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Exploring Japan's Attractiveness as an Investment Destination

Interview - June 14, 2024

The interview highlights the surge in Japanese land prices in early 2023, driven by foreign investments and favorable monetary policies. Tosei Corporation is capitalizing on this trend by focusing on the revitalization of eco-friendly properties and expanding its fund business. Tosei's diversified portfolio and strong network have attracted significant foreign investment, particularly through private placement funds. The company aims to increase its dividend payout ratio, implement corporate governance reforms, and contribute to a sustainable society, all while maintaining employee satisfaction and effective portfolio management.


Sustained by very low interest rates and the lifting of quota restrictions, Japanese land prices saw a huge uptick in the first half of 2023. This was sustained mostly by foreign purchases where 45% of it was coming from foreign-based buyers with large purchases in warehouses as well as in the logistics segment, especially from Singaporean and Canadian-based buyers. Could you give us your take on the global landscape and why you consider Japan so attractive when it comes to investment?

First, regarding interest rate hikes, we need to look at the structural issues in the country. We are a publicly traded company, but the number of listed companies on the TSE is approximately 4,000. On the other hand, the number of small and medium-sized enterprises (SMEs) is about 3 million, of which only 0.1% are listed. Listed companies account for 85% of Japan's corporate tax payments, while 99.9% of SMEs are not making any money. Hence, the government and the BOJ cannot raise interest rates too sharply. The BOJ lifted its negative interest rate in April, but we believe that its accommodative monetary policy is expected to continue, given the situation of small and medium-sized enterprises (SMEs) and local small businesses.

Japan is said to be an attractive investment target because it is the only country in the world with a positive yield gap, Tokyo is one of the largest real estate investment markets in the world, geopolitical risk is low, rents are stable with few delinquencies, and lenders have a favorable attitude toward real estate. We believe that the inflow of funds into Japanese real estate will continue.


The fear of rising interest rates is certainly a first concern for investors looking into Japan. Two other fears have started emerging; however, one is the risk of oversupply in certain asset classes, and the other is inflation, Japan has never experienced inflation the way it is right now. This inflation is changing the relationship with tenants, the cost of materials, and the cost of reconstruction. How serious do you think these threats are for Tosei Corporation?

Historically, there has been an oversupply of large office buildings every year, and last year there was a large supply in Tokyo, but demand absorbed it and it did not become a major problem. In terms of tenant relations, the Japanese work style is very unique from that of the United States. We focus on small- and medium-sized offices, and most of the tenants in small- and medium-sized buildings are small to medium-sized companies, and most of them come to work rather than work remotely. Therefore, the vacancy rate in central Tokyo is stable at around 6%, unlike the U.S., where in some states it is as high as 50%. I think this is partly due to differences in national character and culture, and another reason may be the small size of Japanese housing. The average size is only 60 or 70 square meters, which is not enough space to work from home. Remote work has expanded since Corona, but now the style of working in an office is returning in earnest. In addition, material costs are expected to rise, especially for RC. In terms of the ratio of development and revitalization, we intend to focus on the revitalization business because the impact of construction costs is minimal due to renovation work.

In the development business, most of the pipeline we own has already been contracted for construction, and costs are fixed, so we do not expect them to rise for the next two to three years. In addition, for new construction development, we plan to focus on the development of wooden apartments and detached houses.


Offices are an asset class that has caught a lot of attention due to changes in flexible work policies that began during the COVID-19 pandemic. We are seeing that companies are not only adopting flexible work but we are also seeing the popularization of satellite offices. As such, the design of office spaces has changed, and companies like more modular spaces and smaller offices than they did before. From your point of view, how do you foresee the evolution of office spaces in the years to come?

Since Corona, more and more companies in Japan have set up satellite offices for their employees to work conveniently. However, the market and demand for satellite offices is limited and it is not easy to make a profit in the current situation. Therefore, we have decided not to invest in this sector.

On the other hand, to attract tenants on more favorable terms in small and medium-sized buildings, Tosei has begun offering a new type of office space, which we call “setup offices,” primarily targeting start-up companies. Modern in design, these offices are equipped with a reception desk and stylish furnishings. This is unique, as furnished offices are rare; rather, tenant companies usually provide their furniture.


