With the notable condominium brand ‘Excellent City’, Shinnihon Corporation is looking to contribute further to residential construction within Tokyo’s highly populated metropolitan region
Japan’s last construction boom was more than 50 years ago, prior to the 1964 Olympics. Since then, due to the demographic shift, on one hand, there is an increased need for maintenance and upkeep, and on the other, there is less need for newer construction projects. What is your take on the current state of the Japanese construction market?
To give you an overview of the overall spending on construction in Japan, the peak was 1992, which was 84 trillion Japanese yen. It was still during the bubble period. There was big investment both in the public and the private sector. However, it dropped drastically, and the lowest point was the year 2010, after the Lehman shock, when it became half the spending of the peak time, which is 42 trillion Japanese yen. With the Abe administration, things rebounded slowly but surely due to his policies, and now we have come back to about 67 trillion Japanese yen investment, both for public and private construction.
As you say, aging infrastructure has been a big issue recently in Japan, especially with the highways. Japan is vulnerable to natural disasters such as earthquakes and sudden torrential rains. The Japanese government announced two years ago its strategy to fortify national land. They secured 15 trillion Japanese yen for civil engineering investment, which includes refurbishing bridges, tunnels and other infrastructure, so there will certainly be growing demand in the sector for civil engineering and infrastructure in the private sector.
Speaking of the private sector, with the decline of the population, there will certainly be less demand for buildings themselves. However, the Japanese have this mindset of scrapping and building, so even the Akasaka Prince Hotel, which is considered a well-built structure, is refurbished every 30 years or so.
Japanese people like to live in newly bult condominiums and houses. Although I can see that the secondhand condominium market is now slowly becoming popular, there is still a need for new construction, so there is sure to be continuous growth, due to this scrap and build scheme within Japan, especially in urban areas.
We operate in large urban areas such as Tokyo, but with COVID, there has been a trend of people moving out of Tokyo, but the region still remains an attractive urban area within Japan, so for sure, there would be growing needs and infrastructure in the market, both private and public.
The current situation of the Japanese construction market is such that there is growing demand in the field of production sites because of the recent supply chain disruptions, as well as the trade dispute between the US and China. As a result, Japanese companies are coming back to Japan to do production and export from Japan. Companies like the Taiwanese TSMC are now investing one trillion Japanese yen for the fab in Kumamoto. It is ironic that the Japanese labor cost has not gone up for a long time, and that has allowed Japan to actually be competitive in terms of production. Production site construction has been widely prevalent, and the five major general construction companies already have orders for three years into the future, so factory construction is now the big boom here in Japan.
Japan is definitely becoming more attractive for domestic production and exports but do you believe that this can be sustained in the long term, over the next 5-10 years? What is your position on that?
For three to four years, I predict growing needs in the construction market for factory development, and also there will be tourists coming back to Japan, so there would be more need for hotel construction, but I cannot foresee anything after five years.
Let me talk about our business focusing on the Tokyo urban area condominiums. There is data issued by a research center of condominium sales that shows, before the Lehman shock. 61,000 units of condominiums were sold, but that has dropped down to 30,000 recently, and the prediction for the upcoming year is 32,000, so it is basically between 32 to 35,000 units of condominium sales, so it is around half compared to before the Lehman shock.
Before the Lehman shock, there were so many condominium developers. However, with the Lehman shock, there was a clear change in the market players. The ones currently surviving are firms like Mitsui, Mitsubishi and companies like ours. The prediction here is that the number of unit condominiums sold would probably go down below 30,000. Maybe it will be 20 to 25,000 annually, and that is what I expect. From my perspective, 30,000 units is actually the equilibrium point, where it is a good balance of demand and supply. Actually, the price of a condominium in Tokyo is 82 million Japanese yen, which is quite high. An average of the Tokyo, Chiba, Saitama and Kanagawa areas is 63 million Japanese yen. Compared to 10 years ago, this could be considered very expensive. However, household income has increased in Japan, with wives now working too. Before, it was only the husband working, so the income itself was comparatively lower than today. Due to this, these prices have become the standard. However, I think we have reached the limit, and I think those 30,000 units will start decreasing to 25,000 units soon.
Shinnihon's most notable condominium brand is Excellent City. Can you tell us why potential prospects should look into renting or purchasing a Shinnihon Excellent City property, and what advantages do they bring?
The uniqueness of our condominiums is actually a reflection of our business model. We take care of everything from start to completion, and the maintenance. That has given us a big competitive advantage in the market.
We are a general constructor, so we have the ability to construct, but we also have a division for purchasing land, as well as a design department which plans the most efficient way to increase the area of space for people to live in. We are the ones who construct according to the designs that we have in house. Annually, we provide about 1,000 to 1,200 units of condominiums. Since we have a standard design known as the Excellent Mansion series, we can have orders in big lots, which has the advantage of decreasing the cost of production. We have standard unit baths and entrance gates, so we work with specific companies to provide these products, and so overall, we are able to lower costs and provide a comprehensive service to our customers. Also, we have our own sales unit in-house, consisting of about 40 people. Usually, companies have their own designated companies to do the sales, but we are able to talk directly with our customers, and we have our maintenance team also to take care of after-sales. This comprehensive solution that we provide has given us a big advantage in the market.
Another uniqueness that we have through our comprehensive solution is that we are able to provide assurance and gain the trust of our customers, since we take care of everything by ourselves. For example, there was an incident in the past where construction of a pile was not appropriate. There were three entities involved: the developer, the general constructor and the actual sub commissioner. They were all different companies, so this did not work out. Everyone was blaming each other, and they could not take time to solve this issue. Since we take the responsibility of every aspect by ourselves, we will not hide away, of course. We are able to provide safety and assurance to our customers, and that has been one of the reasons why our customers are choosing us.
