Driving Sustainable Growth in Real Estate Investment

Can you tell us a bit about your organization’s recent activity and strategy?

ORIX Group originated in Osaka before expanding both nationally and globally, but Osaka remains a key base for the company. Our next major initiative is the 2030 Integrated Resort (IR) project in Osaka, and as a company with deep roots in the city, we are working to further strengthen our presence there.

Historically, economic and tourism development in Japan has been centered around Tokyo, but that focus is now shifting to other regions, including Osaka. As part of our strategy to reinforce our presence in the area, our first step was the acquisition of two MIMARU brand hotels, in Kyoto and Osaka targeting inbound tourism. The agreement was finalized last December.

(Left) MIMARU SUITES Kyoto Shijo. (Right) MIMARU Osaka Shinsaibashi East

Similarly, we acquired Hotel Universal Port Vita with the same objective—strengthening our presence in Osaka—and because we were already operating Hotel Universal Port adjacent to the hotel. Our goal is to provide comprehensive accommodation services and cater to a broader range of customers. The hotel’s proximity to Universal Studios makes it particularly attractive to both inbound and domestic travelers.

In addition, we recently agreed to acquire an office building in Tenjin, Fukuoka, with the transaction taking place over six phases. Currently, the rent is below market average, so our strategy is to gradually raise it to align with average rates. This approach reflects our broader strategy of adding value by acquiring properties with lower-than-average rents. Since last summer, we’ve also expanded into residential property acquisitions as part of this value-enhancement strategy.

Hotel Universal Port Vita

What we can share about our short-term vision for assets under management (AUM) is that the JREIT market is currently underperforming. In this environment, increasing our share price is a key priority. One of our core KPIs is Price to Net Asset Value ratio (P/NAV ratio), which we are working to bring closer to 1—it currently sits around 0.85. One of our concerns is the potential for significant rise in interest rates , which is causing uncertainty among both domestic and international investors. The recent decline in JREIT pricing is largely due to capital shifting toward equities, particularly the Nikkei market.

Last October, we made a financial announcement aimed at enhancing ORIX JREIT’s valuation by raising the Dividend per Unit (DPU) by 3% annually. Additionally, ORIX Group, as our sponsor, demonstrated their support by acquiring a 1% stake. This move was well-received by investors, and since the announcement, our performance has exceeded the TSE REIT Index by over 10%.

To grow AUM, a public offering is typically required, but given current market conditions, we are not in a position to pursue that at this time. Instead, our focus is on increasing P/NAV ratio to 1—or as close as possible—while expanding our portfolio in key sectors such as offices, residential properties, and hotels that target inbound tourism.

Another distinguishing feature of ORIX JREIT is our low leverage ratio, which gives us considerable flexibility to take on additional debt. For example, we financed the acquisition of Hotel Universal Port Vita through debt. Our credit ratings—AA- from R&I and AA from JCR—are strong, and maintaining them is a priority. Based on our current financial standing, we can borrow an additional JPY 50 billion without requiring a public offering. However, Japan’s real estate market is currently overheated, making it challenging to find properties that match our investment criteria.

Overall, our strategy is to steadily expand AUM each year, stably grow rental income, continue increasing dividends to investors, and raise our share price to demonstrate the strength and potential of our REIT.

You mentioned that one of your concerns for investors is the uncertainty surrounding interest rate increases. A second major concern is that the market—particularly in certain segments—is becoming overheated. We’ve seen significant returns in areas like the hotel sector, which has attracted investment from both traditional and nontraditional players. Similarly, in the luxury housing segment, rising construction costs have made it difficult for developers to pursue mid-range projects, pushing many to focus on the high-end market and contributing to a surge in new supply. How serious do you consider these two risks—rising interest rates and market overheating—to be for the real estate sector going forward?

The interest rate may rise to 1% or even higher next year, but we don’t believe this will have a direct or immediate impact on the real estate market. This applies across asset classes—offices, residential, and hotels—particularly because rent growth, especially in the properties we own, is outpacing inflation.

As for concerns about an oversupply in the luxury residential segment, the situation may not be as severe as some suggest. The perception of what constitutes “luxury” has shifted—where JPY 100 million once marked a high-end property, today that benchmark is closer to JPY 1 billion. We’re also seeing a rise in the number of financially successful individuals, both Japanese and foreign, who are actively seeking premium housing.

The more pressing issue is the continued rise in construction costs and the labor shortage within the industry. Construction workers are already in high demand, especially in major cities, making it increasingly difficult to secure the personnel needed for new developments.

While this year will see several new buildings completed in areas like Shinagawa, if we look five to ten years ahead, there are relatively few large-scale projects in the pipeline. As a result, we don’t foresee a long-term oversupply issue.

You pointed out that the JREIT segment has been underperforming compared to the broader Japanese equities market, despite the fact that the real estate sector itself has seen some of its best years in recent history. This divergence is especially notable given that the overall market has been on an upward trend over the past two to four years. You've already explained that many investors have shifted toward equities, but looking ahead, do you think the JREIT market is positioned to close the gap with the broader Tokyo Stock Exchange (TSE)? And in your view, what needs to happen for that gap to narrow?