Japan had one of the world’s strictest lockdown measures for non-residents during the COVID-19 pandemic, and as such the knock-on effect was anticipated to last for many years after we exit COVID-19 lockdowns. If we look at the tourism sector, perhaps that is a case in point. Revenue has surpassed pre-COVID levels, but the number of tourists coming to Japan is still below for the 2023 season. In anticipation of this luxury hotel brands such as the Marriott and the Hilton took this opportunity to place their footprint here in Japan since Japan was seen as a country that lacked luxury hotels. Could you tell us, from your perspective, what is your anticipation for the hotel segment for 2024 going into 2025? In the case of your two hotel brands, Cocone and Makuhari, how are you catering to the more luxurious or business-related demand that is anticipated?

First, let me elaborate on the macro view: the number of tourists in 2024 is expected to increase to 33 million, reaching a level similar to 2019. This is a very good scenario. However, to take advantage of this trend, I believe that we need to further strengthen the uniqueness of our hotel brand. The meaning of our hotel brand “COCONE” is a bit complicated. COCORO means heart and NE means sound, and together these two words mean the sound of the heart. The hotel brand is characterized by “Wa-modern,” a fusion of traditional Japanese aesthetics and modern design. The rooms feature a modern exterior and interior design with tatami mats, a uniquely Japanese cultural element, and some hotels also have hot bath facilities and saunas to provide a place where guests can relax their minds. In response to more luxurious demands, Tosei Hotel Cocone Tsukiji Ginza Premier, which opened in September 2023, is the first hotel in the series to offer suite rooms and a library, providing a one-rank higher-quality lodging experience.

As for Makuhari, the hotel also has several rooms that can be used as conference and meeting rooms to meet the demand for business and corporate training, or so-called MICE needs.

We’ve also seen an increase in the luxury segment for prime real estate locations. If you look at the price of new condominiums in Tokyo, it’s doubled between March 2022 and March 2023. How do you expect this trend to evolve and do you believe this trend toward bigger apartments will continue?

I think the trend you mention will continue for the time being. Even in the Tokyo metropolitan area, sales of new condominiums have not recovered since last year, and as you point out, prices of luxury assets in prime areas such as Minato-ku and Shibuya-ku have doubled due to large investments from mainland China. Although prices have doubled, they are still cheap compared to developed countries such as the US, Singapore, and Hong Kong. This is essentially why the Japanese real estate market has high valuations. In the future, we will also focus more on environmentally friendly activities that are attracting investor interest. So far, our activities have been well received by investors, especially our environmental considerations in our revitalization business.

For example, in a recent case of revitalization of a company housing complex, we have achieved an eco-friendly revitalization that reduced CO2 emissions by 30% compared to the previous revitalization. For these aging assets, solar panels and storage batteries have been installed to reduce CO2 emissions in common areas, and LED lighting and other energy-saving equipment have been installed in private areas. The fact that these assets are contributing to society is appealing to investors.


One of the big strengths of Tosei is the revitalization business. The idea is that your company purchases an asset that has declined in value, remodels it with eco-friendly new designs, and then you can upvalue the actual value of the asset. If you take each stage of the revitalization process; buying, enhancing, and selling, what would you say are Tosei’s competitive advantages and what can you do that is unique at each stage?

We have a very discerning eye for real estate and what can and cannot be done. During the purchasing phase, we have built an extensive network with many brokers and they trust us because we can make an immediate decision to purchase an asset. As a result, we receive information on more than 500 assets every month. Investors usually dislike deteriorating or vacant assets, but we can increase the value of such assets and we can purchase them at a lower cost. In the revitalization and asset value enhancement phase,

Tosei also has an in-house first-class architect office. This means that we can plan and propose all kinds of projects, from resolving legal issues with the building to introducing various cutting-edge facility specifications, such as environmental considerations and IoT, appropriately and at a competitive cost. At the sale stage, we have a wide range of exit strategies, including the issuance of real estate-based security tokens (STs) and the promotion of crowdfunding, in addition to a broad network of sales networks, just as in the purchase stage. We are also listed on the Singapore Exchange (SGX) and have leveraged our network to develop our real estate business in the global field, including listing STs on ADDX, Singapore's digital stock exchange.


