We sat down with Mr. Masanori Hirano, president of Heiwa Real Estate Asset Management, the asset manager of the Heiwa Real Estate REIT, a hybrid investment vehicle focused on residential and mid-sized office properties in Tokyo. In our conversation we discussed the prolonged impact of the coronavirus pandemic on Tokyo’s office market, the impact of Japan’s aging society on the availability of residences, the REIT’s latest acquisitions, and more.
What is your general analysis of the Japanese real estate market? How do you expect it to evolve in the future?
I believe that the Japanese real estate market still has a lot of growth potential and is still developing; it has not reached maturation yet. I also believe that there are four factors that we can focus on that can be the reasons for its growth potential: first, progress in securitization; second, a continuous low interest rate; third, diversification of the Japanese economy as a whole; fourth, increased urbanization.
Allow me to go into more details about these four points that I mentioned above. First is progress in securitization. The growth has been possible due to the establishment of Japan Real Estate Investment Trust (J-REIT) in 2001 and because of this there has been a steady improvement of performances. The market has become more diversified with asset categories and classes as well as a wide range of investment opportunities being available. Not only for offices and residential buildings but also logistics, data centers, nursing facilities, and other commercial facilities.
The second factor is the continued low interest rates that the Japanese market enjoys as opposed to the other countries. Here in Japan we also should pay attention to the trend in interest rates. Having said that, the market has been benefiting from favorable investment conditions in recent years.
The third factor is the economic structure in Japan and various industrial sectors such as the financial sector and manufacturing services. They worked together to show support and to strengthen each other with mutual efforts. Even though these certain sectors did take a great hit during the pandemic, such as tourism and food industry, other sectors such as manufacturing have proven to be resilient, due to this fact they were able to continue to support each other.
The fourth factor is the increased urbanization due to the influx of people moving into major cities. With this the population density of cities has continued to grow and this is something that is attractive to the investors who are looking for profits and investment opportunities.
Even amidst the pandemic Japan has done a great job in containing the virus. This was made possible because the people in Japan are very particular about hygiene and they maintain standards as much as possible to mitigate the spread of the virus. All of these factors that I mentioned helped support this very lucrative market. As the pandemic starts to move into the direction of dissolution and things have gotten better, I believe these will greatly help to strengthen the market, increase the transaction volume, continue to achieve stability, and increase profitability.
Why do you think that foreign investors are looking to Japan now? What opportunities does this increase of foreign investors represent for your company?
One huge reason for the influx of foreign investors is because the J-REIT is well established and it has really improved the transparency of the market as a whole. This has made it easier for new players to enter into the Japanese real estate market. The influx of foreign investors into the Japanese real estate market is something very interesting and will help increase the transaction volume as well as make it more dynamic and diverse. I believe that since the Japanese real estate market has been globally indexed, this has been a huge factor that accounts for foreign investment. One thing that we are doing is increasing transparency and making it easier for foreign investors to obtain more prompt information disclosure. We are able to provide the same information in English and Japanese simultaneously. Being able to easily communicate with global investors is paramount. Back in the day we needed to visit our foreign investors and stakeholders in North America, Europe, Asia—primarily in Hong Kong and Singapore—but now due to the pandemic we see that we can use video communication. This method of interaction has definitely increased our ability to communicate effectively and transparently. In Europe there is a high awareness of SDGs and because of this the properties are maintained at certain standards in order to move in the direction of carbon neutral. We feel that very directly and we are making efforts to comply with this move towards carbon neutrality. We are proud to say that we have been able to reduce CO2 emissions by roughly 97%. Furthermore, we also have almost completely switched to renewable energy. We are proud of this as it is a mark of well-established properties that are on the J-REIT. This is highly attractive to our global investors and it is proof that the Japanese real estate market is able to provide solid asset management services.
How do you foresee the evolution of the office sector and its performance in the short term? How do you think these changes in the work style would influence how we utilize the offices? Are we gearing up for a new normal or will we go back to the way it was before the pandemic?
At the beginning of the pandemic we saw that the large companies would be implementing new working styles very quickly and around that time there were rumors that people would no longer be needing office spaces. But I believe that has now been proven wrong and I do not see that people still think that way. However, we can definitely say that the pandemic has actually shown the great merit of having offices to conduct business in person and has shown the value of face to face communication. Having office space is something valuable. The pandemic has brought diverse working styles where people can also choose to work from home and attend corporate meetings using online platforms. We are anticipating a trend, that from 2023 to 2025 there is going to be a massive supply of new offices available and that may have some sort of negative impact. However, when we look at the medium to long term regarding this issue on office spaces I believe that actually this kind of increase of new spaces will prove very beneficial to the market as a whole considering the fact that it will improve the competitiveness of the Japanese real estate sectors as compared to other Asian real estate markets. With regards to increasing competitiveness and attractive qualities I think in the long term we can see that this is going to be beneficial. We believe that the demand will eventually be high considering the fact that these spaces are going to have infrastructure that are highly attractive for global players as well.
