On October 1 2018, Sumitomo Mitsui Trust Asset Management (SMTAM) integrated the investment management function of Sumitomo Mitsui Trust Bank. In light of this merger, The Worldfolio sits down with Yoshio Hishida (President & CEO), Mototsugu Oota (Head of REIT Team) and Masumi Ishida (Chief Fund Manager) to discuss the advantages brought about by this merger, Japan’s booming REIT market and the vision of SMTAM for its future.
In October last year, Sumitomo Mitsui Trust Asset Management integrated the investment management function of Sumitomo Mitsui Trust Bank. Can you give us a quick overview of your firm after this merger?
Yoshio Hishida: With roughly 65 trillion JPY (or 587 billion $) worth of assets under management, we are one of the largest fiduciaries in Japan and in Asia. Furthermore, we manage the largest J-REIT active fund in Japan. We have an extensive business track record, cultivated over many years, both domestically and internationally. One of the strength of our company is our ability to manage Japanese and global equities, and that includes our world renowned J-REIT fund.
We invest in 2,200 Japanese companies, representing 16 trillion JPY of invested assets; and 2,500 overseas companies, amounting to 15 trillion JPY of invested assets.
We have made extensive efforts to strengthen our firm’s reputation as a responsible asset manager by promoting activities such as voting rights exercising and constructive engagement with investee companies. Furthermore, we have continued to enhance our ESG (Environmental, Social and Governance) performance domestically and internationally. Today we are proud to say that our ESG record has evolved into one of our core competitive advantages, and in February 2019 we were honored to be the first recipient of an award in the ESG Investment Category of the Tokyo Metropolitan Government’s inaugural Tokyo Financial Awards.
On October 1 2018, Sumitomo Mitsui Trust Asset Management integrated the investment management function of Sumitomo Mitsui Trust Bank into its organization. While this represents a transition period for our firm, the incorporation was executed smoothly and swiftly. Unlike many other M&A activities, this integration was made easier by the fact that it was a merger of two organizations with drastically different functions. Consequently, business overlaps were effectively eliminated.
Why did you decide to integrate the management function of Sumitomo Mitsui Trust Bank? What are the advantages that it procures?
Yoshio Hishida: Prior to the merger, our firms already collaborated closely as the retail and institutional arms of the SuMi TRUST Group. Although our customer-bases were different, the demands from investors grew increasingly similar. As the products we offered became attractive to both sets of clients, it became obvious that having a single integrated platform would increase our attractiveness and customer-base. The success of our J-REIT business stands as an excellent example of this trend. Previously, J-REIT used to be highly popular with small-scale investors, but largely disregarded by institutional entities. Today, both large-scale and small-scale investors are interested in the J-REIT model, as it offers investment convenience and simplicity. Consequently, integrating our businesses created synergies by enhancing our customer-base and product-offering.
What was the reaction from investors, particularly overseas investors, to the integration?
Yoshio Hishida: When we decided to integrate, many stakeholders asked us if we did so for the sake of “growth-synergies” or “cost-reduction.” I always answered that our only reason for integration was to create “growth-synergies.” As we integrated 2 completely different businesses, there were no overlaps, neither in terms of staff nor assets. Consequently, cost-reduction was greatly limited.
The J-REIT market has been continuously growing for over a decade. Can you give us an overview of the market today?
Mototsugu Oota: In recent years, the amount and value of properties held by J-REITs soared. In 09/2005, J-REITs held around 666 properties for a total value of 3 trillion JPY, approximately. As of the end of 10/2018, these figures increased to 3,862 properties at an approximate value of 17.8 trillion JPY. As such, J-REIT can be considered a steadily growing market.
When looking at the breakdown of J-REITs’ properties according to type, offices are by far the largest segment, accounting for 42.2% of J-REIT holdings. This number is followed by Commercial Complexes (16.2%), Residential (15.3%) and Logistics (15.1%). Hotels (7.3%), Healthcare facilities (0.8%) and other types (3.0%) account for approximately 11% of the total breakdown. In comparison to European REITs, where commercial properties are dominant, the J-REIT market is truly diversified.
When observing the breakdown by location, one can see that Tokyo’s five main wards (33.4%), along with the Kanto region (21.8%), Tokyo’s 23 wards (16.6%) and Kinki region (14.2%) account for more than 85% of the total breakdown. Unlike the rest of Japan, these regions are experiencing an increase in population. Consequently, we can deduct that despite Japan’s shrinking demography the J-REIT market will remain stable and attractive for years to come.
