Technology and Social Impact Drive Kasumigaseki Capital's Success

In recent months, international and Japanese media have voiced their apprehensions as to the performance of the Japanese real estate market for 2025. At the core of their argument has been the possibility of further interest rate hikes, especially as the yen keeps sliding to the dollar. Market players are also on edge over the risk of oversupply, as projects from large developers are set to be completed in the upcoming years. How realistic do you believe these threats to be, and what is your outlook for the 2025 period?

I’m not an expert in interest rates or macroeconomic perspectives, so my thoughts are more on a casual basis. What I believe is that Japanese interest rate policies are largely influenced by external forces, particularly U.S. policies. The sooner the U.S. lowers its interest rates, the more likely the Bank of Japan (BOJ) will follow suit.

As for the issue of oversupply, real estate investment should be considered on a micro level, focusing on each individual asset. Investors can assess the worth of each asset individually and thus avoid the problems associated with oversupply.

Let me elaborate on that second point by utilizing our own products as an example. Among its portfolio, Kasumigaseki Capital operates its own brand of hotels: FAV HOTEL brand series. We believe we have differentiated these hotels from other offerings in the market, which is why we have been successful in the hotel industry from an operational perspective. When the operation is successful and profitable, we can sell the asset at a higher price, even if the hotel competes in a crowded market. To a large extent, our strategy is to focus on uplifting the operation and intrinsic value of assets.

Kasumigaseki Capital has built a business model that combines consulting-type developer with fund management functions. This business model centers around selling land to development fund investors after adding value to the land through development planning (turnaround period of 6 months.) When construction begins, the company wins fees for being involved in the project both as a developer and as a fund manager. Once completed, the building is sold to a core fund investor, and Kasumigaseki receives a success fee while remaining the asset manager of the core fund, allowing to receive yet another management fee. What are the advantages of this business model, especially when compared to that of developers or Asset Managers?

Simply put, our business model allows us to minimize market risks while maximizing gains, enabling us to win more than developers.

One of the lessons I learned from the Lehman shock is that SMEs that use development profit to bolster their balance sheet are, simply speaking, committing suicide.

While large developers, such as Mitsui Fudosan or Mitsubishi Estate, are supported by mega banks, smallers firms do not have that safety. During the Lehman shock, many SMEs went out of our business in part because their balance sheet was exposed to the embedded risks of project development. I was working in a real estate and fund management company at the time, and I realized this situation.

Learning from the Lehman Shock, our company's strategy is to mitigate market risk. I believe our business model is designed to maximize profitability within a limited budget. For instance, suppose we have 1 billion yen in capital, setting aside any loans for simplicity. We invest in real estate, such as purchasing land and developing residential properties, before selling those to investors. According to standard industry margins, a generic developer will make around 200 million yen profit over two or three years.

In comparison, our approach involves selling the land in pieces and providing consulting services, allowing us to achieve a return of 100 million yen in just half a year. By repeating this process four times over two years, we can earn 400 million yen. To be honest, it is a rather straightforward business structure.

The rapid turnover of assets is one reason for our success. The second reason is that we have two sources of income: one from consulting, and one from development.

Why aren't more companies adopting this business model?

To be honest, I personally wonder why more companies have not adopted the same business model!

More seriously, my guess is that there are two reasons why it is difficult for other companies to adopt a similar business model. First, developers are typically not focused on enhancing efficiency through rapid asset turnover. Meanwhile, institutional investors do not possess the capabilities to execute construction themselves. Thus, there's a lack of synergy between these two actors in the market. Secondly, the type of assets we develop—cold storage warehouses, hotels, and hospices—are unique by nature. These sectors align strongly with social investing and ESG principles, making it easier for us to secure low-interest loans and attract blue-chip, socially responsible capital.

In Japan, the market cap of real estate companies has historically been closely linked to a company’s on-balance assets. But due to Kasumigaseki’s business model, this criteria seems a bit off. If we include the AUM (Assets Under Management) off-balanced to investors, Kasumigaseki Capital’s total assets would reach +300 billion JPY, around 4 times more than the company’s on-balance assets. Yet, the company’s market cap hovers around 140 billion yen. How do you explain this imbalance to investors and to the market, and how do you plan to correct it?

First and foremost, let me say that we are not satisfied with our current market cap. In the upcoming years, one of our key objectives will be to drive our market value.

In recent months, our stock has enjoyed sustained bullish growth. Stock investors judge our company’s value in terms Price to Earnings (PE) and Price to Booking (PB) Ratio. Our current PE ratio is around 12, which is considered to be a very high ratio for real estate companies. What the market fails to understand here is that we are not a real estate company. Rather, we are a buying and selling enterprise. Once the market properly understands our business model, I believe it will acknowledge that our company is undervalued. As such it is important for us to continuously showcase ourselves and execute new projects.

