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Sanyu Appraisal: A leading provider of property valuation

Interview - June 21, 2022

Through a wide array of consulting services including valuation, cash flow analysis, property inspections and market studies Sanyu Appraisal offers property valuation services to Japanese and foreign investors alike. Founded in 1980, today they are the largest producer of appraisal reports within Japan, and are consistently top-ranking in sales revenue and number of licensed appraisers, respectively.


What is your macroanalysis of the Japanese real estate market? How you expect it to evolve in the years to come?

My macro take regarding the Japanese real estate market is that it is relatively attractive around the world, not just among Asian markets. I think it comes from some general practices we do in Japan. Investors can count on stability in terms of rent for properties across sectors.

In Japan, when you sign a contract for renting real estate, it's very difficult to change the price on the other end. Levels of rent will change depending on the economic situation but after the contract has been signed then the rent will not change.

So it's basically impossible in Japan to significantly reduce the rent in the Japanese market, even for example, in the case of the COVID-19 pandemic. On the other hand, let's say there is some economic boom in Japan and land prices and new rent increase, it will be difficult to raise the rent agreed on the contract. That works positively in times of crisis, so that you can enjoy stable rent, but in terms of economic boom, it might not work favorably for investors.

Regarding the future outlook, I think that at least in the short term of around five years - we will probably enjoy good conditions in the Japanese real property market because of the stable rent and the low interest rate that will continue in the future.

Another thing is the J-REIT. After maybe 20 years or so since the J-REIT came out on the market, the number of REITs and types of asset classes represented by REITs has increased dramatically to 61 REITs and a market capitalization value of 17 trillion yen. Also, in terms of transparency, I think that information disclosure regarding real proper data has been progressing, and I think it's easier for investors to make an investment in unclear situations.

On the other hand, in the long run, for example, 10, 20 or 30 years from now, I'm not sure whether the Japanese real estate market would be that attractive to investors. The market has been stable, but you don't see any significant economic growth in Japan.

The first reason is that we are going to see a declining population. Right now, as of this February, the Japanese population is 125 million, but that will decrease by 9 million by 2030. And by 2060 we are going to see the Japanese population drop to 86 million so that declining population would negatively affect real estate markets for offices as well as the residential sector.

In Japan we're seeing not very active information disclosure in terms of real estate. We have a lot of data regarding real estate, and we are trying to come up with ideas to do some business based on that. On the other hand, Japanese investors in real estate do not necessarily need that level of detailed information. Some Japanese investors try to keep that information to themselves, and yes, they can use that to their own benefit and I assume these factors will lead to some negative effects going forward.


Transparency has long been one of the criticisms that foreign investors have had of Japanese real estate investments. Although information disclosure has been improving, a lot of documentation such as deeds and contractual obligations are only available in Japanese. How does your company allow foreign investors to navigate the cultural and linguistic differences of the Japanese real estate market?

I think one big issue is that the language itself, the Japanese language, might not be very easy for overseas or English speaking people so we make sure to prepare English versions of all our documents. In the US, Thailand and South Korea - in every region we do business - we prepare both English and Japanese versions of our documentation.

When you look at foreign appraisal forms, there's a significant difference between them and the Japanese ones. For example, the US form has a lot of data, and you can see a lot of photos and many cases related to the use of the subject real estate. So when you take a look at the appraisal data form, you can gain a lot of information. You can tell a lot of things regarding the property you'd like to invest in.

But when you take a look at the Japanese appraisal form, it's very, very difficult. You can see only a limited amount of information related to buying or selling that property so that means we need to explain a lot of the things that are not on the appraisal form. I think that is necessary when you would like to do business based on the Japanese appraisal form.


In the past two years, the ratio of total investment volume of foreign investors in the Japanese market has nearly doubled. Why do you believe that foreign investors are looking to Japan now, and what is the importance of foreign investors for your business?

