageous. Foreign investors can expect good returns given that Japan’s yield gap is larger than other developed countries.

Attracting foreign investors to enter and expand their investment in the Japanese real estate market is absolutely necessary considering our country’s declining birth rate and ageing population. In line with that, it is just as important to grasp and understand their needs and demands, such as the kind of assets they are interested in acquiring. We still lack in this regard, but if we know what they need, we can provide the most relevant information that can motivate them to invest. We would like to increase the number of foreign investors who have a working knowledge of the Japanese real estate market by disseminating information about our common practices in this field.

One of the hurdles that foreign investors encounter is the lack of transparency, but this was largely improved by the dissemination of information from J-REITs. Besides that, it is challenging to properly assess and investigate a property because deeds, titles, and other documents are in Japanese. As a provider of consulting and appraisal services, how does your firm tackle these two challenges on behalf of your foreign clients?

To overcome those hurdles, the Japanese government needs to take the lead. We need to build a strong relationship with professionals at a company, academic or government level, and become engaged in PR activities to promote more transparency. Actually, we conduct seminars that introduce the Japanese real estate market to foreign investors as well as the Southeast Asian real estate market to Japanese investors; but at our scale, we may not be as effective in disseminating information. I think it has to be on a larger scale handled by a bigger organisation that can sustain that kind of system.  

Indeed, the Japanese language could also be one of the hurdles for the foreign investors. We would like to support them by providing English reports of our services such as appraisal, building survey, and market research.

Many actors in Japan are emphasizing the importance of deregulation, which is something that we want to be actively involved in. As far as I see it, the investment environment is improving to lower the hurdles.

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You have opened an office in Singapore in 2017 and Thailand a year after that. Do you have any plans to further expand your international business? If you do, which markets will you prioritise or consider key to your expansion?

As a real estate appraisal company, we are not operating properties on our own. We were not sure how we were to conduct business overseas, but globalisation was the trigger for us to attempt expanding our activities abroad. Our Singaporean office has served as a hub for a broad range of information in the Southeast Asian region. Through that undertaking, we discovered that there are many local investors who would like to invest in Japanese real estate properties. Approximately 6,000 Japanese affiliated companies are located in Thailand and many of them have consulted with us. Also, some Thai companies are trying to utilise the inbound demand for Japan. Both offices have assisted us to identify some business opportunities for real estate consulting. However, we are struggling to proceed with such initiatives abroad due to the pandemic, but we would still like to expand our network in that region. despite the risks. We want to be ready and be more grounded to further expand our business and Asia is where we expect growth. It would be wonderful to go to New York or Paris, but for now, we would like to focus on strengthening and enforcing our business in Southeast Asia.

In the next 15 years, one in every three Japanese people will be over 65. This demographic trend is greatly impacting Japan’s rural areas that are seeing a sharp population decline. On the contrary, metropolitan areas like Tokyo has an increasing population every year as it attracts more people, and the trend of old people selling their homes to buy condominiums in the central area has become prevalent. How is this increasing urbanization affecting the appraisal market and your business? 

I think we should not only consider the city population and commercial activity, but also the regional and the greater city levels. Osaka, Nagoya, Fukuoka, and Tokyo are among the cities where we are expecting some population increase, but we need to look at the prefectures surrounding each city or major metropolitan areas. For example, considering not only Tokyo but also the greater Tokyo area, which includes Kanagawa, Saitama, and Chiba prefectures, can give us a better perspective of its anticipated population rise; however, the population in the Tokyo area is forecasted to peak by 2025 and start to decline, based on the information revealed by the Tokyo Metropolitan Government. Meanwhile, the greater Nagoya and Osaka areas will be decreasing sooner than the greater Tokyo areas. This is a very critical demographic structure problem that we are facing. The living cost in Tokyo is high and with a very limited living space. Furthermore, compared to rural areas, working hours are much longer, which may be the reason for the low marriage and birth rates. To obtain the net increase of Tokyo’s population, we need to get the difference between the birth rate and the death rate. In fact, the net change is in the negative. Before, the influx of people in Tokyo were predominantly college students and fresh graduates from local regions who were seeking better universities and job opportunities.  However, the low number of young people from local areas resulted in a net decrease.

We need generations to have children more easily; otherwise, we will not be able to solve this problem of a declining population, but there is not an easy option for us to combat this issue. One solution that is usually proposed is hiring foreign workers, but this proposition needs to consider numerous related elements There is no easy solution.  To improve the birth rate, Japan as a country should decentralize city and enhance economic function in each region.

In relation to our business, we are focusing on assets related to seniors or logistics along with the aging society and increase of EC ratio. The travel industry is another attractive area because Japan boasts a broad range of natural wonders. According to a professional of the travel industry, Japan have rich environment resource to accommodate 54 million travellers, but going forward, we have the potential to accept up to 80 million travellers if we set up our travel resources appropriately. To that end, we need to support the redevelopment of the hotel industry that has been suffering from the pandemic.

Along with depopulation and aging society with declining birth rate, diversifying our services is also important. One of those is SDGs. We aim to consider the environmental burden of properties and how we can achieve the long-term life cycle of real estate. For that to be realised, we want to have a broad range of options for our consulting by diversifying our business to the extent possible.

Imagine we come back to interview you again on the last day of your presidency; what objectives or ultimate goals would you like to have achieved by then?

My utmost target is to establish our environmental-related business that could be related to renewable energies or our CASBEE (Comprehensive Assessment System for Built Environment Efficiency) certification. We would like to provide support and advice to companies, including those related to us and J-REIT, to build eco-friendly and sustainable buildings. I would be thrilled to tell you that I have achieved all of these during my tenure when you come back.