To acknowledge Kasumigaseki’s true value, you must understand the fundamentals of our business model, especially our fund management and consulting functions.

For us, the key word is optimization. In the current Japanese real estate market, we do not believe that optimization is achieved, especially if we compare our sector to other industries. In the robotics field, for instance, digitalization has already advanced. However, that is not the case for the construction or real estate sector.

Aware of this limitation, one our core strategies is to promote digital transformation and the utilization of cutting-edge digital technologies within our real estate assets, especially our warehouses and cold warehouses. Through a combination of technologies, we are currently achieving advanced automation for our warehouses, allowing us to boost asset performance, attractiveness and profitability.

For our hotels, the utilization of digital technologies allows us to mitigate the impact of staff shortages by limiting the human labor required. In our medical facilities, we are introducing robotics for the same reason.

In conclusion, one of the uniqueness of Kasumigaseki Capital is that we do not just provide “hardware,” but also “software” and “technology.” By integrating both ends and creating a feedback loop between them, we are creating a comprehensive, vertical structure that structure allows us to optimize real estate operations.

If you look at the most successful companies of the past decades, such as Tesla, Nintendo or Apple, a core part of their success comes from creating a vertical business model with different income streams along the product lifecycle. By doing so, you can reach optimal results and increase profitability.

As such, while we are technically a real estate developer, we are also a technology-oriented service provider and facility operator.

In 2021, modern logistics facilities only represented around 10% of all warehouses across Japan. To address this gap, developers entered the market in force, with the Greater Tokyo area expected to witness a substantial increase of 2 million tsubo of new warehouse supply over the next 2 years. On top of the rise of e-commerce, demand for warehouses is expected to come from the transportation, postal and logistics industries, which must address driver shortages caused by the recent revision of labour standards. Considering the sharp increase in supply and the new demands from the e-commerce and transportation industries, what type of warehouses and logistic facilities do you believe have the highest growth potential?

Shortage of human resources is a prevalent issue not only in Japan, but everywhere across advanced economies. While Japan is now at the forefront of this demographic trend, it will soon be followed by other countries. To resolve the bottlenecks that staff shortages create, we are heavily investing in automation systems and robotics, allowing us to effectively replace human resources in cold warehouses, hotels and medical facilities.

Automation technologies are particularly interesting for cold warehouses, as the working environment is not adapted to humans. As such, automating is an immediate need, regardless of labor shortages. Considering that Japan is at the forefront of the ageing demography, our belief is that once we have successfully tackled labor shortages domestically, we will be able to export this model overseas.

LOGI FLAG TECH Tokorozawa I

In December 2023, Nikkei Asia warned that Japan was on the verge of a food supply crisis due to the lack and ageing of refrigerated warehouses, which ensure the distribution of fresh and frozen food. According to the Japan Association of Refrigerated Warehouses, 34% of warehouses were over 40 years old, the benchmark age for replacement (June 2022.) This is particularly worrying when we take into account the upcoming 2030 CFC and HFCs-gas regulations, which could render many of these old warehouses obsolete. Do you also plan to leverage on the need for rebuilding old warehouses?

We receive many offers for retrofitting pre-existing facilities. However, one of the main issues when remodeling a cold warehouse is where to put the boxes that are currently stored in the facility without breaking the cold chain. This is especially challenging in older buildings that require longer reconstruction timeframes.

To address this point, our strategy is to create our own cold warehouse located within the facility of the old asset, allowing us to temporarily receive and store items while constructing anew in the meantime.

Considering that banks have historically been reluctant to lend money to new or unconventional asset types, such as cold warehouses, how do you ensure sound financing?

For our very first cold warehouse project, which was located in Ichikawa, we struggled. At first the loan to value ratio we secured was low, so we had to be confident in our product. However, the track record we have built ever since speaks for itself. All along this track record, we have repeatedly proven to banks and to financial institutions that we not only develop high value assets, but also that we operate them in a productive and profitable manner. This allows us to access easier financing and more leverage.

In Q2 2024, several major hotel transactions pushed up the sector’s acquisition volume to JPY 280 billion, amounting to roughly 2.6 times the volume in the same quarter of the previous year, according to a CBRE report. This spike in transaction was mainly due to premium brands expanding their footprint to fill the gap-in-demand for luxury accommodations. Yet, other gaps-in-demand have yet to be filled. These include a lack of supply for multi-occupant rooms that can accommodate for groups of three or more people, as well as a lack of facilities to cater to long-term stays. What gaps-in-demand does your FAV HOTEL brand series seek to address?

