The interview discusses Japan's current attractiveness for international real estate investors, driven by the yen's devaluation and low interest rates, leading to a significant uptick in foreign investments, particularly in Tokyo and other major cities. Open House Group leverages its competitive advantages by focusing on affordable housing in prime locations, minimizing costs, and understanding customer needs through its integrated group structure.
I could start with a question about Japan and how attractive it is currently for international investors. The yen’s devaluation and very low interest rates are making Japan a very attractive market, not only for land but for other asset classes, too. The first half of 2023 saw a 45% uptick in investment from foreign-based investors. This was backed by investments in warehousing and logistics centers. We saw that USD 3 billion was spent by a Singaporean consortium. Could you tell us, considering the macroeconomic environment of the global situation, what is the attractiveness of the current Japanese market?
What you explained summarizes the attractiveness of Japanese real estate and is triggering foreign investors to invest in Japanese real estate. Globally, real estate and the financial arena have a strong interconnection. China is now experiencing a real estate bubble burst and with high interest rates and a tight US monetary policy, Japan is attracting investors for its stability. So Japan is not chosen for its growth potential, rather it’s more of an elimination method taken by investors which has led to Japan.
While the interest rate is one of the primary factors that is attracting people, it’s not all flowers and roses in the garden, as this is expected to reverse. Some people speculate that this spring, the negative interest rate will be reversed by the Bank of Japan. What is your take on that development in terms of how that will play out? We also know there are other headwinds, such as oversupply in the market. How do you see those threats to your business or the general market when it comes to real estate?
Personally speaking, although there may be a rise in the interest rate, it won’t be drastic like in the US, since it has a huge impact on the economy. The government is also issuing a lot of national bonds so that would make it reluctant to raise the interest rate.
As for what you mentioned about oversupply, I believe it refers to the oversupply of office buildings. The newly built offices would attract tenants, so that would be a high rate of occupancy, but it’s more of the second layer of offices that would be impacted. Also, I believe the increase in construction costs actually has a greater impact than demand and supply.
Your business has been heavily focused on the 23 wards of Tokyo, but there’s also growth taking place in Osaka and Nagoya, as well as provincial cities like Fukuoka, Sapporo, and Sendai. We know in Japan the declining population is forcing the elderly generation to move to these larger cities to seek health care. Could you tell us, as a company with nationwide coverage, what particular growth areas do you foresee having the most potential?
The concentration of population would be more towards the greater Tokyo area, so we want to invest our resources accordingly.
Maintaining infrastructure in rural areas is gradually becoming more challenging. Consequently, this may lead to a further influx of people into cities.This not only refers to hospitals and medical services but also to utilities, like electricity and water pipes.
Last year, the Tokyo population reached an all-time high after a small decline was experienced in the post-COVID period. If you look at the residential market, it’s long been characterized by stability where you have high occupancy rates and you have stable cash flow as well. In recent years, however, we’ve seen a boom in new condominiums, especially in the central area, the price of which doubled between March 2022 and 2023. The demand for luxury housing has also seen pent-up demand. Following this big increase, how do you expect the market to evolve over the next year or two?
You cannot simply classify Tokyo as one area. You have to closely see and distinguish it. For example, the Minato, Chiyoda, and Chuo wards are in the global market, not only for living but also for investment. And our condominium series, Open Residencia primarily targets individuals who purchase homes in Tokyo specifically for living purposes. This is because our company policy is to provide detached homes and condominiums at an affordable price. So with our policy, we try to provide an affordable price and a good location.
And if we could ask you a bit more about your competitive advantage. As we mentioned, you’re operating in the 23 wards in Tokyo and you’re involved in all stages, from developing to managing to selling. You set up several subsidiaries within your company group that allow you to handle these processes. Could you tell us a little about the synergies between the different companies you’ve set up within the group and some of the competitive advantages they allow you to leverage in your day-to-day operations?
