The Allure of Japan's Real Estate for Global Investors

In recent months we’ve seen that, sustained by the low interest rates and the lifting of COVID restrictions, land prices in Japan grow at their fastest pace in 15 years leading into 2023. We saw that the performance of the market, of course, but also a weak yen has made Japanese real estate a valuable investment recently for foreigners. If we consider the global macroeconomic environment, why is Japan such an attractive location currently for foreign investment?

First and foremost, stability is the biggest factor. There may be debate over the stability of politics, but the economy and real estate, with new regulations, have become more transparent and more stable.

BOJ ending negative rates has created apprehension in investment circles. Other threats such as oversupply of office space, have been widely discussed too. How realistic do you believe those threats are for the Japanese real estate sector?

Of course, a rise in interest rate may impact the industry; however, at Mitsubishi Estate we already have long-term fixed loans, and, also, there may be a rise but it won’t be a dramatic rise like in the US or Europe. So, foreseeing the upcoming one or two years, there won’t be much of an impact.

Regarding the oversupply, it is true that there have been new builds; however, in urban areas, the demand is still strong when compared to the supply of the past five to ten years, and it’s not that much of a difference in terms of the demand. So there won’t be a huge disruption in the market with oversupply.

If we can move our discussions to talk a bit about urban development. More than 130 years ago, the Meiji government entrusted Mitsubishi Estate with the development of what was at the time-space. Today it has grown into one of Japan’s most iconic business districts, Marunouchi. What do you think are the key factors that allowed Mitsubishi Estate to be successful in the century-long process?

It may sound a bit abstract, but I believe that the success of our company relies on our corporate culture, which has two main aspects. Firstly, we have a long-term perspective that spans over centuries. Secondly, we are pioneers who are always ahead of our time. We take up challenges and strive to be change-makers in society. Back when there wasn’t yet a business district, we foresaw the need for a business district in Japan’s economy and transformed a space into a business hub. Currently, we provide a conducive environment for startups around the Marunouchi area with over 200 firms. Other companies, likewise, have similar projects, but we have been engaged in city planning that fosters new industries for Japan’s economy for over a century, and creating an environment that promotes open innovation which our efforts have been impactful to Japan's economy.

Another uniqueness that we have is that within this area, we have over 30 properties that we’ve been constantly upgrading and refurbishing. In the 1980s, our projects were halted for a while, but we’ve been constantly growing and developing the city over the centuries, and with new builds, new functionalities are added, so we are always at the forefront of society providing new solutions.

You mentioned the pioneering spirit that you try to cultivate at Mitsubishi Estate. One criticism that large, historical developers often receive is a lack of innovation, a slow embrace of new, disruptive ideas, types of facilities, etc., so it’s a stark contrast to Mitsubishi Estate’s vision of this pioneering spirit. What are some of the urban innovations that you’re most excited to see in the upcoming years?

I may not be directly answering your question, but looking back at our history, about 20 years ago we introduced commercial facilities in this area. Before that, it was mostly office space for workers. By introducing commercial facilities, we were able to diversify the people coming to the area. We want to further diversify, both in terms of the company structure as well as the people visiting the area. For the company structure, not only the major companies but as I mentioned, we have been attracting startups and also academia. So we’re trying to create a platform where multiple parties can join together in the open and create innovation and create new industries and new businesses with inspiration. In terms of the diversity of people visiting areas, we are introducing not only commercial but also entertainment, art, and other facilities to help tourists enjoy the area and let local people enjoy their weekend or nightlife in the area.

I think this focus on improving the area has also seen an increase in the working population in the Marunouchi area by about 20% in recent years. On top of that, you have various projects planned not only in Marunouchi but also in Otemachi and Yurakucho. Among these, the most famous is the TOKYO TORCH project featuring the Torch Tower, which will be the highest building in Japan and will redesign the Japanese sky. Keeping in mind that long-term vision, how do you envision the Marunouchi area looking ten years from now?