Our concept is to be the UNIQLO of the hostelry world: we seek to create a comfortable living environment with a unique design, and to combines high quality accommodations with cost effectiveness.

In recent years, it seems to us that this strategy has been validated by the market. With the democratization of digital means, consumer preferences have largely changed, and people now like to obtain information by themselves. As such, we can cut down on staff, as we do not need to provide restaurant information or activity recommendations. Today, many travelers design their journey by themselves. To be honest, I include myself in this group! While staying in a five-star hotel with a suite of services might be good, I prefer to stay in a comfortable, cost-effective environment where I can design my own plans and activities.

Room in fav HIROSHIMA HEIWA ODORI

During the gradual reopening of travel at the end of the pandemic, the business model of hotels came under scrutiny as operators struggled to limit costs and increase occupancy. For many hotels, an ideal occupancy rate is between 70% and 95%, with break-even points generally located between 50% to 60. In contrast, your FAV HOTEL brand series have a break-even occupancy rate of less than 20%. How were you able to achieve this?

Lowering the number of human resources required to run the property is the first reason for reaching this exceptionally low break-even point. On top of cutting down staff through automation and IT technologies, we also lease our first floor, for free, to a well-known cafe brand. In return for the free rent, we ask the staff members of the café to take care of the occasional requests, check-in and check-out procedures that cannot be automated. Not only does this lower our fixed costs drastically, but it also enhances the value of the building and the branding of the hotel itself.

To further lower our hotels’ cost, we also follow simple and environmentally friendly rules, such as only cleaning the rooms after checkout and limiting the washing of bed sheets.

What criteria do you utilize to choose what asset class to expand into?

Our decision hinges on three steps. First, we need to see clear market signs and demand for the asset. Secondly, we seek to find gaps between this demand and the supply available. Thirdly, we consider the social impact of the asset and prioritize businesses that make people happy.

How important is the social impact of your activity when you decide to branch out in a new business?

I believe that business success is determined by the number of fans or supporters you are able to acquire. Simply out, the best way to make more money or to increase your stock price is to have more fan! So determining which areas we are able to gain the most number of fans is fundamental consideration for us.

This approach also serves to make recruitment easier. Being a force for good in the world attracts talented individuals.

There is one more important component that guides our activities: the work should be fun!

Beyond Japan, Kasumigaseki Capital has introduced a fourth pillar to its business strategy with the launch of luxury housing projects in Dubai. Could you provide insights into your strategies for these two regions, Southeast Asia and Dubai, and how you plan to drive business growth?

Our Southeast Asian business is currently at a halt, so we are now looking into new opportunities. As for our Dubai, it is more of a macro bet that we are taking. Dubai has a growing population and is attracting a lot of investor interest, so we believe the market will continue to grow.

We are currently at the starting stage of our overseas investments. With Japan’s declining population, many domestic markets are shrinking. As a Japanese company, we want to be at the forefront in providing international investment opportunities to the Japanese people.

And beyond Dubai, do you have any other locations that you would like to invest in in the future?

We are currently exploring other places for our cold automated warehouses. We received several contacts from Vietnam, Indonesia, and Saudi Arabia. Since we have built a robust development system and track record, we believe this project can be exported globally in the future.

In the Fiscal Year Ending August 2024, Kasumigaseki Capital posted a +76% increase in its sales, which surpassed 65 billion yen, as well as a +240% increase in net profits to reach more than 5 billion yen. What were the key drivers behind this success?

This aligns with our strategic plan and timeline, marking the phase where we anticipate returns on our investments. Our business model involves initially purchasing land and developing it using a development fund. Subsequently, we sell the developed property to a core fund, earning success fees at various milestones throughout the process. We have now reached the stage where construction is complete, and the property has been transferred to the core fund. Consequently, we are experiencing increased profits as a result of our long-term planning and execution over the past several years.

2031 will mark the 20^th anniversary of Kasumigaseki Capital. What ambitions would you like to have achieved by then?

Over the next five years, my objective is to establish Kasumigaseki Capital as a premier investment platform. We possess the necessary human resources, channels, financial capability, and credibility to facilitate large-scale investments. Today, our company has four core businesses: Warehouses, Hotels, Healthcare Facilities and our Dubai business. In the future, I hope that we can push our core businesses from four to ten.

To do so, we hope to attract talented individuals with innovative ideas and a hunger for creation. Many creative people lack the financial resources or workforce to initiate their ventures. By bringing together these aspiring entrepreneurs and letting them leverage on our investment platform, we intend to foster the development of new businesses. Our hope is that some of these future ventures will succeed and become an integral component of our organization's future growth.

For more information, visit: https://kasumigaseki.co.jp/en/