How Global Link Management Became Tokyo's Gateway for ESG-conscious Real Estate Investors

Sustained by low interest rates as well as the lifting of COVID restrictions, Japanese land prices have seen a huge uptick into 2023, the highest rate in 15 years. Attracted by that performance as well as low interest rates and the devaluation of the JPY, foreigners are pouring into the market, 45% up for 2023. Those buyers included the Sovereign Wealth Fund of Singapore as well as Norwegian pension funds. Could you give us your take on why Japan is currently so attractive for foreign buyers considering the current global macroeconomic climate?

My perception of the market aligns closely with your analysis. Since the onset of the COVID-19 pandemic in 2020, we have seen a surge in foreign investment into Japan, which continued through 2022 and 2023. The peak of this foreign investment occurred in the fall of 2023. From late 2023 until recently, foreign investors, particularly from the US and Europe, have been redefining their investments in Japan based on new developments.

At the end of 2023, the Bank of Japan (BoJ) abolished its yield curve control policy, which included the negative interest rate, following an announcement by BoJ President Mr. Kuroda. This shift made US and European institutional investors apprehensive about potential further increases in interest rates, leading them to reconsider future investments in Japan. However, it has become evident that these institutional investors recognize Japan as a highly promising investment destination. Although interest rates may rise, this increase is expected to be gradual. Additionally, the rise in interest rates is not occurring in isolation; it is accompanied by inflation and wage increases. These factors, coupled with continuous demand and rising rents in the Tokyo metropolitan area, maintain Japan's attractiveness as an investment destination.

2023 marked a peak in foreign investment, but there has been a lull until recently. During this period, Japanese institutional investors have increasingly entered the Japanese market. Notably, the Tokyo Stock Exchange has requested Japanese companies to boost their share prices and achieve price-to-book ratios (PBR) of 1x. To achieve this, it is crucial for companies to strengthen their assets. Consequently, we have observed a trend of company share buybacks and increased investment in real estate by Japanese institutional investors. This shift is expanding our customer base, and we anticipate a second wave of US and European institutional investors returning to Japan, bolstered by the growing presence of Japanese domestic investors and heightened demand for metropolitan real estate.

In recent months, Japanese media and observers have voiced their apprehensions as to the performance of the real estate market for 2024 and 2025. At the core of their argument has been the possibility of further hikes in interest rates, especially as the devaluation of the JPY to the USD continues. Market players are also on edge over the risk of oversupply in certain asset classes. This is true for the luxury housing segment, which has become more popular for residential developers as they can better offset rising construction costs in comparison to more affordable housing projects. How realistic do you believe these threats to be?

Regarding the risk of the BoJ increasing interest rates, it is true that, generally speaking, interest rates will rise, but this increase will be gradual. Although inflation has returned as of late, Japan lived through decades of deflation, and maintained a negative interest rate policy since 2016. Looking back to the 1990s, just before the bubble economy burst, the interest rate in Japan was around 8%. Compared to that, there has been a significant shift. Currently, property yields in Tokyo are said to be between 3.5% and 4%, and net operating incomes (NOI) remain quite high even with the increase in interest rates, which is a positive point for investors.

The rise in interest rates will surely be gradual, increasing not by whole percentage points, but rather in the range of 0.25 to 0.5 percent. This is because Japanese wages have not yet caught up with global standards. With inflation, there must be corresponding increases in wages, which would also lead to higher real estate prices and rents, thereby justifying an increase in interest rates. Everything needs to be aligned before the interest rate can rise to sustain the Japanese economy. If the inflation rate of 2% continues for the next three years along with wage increases, the BoJ would be able to raise interest rates to a higher level, but it would be very gradual, as I mentioned, in a step-by-step manner.

There is also concern about a logistics sector crisis in 2024 due to new regulations regarding the labor hours of truck drivers and other logistic workers. The cost of labor has increased along with the current depreciation of the JPY and other factors, resulting in higher construction costs. Rising wages are an essential factor for rising prices of land and buildings.