The revitalization business is just one of six core divisions you have at Tosei. When you look at your six different divisions, what advantages do you feel you have separating your company this way and what synergies are you able to create among your six divisions?

In our long-term vision and medium-term management plan, we plan to expand all six businesses in our portfolio. For the time being, however, we will focus on two of them: the revitalization business and the fund business. About the revitalization business, the market in the Tokyo metropolitan area is very large, with an annual transaction value of about 10 trillion yen for the sale and purchase of small and medium-sized existing properties in the metropolitan area. Therefore, we believe we can still increase our market share in the Tokyo metropolitan area.

Our business model is characterized by very high synergy effects among our business divisions. While Tosei conducts the revitalization and development business and our subsidiaries provide asset management and property management, we believe we have created a one-stop value chain that is essentially all in-house.


You talked about your desire to increase your fund business in the near future. A big focus of the fund business is your Tosei Real Estate Investment Fund (REIT). The Japanese stock market has increased tremendously over the past year but that growth hasn’t been seen yet in the Japanese REIT (JREIT) sector. Do you think there is an opportunity there?

We do not think REIT unit prices will rise. The Bank of Japan's interest rate hike will be gradual, but since JREITs are financial instruments, they are sensitive to the Bank of Japan's attitude and movements, which will be difficult under inflationary conditions. We intend to stretch out mainly in private placement funds, which we are still focusing on.

Tosei has established a security token and Tosei Real Estate Crowd along with a digital matchmaking service for the six business divisions that you have. Can you tell us a little bit more about how you are utilizing technologies and digital tools to enhance your customer service?

In my view, the market will certainly expand in terms of digitalization. In 2021, we became the first Japanese company to list a security token (ST) backed by Japanese real estate on Singapore's digital securities market, ADDX.

In the Japanese digital securities market, ODX was opened in Osaka last December, and digital marketing is attracting increasing attention. Asset management with blockchain technology is a trend that is attracting a lot of interest, especially from startup companies and young people who are familiar with digital technology, as well as investors who have developed from REITs in terms of expanding their investment asset portfolios. We have decided to enter the realm of digital securities as well, as we expect demand to grow for these products as investment products in the near future.


For a lot of young Japanese people, real estate is a huge investment and thus they are still staying at home with their parents into their late 20s and even early 30s. With these tokens, there is an ability to buy portions of a property rather than the whole property. Is this an avenue you would like to explore with your digital tokens?

One of the advantages of Tosei's crowdfunding is the ease with which investors can invest as little as 10,000 yen. This ability to invest such a small amount has expanded the scope of investment among younger people. On the other hand, since the average investment amount in our crowdfunding is approximately 1 million yen, we believe that the flexibility to invest from as little as 10,000 yen to a certain size is also attractive as an investment product.


Ever since the 1990s bubble burst, retail investors here in Japan have been very reluctant to use their money in certain asset classes. If we talk about money under lock and key, it is now up to around JPY 2 quadrillion which are in government bonds or savings accounts which are losing year on year to inflation. Unlocking this money could be a huge tailwind for capital markets here in Japan. Could you give us your prediction on how this situation will play out?

What has affected the Nikkei 225 is the emergence of many foreign investors and NISA. In terms of individual investor initiatives, in real estate investment, many individuals are among the buyers of real estate under 500 million yen, which is valued as a stable asset. As the integration of real estate and DX continues, new schemes such as crowdfunding and ST are being introduced to attract a new investor base. I believe these initiatives will make real estate investment more accessible to individual investors.


Your fund and consulting business manages over JPY 2 trillion in assets. 80% of the properties in this fund are residential and offices located in the greater Tokyo area, however, we noticed that in recent years you’ve added new types of asset classes including logistics, commercial facilities, and even data centers. Additionally, you’ve looked to regional diversification with the additions of Osaka, Nagoya, and Fukuoka properties which now account for around 15% of your overall assets. Looking to the future, are you interested in further diversification when it comes to the asset types and regions within your portfolio? If so, where and why?