When analyzing the land prices of the three main metropolitan areas that J-REITs have invested in (Tokyo, Osaka and Nagoya) land prices have increased for five consecutive years in terms of residential properties; and six consecutive years for commercial properties. The recent surge in land prices and rental value indicate that this trend will continue and investors can remain confident as to the future outlook.
In 2006 and 2007, land prices for commercial properties and residential properties hit an all times high, effectively jumping by 10.4% and 4% respectively. This consequent increase was caused by speculative foreign investments which manipulated the market. From 2013 onwards, the steady increase of land prices was caused by the positive demographic line of the three main metropolitan areas.
In 2018, Japanese media argued that there would be an oversupply of offices due to the amount of new facilities expected between 2019 and 2021; a claim that was largely refuted by real estate firms. What is your point of view on these critics?
Masumi Ishida: To answer this question, we must look at the fundamentals. Regardless of 2020 Tokyo Olympics, Tokyo’s working population has increased by 100,000 individuals every year driven by the rise of telecommunications, financials, academics and professionals. This growth is laying a solid foundation for demand to increase. Even beyond the 2020 Olympics, we expect Tokyo’s labor force to pursue its upward trend due to larger employment opportunities for those intellectual professions.
According to our estimates, the population of Tokyo’s 23 wards will reach its peak in 2030. Naturally, demand for office facilities will develop adjacently to Tokyo’s demographic growth, which is mainly triggered by office workers, such as those I mentioned – telecommunications, financials and professionals. Judging by these numbers, it is difficult to imagine that demand for offices will collapse after the Olympics. Consequently, we believe that these criticisms are the result of a lack of information.
How do you explain that regional areas, such as Fukuoka, Nagoya or Hiroshima, are becoming increasingly attractive for real estate investments?
Masumi Ishida: The attractiveness of regional cities has increased due to a greater concentration of populations. The population of Kyushu Island has been moving to Fukuoka, concentrating in this major city. In the Chugoku area, people have been migrating to Hiroshima City, and the demographic line of the city has shot up. A similar observation has been made when observing the large cities of Kansai, namely, Osaka and Kyoto. In the case of Hokkaido Island, Sapporo City has also experienced an influx of inhabitants from regional villages. With demographic concentration comes a greater demand for offices, commercial facilities and more. Hence, the attractiveness of real estate investment has shot up.
In March 2019, the Government announced their latest data statistics on land prices regarding commercial properties in Japan’s five main cities, namely, Tokyo, Yokohama, Kyoto, Osaka and Nagoya. For each of these cities, land prices have increased sharply. Kyoto’s land prices, for example, surged by 13.4% as Tokyo and Osaka increased by 7.9% and 10.6% respectively. Kyoto’s significant increase in land prices has been caused by the soaring numbers of overseas visitors to Japan.
Can you comment on Japan’s Risk Premium?
Masumi Ishida: As of October 2018, the Risk Premium stood at 3.9%, a high number in comparison to the average of the inflationary period between 2005 to 2007, which boasted a 1.7% Risk Premium. Since 2012 onwards, the Risk Premium averaged 3.2% as the market perceived that Japan was coming out of its deflation period thanks to Abenomics.
What has been the impact of Abenomics on the real estate market?
Mototsugu Oota: Although these were technically parts of Abenomics, particularly the Bank of Japan’s (BoJ) policies are to thank for the positive results brought about to the real estate sector. By maintaining low interest rates and inciting both organizations and individuals to move their money, the BoJ successfully injected large sums of capital in the economy and the real estate sector.
In order to increase transparency and to ameliorate attitude towards shareholders, Abe introduced the Corporate Governance code and the Stewardship code. How did these enforcements influence your company?
Yoshio Hishida: Our company is an excellent example of the positive changes brought about by the Corporate Governance and the Stewardship codes. When we integrated last October, we decided to amend our governance system. Firstly, we transformed the constitution of our board. Currently, our board is composed of eight directors including myself, but there is also one member from the United States of America -who is also our co-chairman,- one woman and three independent directors. Besides for the chairmen and myself, there are no direct executive directors on our board. Therefore, we have attained a board composition similar to the UK or USA standard. This open structure has proven to be successful for our company as it has created a variety of opinions, generated open discussions and diversified our viewpoints. Diversification of individuals is key to the success of an asset management firm. Luckily for us, we have that.