Seeing the upcoming ten years, in 2028, the Torch Tower will be completed within the TOKYO TORCH district. The tower comprises not only office buildings but also commercial facilities and Dorchester Collection, high-end hotel, and residential units with entertainment as well, so after the completion of Torch Tower, inside the TOKYO TORCH  district, which would be a town on its own.

As for our office compounds, we want to provide an open innovation platform, and that is the direction that we are currently undertaking.

In ten years, there will be a further progression of diversified work styles. For example, in Singapore or Japan, I heard people are coming back to the workplace, but in the US and Europe, remote work is still dominant. During COVID, Japanese people realized the importance of gathering in the office meeting in person, and working together directly so we want to provide this Otemachi, Marunouchi, and Yurakucho area as a hub for people to gather and create open innovation, augmented by technology. 350,000 people are working in the area and we can enlarge the population in this area by using technology. So this combination of physical space with technology is the crucial path.

A few years ago, we announced that currently, 350,000 people are working in this area. We want to enlarge it up to one million, including those who are interconnected with the area.

To further develop that point, I would like to ask you about some of those projects that you’ve engaged in. For example, you launched the flexible workspace “xLINK.” Could you tell us about some of those new projects and how you’re able to target that new demand for flexibility while still focusing on office space?

With COVID, the work style changed and there are an increasing number of startups, so on top of our regular, fixed-term lease agreement, we realize the importance of having temporary or more flexible office usage. We want to increase the space for flexible offices in the Otemachi, Marunouchi, and Yurakucho areas by up to 5%.

If we could talk a bit about the logistics field if you look back at 2021, modern logistics facilities only accounted for 10% of the total supply in Japan and this was identified as a big supply chain weakness of the country. We saw big developers, including Mitsubishi Estate, come into force. Your company recently announced that you would invest JPY 500 billion over the next ten years in the development of the logistics sector. I have two questions for you. First, considering the rise of e-commerce and new transportation demands, what type of warehouses and facilities do you believe have the highest growth potential from an investment perspective? Second, which areas and facilities will your group focus on?

With e-Commerce, there is a need for more of the cutting edge in terms of the facilities and that is the area we’re focusing on. At the same time, autonomous driving is the future path the Japanese government is currently taking. It is still in the trial stage, but foreseeing the future, we are currently investing in companies with relevant technologies and developing and planning the main logistics facilities that would be required once autonomous driving comes into play.

Once autonomous driving has been realized, transportation will likely be on the highways and there will be a need to reload the containers from the highways to town roads, so we are thinking of having facilities in between for the reloads and focusing mainly on urban areas like Tokyo, Osaka, Kyoto, and Nagoya. Currently, in Kyoto, we started a project of constructing a logistics facility compatible with autonomous driving, but we cannot actually foresee how soon autonomous driving could be realized, so our project heavily depends on that progress.

As for more conventional logistics, we are focusing on Tokyo and Osaka, the major urban areas. We also are focusing on cold warehouses, the freezers, and refrigeration facilities which, of course, are also a focus for other developers. Together with our business pillars of office and house development, we are emphasizing this logistics sector as well.

If we look at Tokyo’s residential market, we see that the population declined in 2020 which resulted in a drop in demand but by August 2023 it was at its peak, the highest it has been to date. We know that this has fueled demand when it comes to luxury housing as well as condominiums and additionally, we’re also seeing a rise in digital nomads being attracted to Japan and the government policies that are helping to facilitate them. Could you first tell us about your luxury-based segment and the kind of new developments you are targeting there? Secondly, you’ve partnered with Blueground Holdings, how will that help you address digital nomad needs?

In terms of the housing sector, during COVID there was a dip in demand but now it’s coming back. Also, one change we have seen is that people sometimes prefer to have two homes. Another change is the increase of so-called power couples. Before in Japan, there was a trend that one of the partners had to stay at home while the other one was working. However, in today's Japan, it has become common for both partners to work outside the home, which allows people to purchase more properties. While the overall demand in Japan may dwindle, the housing demand in the urban areas is increasing.