In reality, the number of domestic JREIT investors hasn’t changed significantly over the past ten years. One of the main reasons the JREIT market lacks momentum is that American and British investors have remained heavily focused on their own domestic markets and have done relatively little overseas investing. Additionally, currencies like GBP and EUR currency are currently at all-time highs and are expected to decline, while JPY is on the opposite trajectory.

To shift this situation, it’s essential to better communicate to foreign investors that, unlike USD, JPY does not experience rapid or drastic fluctuations. Its movements tend to be gradual. If investors can better understand this stability, it may encourage them to re-engage with the Japanese market. In fact, after the Bank of Japan announced an interest rate hike at the end of January, we observed an uptick in JREIT purchases. This suggests that investors now recognize that while interest rates may rise slightly, future increases will likely be limited—offering a level of reassurance about both yen stability and rate management.

From both macro and micro JREIT perspectives, it's crucial to demonstrate that we can continue to grow even in the face of interest rate hikes. The fact that rental income is increasing at a faster pace than interest rates highlights our revenue growth and underlying profitability. That’s why it’s so important to show strong performance in our financial reporting and clearly communicate that growth to the market.

In terms of investor behavior, we’ve observed that JREIT tends to attract more passive investors than active ones. For ORIX JREIT, a key goal is to position ourselves as the go-to investment option for active investors. By doing so, we can help energize the REIT market. The overall size of the Japanese REIT market has remained fairly static, at around JPY 14 to 15 trillion, so within that space, it’s critical that we clearly communicate our strengths—especially our rising rents and growing dividends—as a way to stand out.

ESG investments are increasingly seen as a way to attract foreign capital, and nearly 80% of your portfolio is already green certified. You've also issued multiple green bonds to support your investment activities. How important is ESG investment in your strategy to attract foreign investors? Additionally, what challenges do you face when it comes to implementing ESG investments, particularly in terms of reporting and regulatory compliance?

Our ESG strategy is centered on renewing our portfolio. Since our listing in 2002, many of our properties have aged, so by replacing older buildings with newer, more energy-efficient assets, we can significantly reduce the portfolio’s overall CO₂ emissions. This has allowed us to achieve approximately 80% green certification across our portfolio. Our efforts are aligned with the Japanese government’s goals of reducing carbon emissions. To stay on track, we monitor and strengthen our ESG initiatives on an annual basis.

We also place strong emphasis on the Plan-Do-Check-Act (PDCA) cycle to ensure we are making continuous environmental improvements. Regarding green bonds and green procurement, we understand that lenders and investors have high expectations for these instruments, so we work closely with them to ensure transparency and compliance.

Ultimately, the greener our asset portfolio becomes, the more accessible green loans and ESG investments become. It’s a mutually reinforcing cycle, and we are committed to further advancing the environmental performance of our assets.

You’ve mentioned your goal of improving P/NAV ratio and share price. In that context, many funds are turning to AI and automation to enhance profitability and streamline operations. What are your priorities when it comes to improving efficiency through automation and AI? And which areas of your business do you believe have the greatest potential for adopting these technologies?

At ORIX Asset Management, we actively manage the properties within the ORIX JREIT, and it’s essential that we incorporate AI and technology to optimize those operations. That said, we are still in the process of implementing these systems.

Our AUM continues to grow annually and currently stands at around JPY 750 billion. If we can streamline operations and reduce the labor required for administrative and paperwork-heavy tasks, we’ll be able to reallocate staff toward more strategic functions—such as asset acquisition, sales, and rent negotiations. We believe this shift from backend to frontend roles will directly contribute to increasing our revenue.

You mentioned the increased commitment from ORIX Group. While your relationship with the group has been long-standing, their recent decision to invest directly in ORIX JREIT marks a deeper level of support. Could you share some of the advantages and synergies this partnership brings? How do you see this increased investment helping ORIX Asset Management move forward in the coming years?

It's important to distinguish between the group synergy and the capital investment itself. ORIX Group’s 1% stake in ORIX JREIT is primarily from an investor’s perspective. With this investment, they have a greater incentive to help raise ORIX JREIT’s share price, improve profitability, and increase dividends. This shift in perspective strengthens our alignment and further solidifies our partnership in advancing the REIT.

ORIX Group was founded in 1964 as a general leasing company, and then expanded into real estate, lending, and leasing markets. In 2002, they launched their JREIT business. In their most recent fiscal announcement, they set a target to grow their AUM from JPY 69 trillion to JPY 100 trillion. ORIX Asset Management plays a role in achieving the group reach this AUM growth goal.

ORIX Group has strong relationships with financial institutions across Japan and a well-established presence in global capital markets, including U.S. and EU bond markets. For ORIX JREIT, this provides a significant advantage—we can tap into ORIX Group’s vast financial network to secure financing from banks across the country.