I think you can see in newspapers or magazines that the Japanese real estate market is stable and the gap between the interest rate and yield is very favorable for investors. One can enjoy almost zero interest rate from Japanese government bonds. The yield coming from Japanese government bonds is almost zero, but on the other hand the yield coming from the Japanese real estate market is 3 to 4 percent so you can enjoy that gap.

I think the biggest reasons why foreign investors are trying to invest in the Japanese real estate market are firstly the stability and secondly the high yield gap. Furthermore, I think that from some perspectives Japan is probably seen as a small country. What I mean by this is that when you take a look at the Japanese real estate market, I think you can just pay attention to Tokyo, Osaka and maybe Nagoya. You can just focus on these three areas in Japan in terms of real estate and real property investment. I think that may be easier for investors to pay attention to.

Actually, 30 years ago, when the bubble economy of Japan collapsed, changes in rent prices impacted in a ripple effect from Tokyo to Osaka to Nagoya and Fukuoka to Sendai. So that means you are going to see a narrowing gap of market trend between Tokyo and the other local cities in Japan.


Has the increase in the total investment volume of foreign investors in Japan had a tangible effect for your business?

Not really, because the increase in terms of requests for appraisals from foreign investors have not been significant. The reason is that foreign investors tend to pick a major foreign real estate company such as CBRE, which is a foreign affiliated company working in Japan; I think they are more familiar to foreign investors. So even though we say we offer just half the price of a firm like that, not many foreign investors are trying to go outside their comfort zone. But on the other hand, of course we are welcoming a lot of foreign investors coming to invest in the Japanese market, and from a business perspective we very much appreciate that.


Following the latest wave of the Covid pandemic, commentators are saying that retail is well on the road to recovery in Japan. Do you agree with this sentiment, and if so, how long do you expect a full recovery to take in this sector?

Regarding the recovery of retail, for example restaurants, I don’t think we’ll be able to see a rapid recovery very soon. That is because after the Covid pandemic started, I think many people were not very willing to go and eat out and they lost that habit in their lives. In terms of Japanese customs in the past, many people would flock together and eat outside with a lot of people in the group. However, I think that actually there are many people who do not like getting together to eat out.

I actually love eating out and drinking alcohol together with others, and pre pandemic I would go out probably 5, 6 or 7 times per month but after the pandemic hit us, it's almost become zero and I'm getting used to it.

So based on that, I think it would take a lot of time to achieve a full recovery, or I think we may not even be able to see a full recovery in the future. But on the other hand, I think we can expect more and more growth in terms of e-commerce, so I think that the logistics sector will see growth in the future.

How do you expect Japan's population decline and demographic situation to impact the appraisals of residential properties in the future?

The first numbers I'd like to share with you are from the 23rd special district in Tokyo. In 2021 you actually saw a decrease in the number of people coming to Tokyo. This is the first decrease since 1996, and of course that comes from the overall decrease in the overall population, but as well as a trend for remote working from home. I believe that trend will continue and accelerate in the future.

From the macro perspective, we have residential stocks of about 62 million all over Japan. That is based on data coming from the Ministry of Land, Infrastructure, Transport and Tourism, gathered in 2018. The number of households living in those residences is actually 54 million households so that means the vacancy rate of residential property is 13%, and that will increase going forward. So in the residential sector I think we can expect a relatively negative future in terms of condos or renting houses.


You have formed partnerships with other regional appraisal companies in places like South Korea and Thailand. What benefits do these partnerships bring to both Japanese investors in Japan looking overseas and foreign investors looking to Japan? Do you have any plans to develop your overseas network?

We are working with a lot of overseas partners who come from places where the concept of ownership with real estate, for example, is significantly different. The system related to it, the laws and regulations, are totally different in each country.

However, we can find one common thing in every country and that is the phased approach method of appraisal. By finding common ground in terms of the appraisal method, we can cooperate with overseas partners.

From that perspective, the appraisal standard method is like a lingua franca or common language in between each country. I think that is similar to what you see in the accounting industry, where you have the accounting standards to be used in the same language, almost like an operating standard.