Digital nomads are a unique case in the scheme that will be introduced in Japan. We have been collaborating and partnering with two overseas brands that have the know-how so we can create co-living spaces to provide new interaction opportunities for these so-called nomad workers. They come to Japan, not only to enjoy the country, but to enjoy the interaction with others, so providing this kind of opportunity is important. Also, recently there have been more cross-border movements, and foreigners coming to Japan are interested in having a living space, so what I mentioned about providing new kinds of high-end condominium housing, we are also focusing on these foreign visitors who are interested in having a long-stay base in Japan.

I’d like to ask you about the idea of regional revitalization here in Japan because I know that your company also builds airports. When we interviewed Nishitetsu, they spoke very passionately about refurbishing Fukuoka Airport saying that it should be a hub. They spoke of how Japan has 98 airports, which is two for every prefecture, and that there was a complete oversupply. We know you’re involved in, for example, Miyako Shimojishima Airport and built a resort with the Hilton. Could you tell us, first, do you think there’s an oversupply of airports in Japan? And second, in terms of regional revitalization, how important is that intersection between hotels and local airports?

It is hard to say if there is an oversupply of the airports, but our airport business is not only involved in commercial facilities within the airport but also the revitalization of the area.

Regarding our involvement with the Shimojishima airport, we have constructed one hotel, and another one is under construction and we have a vision of revitalizing the whole Miyakojima island area.

We are also involved in Takamatsu, Shizuoka, and Hokkaido airports and we hope that this will be a pivotal point in making contributions to the local revitalization.

For investors, 2023 was an interesting year. High interest rates and tightening credit caused large-scale projects to have fewer bidders. We know that in 2024 there’s expected to be a reduction in the interest rates. Can you tell us about the US business and how these developments are going to affect it? What are your predictions?

Reviewing the statistics, a decrease in the interest rate is not seen yet.

It may take some time until the interest rate gets lower in the US, but once the rate is low, there will be more investment in real estate. So we’re not pessimistic about the situation.

In terms of the demand for the segmentation already mentioned, there’s a growing demand in the housing sector, data center, and also logistics. In the US, we have concentrated our resources on the development of the housing, data center, and logistics sectors, both in terms of leasing and also of house sales. Since we have been in a growing market, we see a huge potential.

The US market is growing and although there are some political concerns, we think the US real estate market has huge potential. Our strength in the US lies in our group company, Rockefeller Group International, Inc., which gives us a strong presence in the US market. With locations nationwide, the company has a well-established system and a team of experienced staff who are engaged in project acquisition and development promotion. We conduct more of the investment business so maybe we will need to wait until the upcoming year, not 2024, but 2025, but we see great potential in the market.

I understand that the office sector in the US is not performing well due to the impact of COVID-19. The pandemic has led to remote working being the dominant work style which has caused the office market in the US to experience a downturn. However, there is a division in office needs, with top-tier buildings known as trophy offices maintaining high occupancy rates and stable rents. We own two trophy office properties in New York and fortunately, they have almost full occupancy. There has also been a renewal of the lease agreement.

First, if we look beyond the US market when I was reviewing your midterm strategy, you said that you expected to increase overseas investments beyond the US, with another focus on Europe and the Asian region. Can you run us through the evolution of your real estate strategy and the particular regions you’re looking to target in the upcoming years?

In terms of locations, it’s the US, London, Sydney, and Melbourne. We have over ten years of experience in Bangkok, and that’s doing well. For other Asian areas, we are now being selective in terms of which countries/projects to join.

You became the president and CEO in 2023. Please imagine that we come back to interview you again but on the last day of your presidency. What personal objectives or ambitions would you like to achieve during your time as president?

That’s a difficult question, but I would like to make the Otemachi and Marunouchi area the number one business center in the world. I will also be grateful and happy if the Mitsubishi Estate group can be a respected group globally.

For more details, explore their website at https://www.mec.co.jp/en/