To give you a concrete example: Our American board member always brings us back and compares us to global standards. He makes us ponder difficult questions, such as: can we succeed to reach this global standard? Do we understand this global standard? While global standards are not an end per say, and while we purposely choose not to simply attain certain standards but in fact surpass them, the ability to question our strategy is an undoubtable advantage.
How do J-REIT compare with foreign REITs?
Mototsugu Oota: When comparing global REIT spreads against the relevant government bonds, J-REIT came in second behind France, an attractive ranking especially in comparison to major markets such as the USA and Australia. When comparing the US and Japan, dividend yields are similar, at 4.3% and 4.0% respectively. However, the yield spread greatly differs in favor of Japan, which boasts a 3.9% yield spread while the US is stuck at 1.2%. Consequently, international investors have found J-REIT to be a lucrative investment. For example, Green Oak Real Estate of the US is said to have purchased Takeda Pharmaceutical’s Osaka head office building.
What will be in the impact of the Tokyo 2020 Olympics on Japan’s real estate sector?
Mototsugu Oota: Ahead of the 2020 Tokyo Olympics, transportation infrastructure has been streamlined with the goal to further transform Tokyo into a sophisticated metropolis. In terms of railway projects, the openings of the Metro Subway’s Toranomon-Hills Station and of JR’s Takanawa Gateway Station will further enhance the connections between Tokyo’s 23 wards. When observing the effects of former Olympic Games on other cities, one can observe the rise in prices before, during, and after the event. In comparison however, oversea countries have limitations as to foreign investors holding real estate assets; restrictions that Japan does not have, which further increases its attractiveness. Furthermore, as the Tokyo Global Financial City Vision continues its development, it will increase the job opportunities present in the Tokyo area for both local and foreign workers. Naturally, demand for properties will remain strong.
In comparison to other main markets, Japan also benefits from a stable political scene. The UK faces a lot of uncertainty due to Brexit, while the Australian property market may be impacted by the US-China trade war, although we do not know for sure where Australia stands on the issue. If Australia comes out as backing the US’ position, then it is possible that money inflow from China may weaken and limit the Australian market’s liquidity. Should money move away from these two core markets, then we believe the attention of investors will move to Tokyo. To look even further into the future, we can also expect the Osaka Expo 2025 to maintain momentum.
What are the competitive advantages of the investment management function of Sumitomo Mitsui Trust Asset Management?
Yoshio Hishida: Our J-REIT fund manager has a wealth of experience in managing equity, fixed income and real estate portfolios. Our fund manager has conducted numerous on-site research and appraises properties using property methods. It has conducted thorough research and appraisal on 90% (in value terms) of properties held by J-REIT. As a result, investing in our J-REIT fund can be seen as property investment rather than a securities investment; another point that enchants our clients.
What was the importance of J-REIT in Japan’s real estate boom?
Masumi Ishida: The importance of J-REIT in Japan’s property market is due to two main reasons: Firstly, J-REITs are one of the largest trader of properties in Japan. Secondly, it has allowed individual investors to invest their small capital as part of a J-REIT fund, allowing them to put their money into physical assets. Furthermore, the number and amount of properties held by J-REITs has been steadily increasing, naturally enhancing the possibilities and investment options. The value of J-REIT properties has increased by 1 trillion JPY year-on-year, leading us to become one of the largest players in the market.
When considering investing in Japan, some investors are scared of the earthquake risk. How would you address these claims?
Masumi Ishida: The Japanese construction industry has extremely high standards, which are strictly enforced by the Government. Even in case of an earthquake measuring point six to seven on the scale, buildings will not fall down. There were no collapses by J-REIT properties in the Sendai area during the Great East Japan Earthquake. Of course, some of them suffered damage, but nevertheless, none were destroyed. The Japanese law protects the value of buildings and the lives of people.
Looking at the future, what goals and ambitions do you have for Sumitomo Mitsui Trust Asset Management?
Yoshio Hishida: Our objective is to be the “best for our investors.” While the size of our company is indeed important, our goal is not to become the largest. Our true mission is to be the most competitive in the world.
What legacy would you like to leave behind in this company?
Yoshio Hishida: My first objective is to increase the social and political diversity of our company. My second objective is to install an environment where individuals have the freedom to disagree.
To some extent, I believe that our business is similar to journalism. When a journalist attempts to write an article, he does not put pen to paper with the objective to win an award. He does so to tell a story and inform his readers as best as he can. When one keeps his readers or clients in mind, awards will naturally follow after. That is the same for us. To be regarded as the best fiduciary in the world, we must only focus on the satisfaction of our clients.