Regarding the problem of an oversupply of luxury homes, many Chinese investors have been entering the Japanese luxury condominium market due to the impact of China's real estate bubble. However, with rising stock prices and other factors, the number of wealthy people in Japan is also on the rise, and domestic demand is gradually increasing. Over time, more Japanese people will have the purchasing power for luxury housing. With an increase in dual-income households, there will be higher purchasing power for real estate. With those changes in mind, I expect demand to keep up with supply.

ARTESSIMO is your property management business, which you started in 2006, just one year after your foundation. Today, it represents a diverse portfolio of residential properties. Could you highlight for us the unique features of the ARTESSIMO series?

The location of the ARTESSIMO series is our strength and point of differentiation. This is because each building is close to the station (within a 10-minute walk), close to the city center, and has high land prices, all of which are related to proximity to the city center. We call this "3 Chika (San-chika)," which not only means close to the city center or the station, but also shares the same pronunciation as the Japanese word for land price.

The population of Tokyo's 23 wards is approximately 14 million, while the greater Tokyo area has a population of 35 million, making it one of the world's largest metropolitan areas. Furthermore, more than 100,000 people move to Tokyo every year, and the population continues to grow. With the ARTESSIMO series, we offer properties ranging from 20 to 50 square meters, with layouts from one to two rooms and kitchen designs. These properties can accommodate a single person or a household, catering to one to three people. Every year, 10,000 units of condominiums and housing are provided, but the number of people moving to Tokyo is ten times that amount. As a result, our series maintains a 99% occupancy rate, with a very low vacancy rate due to the high demand outstripping supply. This is the strategy we are operating under in the metropolitan area.

Your company places a significant emphasis on environmental performance and incorporating natural elements in its design. This focus led to your acquisition of zero-emission housing certification in 2022. It's only this year that regulations regarding the environmental performance of buildings have been standardized in Japan. In this regard, Japan seems a bit behind the US and Europe, where such energy ratings are subsidized and mandatory for construction. Why did you decide to prioritize environmental performance? Do you anticipate an increase in demand for zero-emission housing and sustainable development?

As of 2024, all of our newly developed compact condominiums are constructed in compliance with environmental regulations. We provide a certificate for each building we develop, recognizing its environmental compliance. We are among the first companies to receive this environmental certification.

This initiative stems from our learning from Europe, a region that is highly advanced in environmental sustainability, particularly in construction. It is crucial for us to appeal to European investors, especially real estate fund managers, by strengthening our environmental, social, and governance (ESG) practices. As a listed company, it is essential to enhance our ESG credentials and contribute to CO2 reduction to mitigate global warming through our business operations. Global Link Management (GLM) has studied cases in Europe where buildings lacking environmental recognition have decreased in value. Even if a property has the same structure, its popularity and rental potential are significantly reduced without environmental certification. Currently in Europe and the United States, publicly listed companies are being encouraged to have their offices in buildings that have environmental certification.

Another advantage of our zero-emission buildings is that they can save up to 20% of energy costs. Investors are willing to accept the increased purchase cost of zero-emission properties, as it contributes to maintaining asset values ​​in the mid- to long-term and has a positive impact on returns, such as rental income. There is also an increasing number of individual tenants who want to live in places that are good for the global environment. With this understanding, we are strengthening our business operations to be completely eco-based.

ARTESSIMO The Nature Hamacho

You launched UCHIWA in 2019, a company that focuses on housing international students. How has this business evolved since the COVID-19 pandemic?

UCHIWA was established in 2019, a pre-COVID period when there were many foreigners who were interested in coming to Japan to study and work. We provided a comprehensive service to help students get into the country, as well as match them with a school. In addition to those services we would also provide student-ready accomodations. With COVID-19 however, there has been a big downfall in business, and it is only recently we are seeing students coming back to Japan.

Another service you launched is AtPeak, a series of IT-related products and services. This includes health care assistance, disaster prevention initiatives, and even generative AI services. What advantages do you think having this IT-related branch will bring to your group as a whole?

In December 2023 we established AtPeak with the purpose of combining DX (Digital Transformation) technologies with real estate operations. The platform is scheduled to launch in the near future so I can't share any specifics, but we are currently building a strong foundation for the product.