As for the future, we don't have enough knowledge about the markets in other countries but we would ‘do as the Romans do’ if we need to cooperate with top class appraisal companies in each country. We’d need to find a person familiar with the practices in each country, so we'd like to take it step by step to build relationships with new partners in each country and we’re actually doing this in Vietnam as well as in South Korea and Thailand, so we'd like to lay the groundwork to get a foothold in each country together with new partners and we'd like to continue that activity going forward.


Looking at the future, are there any new markets that you're currently targeting on top of Vietnam, as you just mentioned?

Yes, we'd like to focus on Asia and, for example, Cambodia. We can expect significant growth there, and we have some partners in Australia, Singapore and Hong Kong as well.


Do you believe that the growth in the logistics sector of the Japanese real estate market will be sustained even after the pandemic has passed?

Yes, to give you the numbers, as of last December, the vacancy rate for logistics facilities in Japan’s metropolitan areas is just 2.3%. That was about 20% following the Lehman financial crisis. I believe there will be sustained growth in the logistics area going forward.

The e-commerce rate, especially regarding B2C business in Japan, would be about 8.1% of all transactions - I'm not sure, but I think that could be more than double in the US - and I think that number will continue to grow in Japan going forward.

Older people may not prefer e-commerce, but more and more young people will enter the market and they will choose e-commerce so I think that growth will be sustained.

On the other hand, when considering areas for logistics centers for example, I think there is some available land even near Tokyo. For example, land that used to be used for factories can be used to house new logistics centers. For that reason, I believe there will be continuous growth in the logistics market.


A lot of these warehouses that were built years ago don't have recent technologies, so acquisitions of new logistics facilities are being made by foreigners and Japanese firms. How is your firm trying to grab the opportunities from this trend to modernize logistics facilities?

Yes, of course we'd like to capture the opportunity for the appraisal of moveable properties in logistics facilities as well. In the past we've been paying attention to moveable properties appraisal for factories of manufacturers, for example.

When we actually evaluate this and conduct an appraisal of buildings, we also appraise the machinery or equipment they have and we would like to increase that activity as well. In addition to that, in our company we have some qualified employees in movable appraisals that are used in the US, but there is also the Japanese version, so there are some employees that can handle movable property appraisals and we'd like to capture such opportunities so that we can utilize that know-how.


Let's say we come back to interview you again on the last day of your presidency. What would you like to tell us about your goals and dreams for the company by that time, and what would you like to have achieved by then?

My take on the Japanese real estate market is that real estate companies that engage in selling real estate to customers, renting and conducting evaluation are lagging behind compared to other industries in Japan. This is also the case with information disclosure as well, and also in financial institutions, banks or certified public accountants. They have certain knowledge of real estate, but they still are not very familiar with real estate practices in the market itself.

So the answer is that I would like to make more and more people interested in or aware of real estate in Japan. That's what I'd like to achieve. Actually, in Japan there are very, very few cases where you are legally required to collect real estate appraisals. You can choose to do real estate appraisal or not, but doing real estate appraisal has a lot of benefits and as I mentioned earlier, in Japan information disclosure is not done properly so if one party has a lot of information and knowledge over the other side, then they have an advantage.

Say there’s a condominium you can sell for 50 million yen. Sometimes it will be sold and bought again for 40 million yen due to unfair practices. I hope many people utilize our realistic appraisal services so that they can be engaged in fairer activity based on our evaluation and they can be engaged in negotiations in a fairer manner.

That requires lower prices for real estate appraisals and also we need to make it easier for clients to understand what kind of approaches we use. Our appraisal form documents are small in number compared to that of major foreign appraisal firms but our price is about half or 1/3 or even 1/4 of their price.

We are proud of the fact that we are providing everything that our clients need. I sincerely hope that real estate appraisal will further spread going forward and increase the transparency of the real estate market in Japan. That's what I'd like to contribute to.