Tosei focuses on the Tokyo metropolitan area for its revitalization and development business, but for its fund business, Tosei would like to invest throughout Japan. In particular, there is a need for diversification in terms of location. Of course, the asset classes we handle are now quite diversified, and we intend to further develop our portfolio in the future.


March 2024 saw a record high for Tosei on the Tokyo Stock Exchange, and we also just learned that you had a 12% increase in revenue for the 2020 fiscal year resulting in a record profit margin of JPY 10 billion. Could you tell us some of the reasons behind your recent success?

It simply comes down to portfolio management. In the fund business, Tosei Group has become the largest private fund manager in Japan in terms of assets under management. Currently, AUM is 2.4 trillion yen. Our business advantage lies in the revitalization business, which revitalizes the value of buildings through both hard and soft value-up of properties, thereby enabling us to enjoy high rents. We also convert them into offices and hotels, which I think is a unique aspect of our business.


2023 marked the end of your Infinite Potential mid-term plan. This was very successful and saw that you were able to double your assets and triple your profit before tax. Now you have a new mid-term plan in place called Further Evolution 2026, with one of the key objectives being to reach sales revenue of over JPY 123 billion. What have you identified as the key factors to achieving these results?

Again, it comes down to effective portfolio management. As I mentioned earlier, we plan to expand each of our six core businesses, of which we are particularly focused on the revitalization and development businesses. There is a huge volume of transactions in the Tokyo metropolitan area and great business potential. Furthermore, we are also focusing on the fund business, since only about two of Japan's listed companies are engaged in asset management for foreign companies. Fortunately, major companies like Mitsubishi and Sumitomo do not manage assets for foreign investors.

Tosei focuses on developing asset management strategies tailored to each investor. Our portfolios are very well balanced in terms of both types of investors and assets under management. This balance is the core of Tosei's ability to effectively build strategies of uniqueness.


When looking at your assets under management (AUM) for your fund, 60% comes from foreign investors and I believe that since we last checked it has now jumped to 75%. This is a very unique situation when compared to similar funds in Japan. What do you think makes Tosei so attractive to foreign investors?

Other firms like Mitsui and Mitsubishi do not contact foreigners for asset management, their priority is investment and domestic business. On the other hand, we are already listed on SGX in Singapore, the financial hub of Southeast Asia, so foreign investors know about our fund business. before listing on SGX, no one knew Tosei, but since listing, we have gained recognition and have been able to promote large asset management projects We are now able to promote large asset management projects.


In your Further Evolution 2026 mid-term strategy you have a forecast to increase the dividend payout ratio to 35% by 2026. That is quite high for the class of stock that your company is in. Why do you believe that increasing the dividend payout ratio shortly is important?

Historically, Tosei has focused on returns to investors.

We consider the level of shareholder return while placing the highest priority on investment in growth and maintaining sound financial discipline. We also consider the dividend payout ratios of competitors in the same business and the shareholder return policies of other companies in the world to ensure that Tosei is not inferior to them.


For Tosei Corporation, what corporate governance reforms have you implemented over the past few years, and are there any new ones you plan on making?

The Annual General Meeting of Shareholders was held in February, and one of its agenda items was the appointment of a female director, one female director was appointed at the 2024 Annual General Meeting of Shareholders. In addition, the term of office for directors was changed from two years to one year.


Out of all of the projects that you have overseen at Tosei, which is your favorite?

I personally love Cocone. Especially Tosei Hotel Cocone Ueno, which was a 25-year-old used office building that we were able to add value to and turn into a business hotel.

Imagine that we come back on the very last day of your presidency and have this interview all over again. What goals or dreams do you hope to achieve by the time you are ready to pass the baton onto the next generation of Tosei executives?

Tosei's long-term vision is to contribute to a sustainable society, and to this end, we are currently working to provide environmentally friendly products with sustainability in mind and to reduce CO2 emissions. In terms of employee benefits, it is extremely important to increase employee satisfaction, but first and foremost, we must find the best possible successor. Entrusting the company to a good bearer is fundamentally an important mission for me.


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