It is true that Japan’s population is declining and the society is aging. However, in major urban centers such as Tokyo, Osaka, and Nagoya, the population is increasing and is expected to increase in the years to come. By the year 2033 one in every three regional homes in Japan is expected to be vacant. How do you expect Japan’s demographic situation to impact the residential or housing markets going forward?
One thing that is certain is there is going to be a trend of inflow of people into the urban centers of Japan including Tokyo. Although with covid this trend has plateaued, I expect it to pick back up. With regards to the decreased demand in single-size units of houses in Tokyo and other cities, there was a negative impact due to covid due to the decreased influx of students as well as those in the restaurant business, service sectors, and those who may have purchased their second homes in this area.
Within the real estate market the single-type units have played a central role but we believe that this is actually changing and there is going to be more demand for larger family-size units. The demand is not only increasing for new spaces but older properties with family-size options as well. With regards to properties solely for investment purposes, I believe this kind of market is something that has grown together with the establishment of J-REIT. It is relatively new in the Japanese market which had just begun in the early 2000s, but there is definitely potential growth for this moving forward.
The J-REIT managed by your company started with investments mainly in office properties , but in 2010 with a absorption merger of Japan Single-residence REIT Inc.you diversified and entered into residential and property markets. In this environment, given that you believe that asset type diversification is one of the main strengths of Japan’s market, do you have any plan to further diversify your portfolio?
HEIWA REAL ESTATE REIT, Inc., for which we conducts asset management, is focused on these two assets—the offices and residential markets—we believe that there is still a lot of room to grow for these markets. We can really see that we can reap both stability and profitability for our investors and clients. For that reason we will continue to focus on these assets, however, that does not mean that there are no other opportunities apart from these two assets. Although right now we are majorly managing the J-REIT, we know that the environment will change in order to enable the management of other types of properties such as for commercial uses, for example, industrial properties, factories, and other similar types. Currently we are focusing on office and residential types of management models but it does not mean there are no other opportunities in the future of other types of investment options.
I would like to ask about two of your recent acquisitions, the OSAKI CN BUILDING (office property)which you acquired in June last year as well as the HF TSUJIDO RESIDENCE which you acquired in February this year. Can you tell us what motivated you to acquire these two particular properties?
The OSAKI CN BUILDING is profitable because that building is only minutes away from the station. It also has a great environment for working and living: you start to see the environment is starting to change due to the increase of high end housing complexes around the area. Not only is it good for offices and residential housing units; you start to see a lot of investments into educational institutions— particularly in early childhood education. It is a great area and we saw a great investment potential.
Speaking of the HF TSUJIDO RESIDENCE, when it comes to privately-owned condominiums in Japan it is actually quite costly for a regular, average salary man to own his own apartment—nowadays it is close to impossible. When it comes to buying a condo, a couple needs to be both working for them to be able to afford to buy one. With this given situation we are starting to see a change in that market. More family-size units are becoming more attractive. This HF TSUJIDO RESIDENCE caters to such spaces which are three LDKs and more than 80 square meters in area. This was something that we were looking to target. Further, given sharp rises in property prices, we are working on the development of ordinary land lease rights. It is quite difficult to have contracts where you have full ownership of the land. The way we handle our business allows our investors to have multi purpose usage of the land. Obviously in order to create and acquire such properties you have to be quite competitive. We have decided to go through these processes in order to create something that is of great value to our clients.
Imagine we come back to interview you again in five years, what objectives or ambitions would you like to have accomplished by then?
Definitely our company has a vision and goals that we would like to have accomplished. Currently, we are solidifying the structure of our business for offices and residences, but perhaps five years from now we will have ventured into other types of real estate options especially considering the fact the Japanese real estate market is definitely going to continue to experience a dynamic and accelerated growth. It is possible that we will have another management company to take care of other types of asset classes. Personally I am really looking into strengthening the foundation of investment opportunities for the population of Japan considering the fact that we are looking forward to this 100-year lifespan type of culture that has become the new normal here in Japan—with the average lifespan increasing. Compared to our global counterparts you see that Japanese people are not very experienced in investing in properties. I want to help change that and create stable investment opportunities and a very solid investment foundation catering to the 100-year lifespan.