Basically speaking, it will be an AI-driven platform that can be accessed at home or at the office. The main feature of the products developed by AtPeak is the integration of big data and map data. For real estate development, it could be best utilized for finding vulnerabilities to disasters on a map, as well as help companies assess risks and simulate optimal property development in compliance with relevant laws and regulations, including incorporating crime prevention and disaster prevention measures into buildings. Our targets are real estate developers mainly, who we believe can best leverage this platform.

Not only are we trying to provide B2B, but we also want to provide a B2C aspect as well. This can be achieved by enhancing health, crime and disaster prevention features to suit each unit or apartment within a building.

Since 2014 you’ve been increasing your sales year-on-year, and 2023 was no exception. You increased sales by almost 16% while operating income grew 87%. Can you comment on this success?

The reason we've experienced such significant growth is due to a shift in our business model. In 2017, we listed on the Tokyo Stock Exchange, and at that time, our business focus was on individual domestic investors. However, since 2020, we have expanded our direct channels to overseas institutional investors, such as Star Asia, as well as domestic institutional investors. This shift has transformed our business model into an order-based approach that caters to the specific needs of investors, particularly those from overseas. These investors have a strong interest in ESG and environmentally friendly investments. We are able to meet this demand thanks to our extensive experience in purchasing and developing land. Essentially, we have customized our business from a B2C model to a B2B model.

As a joint venture with the Star Asia Group, you established SAGL Advisors, an asset management company that manages real estate funds focused on residential properties. Could you tell us more about the decision to create this fund and why you selected Star Asia as a partner?

We entered into a joint venture with Star Asia, firstly, because I have a good acquaintance there. Star Asia is a US-based institution with strong investment capabilities. However, they lack development capabilities, which is our strength. During COVID-19, all financial institutions halted their activities, so I discussed with my friend at Star Asia the possibility of a joint business where we would handle the development, and Star Asia would handle the purchasing. We would then operate and sell together.

From June 2023 to June 2024, your stock price increased by more than 50%, jumping from around 1,200 yen to more than 2,100 today, after having reached a peak of nearly 3,000 yen in February 2024. Considering this surge and your increased collaboration with institution investors, how are you communicating your company’s perspective to the market?

To be very honest, we have not been as proactive as we should be in our communication activities with institutional investors. However, since surpassing the 20 billion yen mark in market valuation last year, we have received more requests for one-on-one meetings with foreign investors.

We are now trying to reform our company’s governance from Board 2.0 to Board 3.0. Board 2.0 focused on the separation of management and execution, whereas Board 3.0 emphasizes the inclusion of foreign investors as outside board members. Therefore, it is important for us to strengthen both our English-speaking and Japanese-speaking human resources to elevate the company's value. We are currently making reforms in this management structure to be more appealing to foreign investors and to financial markets. Additionally, we aim to increase our market cap beyond the 100 billion yen mark in order to be more highly recognized by institutional entities, both as an investment and a business partner.

I want to stress that we are on a path of growth and will continue to expand as a company. Investors often ask me about our prospects for the next three years, questioning whether the company will grow or stagnate. I always emphasize that we will definitely continue to grow for the next three years, and hopefully well beyond that. We predict that this growth will either be at the same or at an even faster pace. We will be announcing our new Mid-term Management Plan in November, so keep an eye out for that in the near future.

The keywords of our upcoming strategy will be the combination of digital transformation (DX) and real estate development, with a continued focus on attracting institutional partners. Although I haven’t mentioned them today, Mitsubishi Jisho and Tokyo Real Estate are among our domestic customers. Our strength lies in catering to the specific needs of these investors through custom-made developments.

Imagine that we come back in 2035 and have this interview all over again. What goals or dreams do you hope to achieve by the time we come back for that new interview?

In a recent meeting with my staff members, we envisioned the company's future over the next 10 years. One ambitious target we set for ourselves is to become a leading real estate developer with a market capitalization of JPY 1 trillion. Achieving this milestone would not only position us as the top developer in Japan but also place us among the top 200 listed companies domestically. This goal reflects our commitment to excellence, innovation, and leadership in the real estate sector, and it underscores our determination to drive transformative growth.