Another key advantage is the strength of the ORIX brand. As part of the group, we benefit from their reputation and credibility, which has helped us gain easier access to attractive property acquisition opportunities.

Your sourcing strategy in recent years has been quite notable. Historically, you've focused on office buildings in the greater Tokyo area, but that's clearly evolved—with acquisitions like the property in Fukuoka and the MIMARU hotels in Osaka and Kyoto. At the same time, property prices across Japan have risen significantly, which is pushing some smaller players out of the market or at least out of certain asset categories. Given these recent acquisitions and current market conditions, how do you see your sourcing strategy evolving going forward? What adjustments are you making in response to the broader shifts in the real estate landscape?

Our sourcing strategy is currently guided primarily by our share price. With our implied cap rate hovering around 4.7%, we need to be mindful not to pursue properties with yields below that level, as doing so would go against investor expectations. We’re prioritizing deals that align with that implied cap rate to maintain investor confidence. Once we’re able to push P/NAV ratio closer to 1 and lower our implied cap rate, we’ll have more flexibility in our sourcing approach.

At this stage, our key focus is on Net Operating Income (NOI) yield, as investors are generally expecting around a 5% return. However, in the current market, finding properties that meet that threshold is increasingly difficult. One way we’ve responded is by targeting properties where rents are still below market averages—such as the office building, we acquired in Tenjin—which gives us potential to increase income over time.

Ideally, we’d like to acquire office and residential properties in central Tokyo, but given the presence of large foreign funds and other aggressive real estate investors in that space, acquiring high-NOI yield properties there is a challenge. That’s why we’re working on developing a new, differentiated strategy to secure assets that still align with our financial goals and investor expectations.

As part of this new strategy, what types of properties are you focusing on, and which specific locations or regions are you targeting for future acquisitions?

Our current focus is on Tokyo, followed by Osaka, and then key regional capital cities such as Nagoya, Sapporo, and Fukuoka. While we do have some regional properties that were acquired in the past, our strategy moving forward is to concentrate on centrally located assets in major urban areas.

One interesting development in the greater Tokyo commercial office segment is that, contrary to earlier predictions, vacancy rates remain very low—around 2.4%. While flexible work policies have become a global trend, many companies in Japan are now leveraging office spaces as a way to enhance their appeal to new recruits. How are these trends influencing your strategy in the office segment? And how do you see the sector evolving over the next year?

I believe there will continue to be strong demand for office space. We’re seeing both new developments and refurbishments of older buildings, and across all asset classes—whether offices, hotels, residential, commercial, or logistics—we’re in a position to raise rents.

Specifically in the office sector, vacancy rates for JREIT-owned assets are close to 0%, which is significantly lower than the broader Tokyo market average of 2.4%. We’re actively pursuing newer properties so we can gradually replace aging assets in our portfolio. This not only helps reduce the average building age but also strengthens our ESG profile.

That said, newly built properties are currently very expensive, and yields for prime (S-class) office buildings are around 2%, which is not aligned with our target returns. As a result, our strategy is to focus more on mid-class office buildings, where there are more favorable acquisition opportunities. In the current environment, it’s crucial to seize the right opportunities as they arise in order to continue growing the company.

In the residential segment, an interesting trend over the past six months has been the entrance of foreign institutional investors into Japan’s multifamily property market. Historically, this segment has seen limited exposure from overseas institutions, but increasing urbanization rates have drawn significant attention. Major players like BlackRock and Goldman Sachs have recently made notable moves into the market. Do you view the entry of these foreign investors as an opportunity and a sign of validation for the market’s growth potential? Or do you see it as a major challenge, given the increased competition from players with different strategies and greater financial resources?

I see this development positively, as it helps activate the market and contributes to a broader, more favorable impression of Japan—particularly in areas like food and tourism. The entry of more players into the residential segment makes the market more dynamic, which we welcome.

Of course, increased competition means we may lose out on some bids, but that’s a reality in any maturing market. As the sector grows, competition is inevitable, and the key for us is to differentiate ourselves in order to remain competitive and successful.

Let’s imagine we return to interview you again five years from now. What specific objectives would you like to have achieved by then, and how would you like the company to have evolved in that time?

In five years, the Osaka IR project will be completed near the current Osaka Expo site, marking a major milestone for the ORIX Group. Given the volatility of the real estate market, staying flexible will be essential, but by 2030, I hope to be able to say that we successfully acquired many of ORIX Group’s flagship projects.

I also expect that by then we will have surpassed a P/NAV ratio of one and completed a public offering, expanding our AUM from JPY 750 billion to JPY 1 trillion. Most importantly, I hope to say that ORIX Asset Management has become a unique, differentiated company and one of the dominant players in the market. To achieve that, our focus over the next five years will be on earning and strengthening the trust of our investors.

For more information, please visit their website at: https://www.orix.co.jp/oam/en/profile/