Another characteristic is that since we take care of everything by ourselves, our employees or staff are motivated. Their colleagues have worked hard to acquire the land to do the construction, so the sales units are highly motivated, whereas for other companies, they are selling a condominium that is made by people they do not know.
This sense of unity within the company has actually given us big construction and sales power, and we are one of the few companies who can complete the sale of a condominium before the end of construction.
What are some of the challenges that Japan's demography poses to your business? What are some of the opportunities that it presents for your firm?
In fact, the shortage of labor force is actually the biggest problem that is imposed on the Japanese construction sector. The job itself requires hard work, and the environment is quite harsh. During summertime, it is very hot whereas during winter it is cold.
There are not many people of the younger generations who want to work in this industry, and if you go to a construction site, it is oftentimes more of the elderly, senior generation that is working there. We have to change this industry so it becomes more attractive to the young generation. Next April, there will be legal enactment of new labor hours limitations, and with that, the industry will be under the surveillance of restrictive labor laws that will allow laborers more down time.
Currently, they are so busy that they are not even able to take two days off during the week. At the same time, since there are not many Japanese people who are willing to work in the industry, we need to open up to foreign workers. However, the Japanese economy itself has been undergoing a long period of deflation, and it needs to become more attractive to foreign workers. Salaries in Japan have not risen for a long time, so in order to attract foreign workers, Japan needs to be attractive as a country.
As for our company, since we have a profitable business model, we are able to pay a higher standard salary to our workers than other companies to attract them. Our founder has been saying our company philosophy for 50 years: “Best business. Best life”, meaning that you work hard, but at the same time, you enjoy your life. With this philosophy in mind, we are trying to promote a healthy and beneficial life to our employees.
Currently, the number of people per household is three or less. I mentioned about the 30,000 condominium units sold currently, but the size of each has been getting smaller. Before, it was more like 3LDK – a living, dining room and kitchen structure that was common - but with less people living in each apartment, less people are bearing children, or there are many unmarried people, so there is higher demand for 1LDK or 2LDK. More of a compact type of condominium. As a company, we are trying to shift ourselves and we are learning to meet current market demands and to be flexible.
You have your own precast, pre-stressed concrete construction method, where the materials are manufactured in a factory and then brought for assembling on site. What are the advantages of this method in comparison to more conventional ones? How does it allow you to save on precious labor hours?
We have recently begun introducing our precast technology in the construction of our condominiums. This could be used in areas such as balconies. By making the balcony itself in the factory and bringing it on site, we are able to save labor as well as limit the time of construction.
If you use the conventional concrete and construction method, it takes time and it is highly dependent on the weather conditions. It takes time for curing. The precast method is posing a big advantage in terms of time as well as labor saving, and also maintaining high quality. We have a subsidiary which has pre-casting technology which can leverage our technology in expediting and providing quality construction.
Let me introduce Kenken Co., Ltd., our subsidiary which has PC (pre-casting) technology. This technology has been used in the rebuilding of the national stadium. The stadium seats have a long span of concrete. If you do it on site, you cannot actually have that much of a long span, but since it is premade in the factory, you can have fortified concrete made into shape, then embedded and installed on site.
I also mentioned about the need for renovating the highways. Pre-casting technology can be used to make the base of the highway in the factory. This requires a certification that we are planning to receive by the autumn, so we will also be able to take part in infrastructure renovation.
Could you elaborate more on the role that partnerships play in your business model, and are you currently looking for partners?
With our current capacity, we are not really focused on overseas partnerships right now. However, with the diminishing Japanese market, it is certainly important for us to have our eyes on overseas markets and start looking into expanding. Doing everything by ourselves is not feasible and not practical, so finding a good partner, and then maybe a joint venture, would be the appropriate strategy.
About 15 to 16 years ago, we started our operation in China with a trustable partner, and we operated as a developer there, so if we could find a trustable partner in other countries, we would love to start partnering and collaborating as part of our international operations.
Are there any countries or regions that you have identified for further expansion into?
There is huge growth potential in Southeast Asia, so we are looking into the area as a major option. If we were to go to the overseas market, we would not only just want to invest financially, we would want to fully take advantage of our integrated comprehensive business model and use our strength as a general constructor to not only do the development but do the construction also.
We can take the lead in the market and show our strength. The case in China, and the reason why we decided to stop our operation there in 2018 is because of the abrupt political policy change that has a high risk for business.
Imagine say we come back to interview you again on the last day of your presidency: What would you like to have achieved by then?
Our company was founded in 1964, during the year of the Olympics. It will be commemorating its 60-year anniversary next year, but in terms of the fiscal year we are currently at the 60th fiscal year, which is a big number in Japanese culture.
The founding owner’s philosophy and vision of the company is embedded in every member of our staff, so based on that, we would like to continue to have sustainable growth. Five years ago, we surpassed 100 billion Japanese yen in turnover annually, and since then, we have been surpassing this target continuously. We have no loans, and soon we'll be reaching assets of 100 billion yen.
I became the president and experienced the Lehman shock, and we had struggled getting loans from financial companies because of the disruption in the financial industry, so we learned the importance of being self-sustaining in terms of finance and being debt free.
Currently, I am quite worried that since we became a stable company our employees may be feeling too safe, so it is important that we open our eyes and continue to be more active in the market.
I said that there are about 30,000 condominium units sold annually in the Tokyo urban areas, and we currently have about a 3% share of it, so if we could increase our share of the market, we could have a bigger business in Japan. Our target probably would be around 10% or more, surpassing a double-digit share within the major Tokyo area. Furthermore, international expansion is another big opportunity that we should undertake, and within my presidency I want to start building the foundations for our overseas expansion.