First and foremost, within the cycle of real estate development, purchasing good land is crucial and the amount of information you’re able to gather determines the quality of the purchase. We establish an overwhelming difference from other companies in our ability to gather information from each of our group companies.
Major companies like Mitsui and Mitsubishi usually bid on a large plot of land, but our strength lies in acquiring small plots of land exclusively. The distinctive feature of our condominiums is that each project is relatively small, typically around 20 or 30 units. So, it's quite a hassle (laughs). However, because of this, the locations are excellent, and we can acquire the land at a lower cost, allowing us to offer our customers affordable prices.And because we also conduct sales within our group company, we understand the needs of our customers. The Open Residencia series has, from the outset, minimized parking spaces and avoided constructing luxurious entrances or shared facilities. Nowadays, with rising construction and land costs, even major developers are gradually reducing the number of parking spaces. However, I believe we were the first ones to initiate this approach.
Also, the lifestyle of people in Tokyo has changed. Since it has such convenient public transportation, they don’t need their cars, especially for first-time buyers in their thirties. And rather than having fancy entrances or common spaces, people prefer to live as close as possible to the station or their workspace.
Speaking of stations, we talk about the shinkansen and the maglev, one of the world’s fastest speed trains that will go to Nagoya. I live in Tamachi and between Tamachi and Shinagawa is a station called Takanawa Gateway every time I go past it, only a few people get off, but I always think that when that shinkansen opens and the terminus is in Shinagawa, surely a place like Takanawa Gateway will explode as it is a very underdeveloped area. Could you comment on a place like that and why it’s so underutilized?
It’s under development. So once all the buildings are complete, you will have more people getting off there. Originally, the seaside area of Shinagawa wasn't considered particularly desirable. It was mainly characterized by warehouses and similar facilities, but recently these plots of land have been converted to more of an urban development building construction.
From your point of view, what would you say are the competitive advantages of Open House Group throughout this process of buying, developing, and selling?
Our company was established in 1997. We started as a real estate sales company, so we started by understanding the needs of our customers. Since we start from the needs of our customers and then procure the land and develop, we have a higher success rate. Many other Japanese developers start from the purchasing of land and the development company is the parent company and the sales company often is the subsidiary. So, it’s basically, the developer builds products they believe are good, and the sales company works to sell those products to customers.
Currently, our company has transitioned into a holding company structure. However, Initially the sales company was the parent company, with the development company as the subsidiary. That's the significant difference.
And could we ask you to comment on your finances? You’ve experienced great growth from 2020 to 2023, basically doubling from JPY 570 billion to JPY 1.1 trillion. For the first quarter this year, you’ve already increased by 20% year on year. Can you comment on these fantastic financial results for the forthcoming quarters this year, what expected challenges do you foresee and how will you overcome them?
We are a fairly young company, but we could say that we have a 26-year history. With significant growth in recent years, our accumulated knowledge and experience has finally flourished. Our personnel and the network that we have been nurturing are now bearing fruit.
Affordable is the keyword in our company, so we are focusing our asset classes on affordable properties, both as a living compound and as investments. It is true that, market-wise, there’s a need for more high-end properties, but our focus is more on the affordable range. In Tokyo, we can provide an affordable range of products, but I believe in Paris, Singapore, and London, they’re not affordable. Providing property in an affordable range is burdensome and there are many challenges, but it is worth doing.
I think a very interesting feature of the Open House Group is this kind of focus on social well-being. You mentioned your focus is on affordable housing, on real houses that people are going to use. And that’s why you make them cheaper, you make them conveniently located near stations. But that’s not the only thing. We found your Kon-ie-musubi project, for example, which caught our attention. It was like a matching service for housing as well as partners. The question that we wanted to ask you, especially as you’re the CFO, is when making business decisions, how important is social contribution to the Open House Group?
If a business doesn't contribute to society, it will eventually come to an end. Therefore, for continuous company growth, it's crucial to determine whether the business itself meets societal demands. While it might seem more appealing to be stylish or luxurious, what truly endures in the long run are the things that are genuinely needed.
You’re not just focusing on the affordable housing aspect domestically. You’re also doing this internationally. We saw that you started a rental housing complex in L.A. recently, where you are promoting affordable housing in an urban center with a six-story development and 376 units, and you previously established operations in the US in 2016 with Texas Realty. You also have Open House Hawaii. Could you give us an insight into your strategy for the US market? Which centers to urban centers do you see having the most potential moving forward?
Japan has an aging population, and while the area we operate in is currently stable, in the long term, the population is decreasing. Therefore, it's essential for us to develop businesses outside Tokyo and even internationally to adapt to this situation. So we were trying to expand overseas to compensate for that. Since 2016, we have had US operations centered on the southern part of the US. We purchase second-hand detached houses, remodel them, lease them out to locals, and then provide them to Japanese investors. And we started the development project in L.A., as you just mentioned. The key word here is affordable, so we acquire affordable properties typically inhabited by average Americans and lease them out. Then, we sell these properties to wealthy Japanese individuals at a price range that is easy for them to invest in. It may not be a very high-return investment, but it’s stable and with the depreciation of the yen and the situation in the US market, Japanese investors are gaining a lot. Although our strategy is an affordable and stable investment opportunity, in the long term, that is more profitable.
Looking at the future, what role will the US market play for you? Do you plan on expanding it further or do you also have your eyes on other regions?
We want to expand our presence in the US market. The advantage we have is that we are not only providing housing to Americans but also investment opportunities to the Japanese, which only we as a Japanese company could do. Japanese high-net-worth individuals and small to medium-sized enterprises are interested in diversifying their assets and are especially interested in having real estate in the US. So we’re trying to exploit this potential need, providing new opportunities to the investors.
When it comes to the US market, however, it’s a very big market with a different culture, both in terms of business and in terms of investment mindset. How are you able to bridge that? Let’s say I’m a Japanese high-net-worth individual looking to diversify in the US. Why should I trust your market knowledge rather than an American company with a Japanese office?
Unfortunately, Japanese people are not very proficient in English so we have to provide the service in Japanese. There are different levels of high net-worth individuals. While true high-net-worth individuals may have access to higher-tier services, we focus more on the lower range of the high net worth individuals. But they are rich enough. Also, since they’re not living in the compound, it’s more for investment, so they’re more flexible. And also, the credit comes from us being a large, listed company. We also manage the compound ourselves. We have about 150 staff members in the local area to manage the buildings, so we don’t just delegate to a third party, but we take responsibility.
About those retail investors or high net-worth individuals, we know the Japanese are very conservative, but this is especially so when it comes to the real estate market. With the bubble bursting in the 1990s, a lot of people save their money now only in government bonds or savings accounts and, of course, that’s losing money each year on those accounts due to inflation whereas real estate represents a valuable, stable, long-term investment with a good return. But 2 quadrillion JPY in assets are still locked up in these very traditional financial packages. How do you foresee that huge amount of money being enticed out onto the market? Do you see it as a flood scenario whereby a few people do it and everybody will then follow? What kind of offering needs to happen before the confidence grows from the market?
The situation has been changing since the Lehman shock. It’s been about 16 years now and the younger generation is actively investing in stocks. People less than 40 years old only have experienced a rise in the stock market and the real estate market. The trend towards investment is now more becoming mainstream thanks to governmental policies like the Nippon Individual Savings Account (NISA) and also with the mindset change with newer generations.
I have one more question for you today. And this is more of a personal question to get to know your vision a bit better. Please imagine that we will come back to have an interview with you again in five years. What objectives would you like to have achieved and where would you like to see the Open House Group at that time?
In Japan's real estate market, zaibatsu(conglomerates) are predominant, but Open House has been growing significantly. However, it's still an industry largely dominated by conglomerates. We aim to establish ourselves as a company that is always mentioned alongside conglomerates, as "Conglomerate +1"
For more details, explore their website at https://openhouse-group.co.jp/en/
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