The Rise of Ready-to-Use Office Spaces in Japan

Sustained by very low interest rates and the lifting of the COVID policy, land prices saw their biggest uptick last year and thus we are seeing foreign investors pouring into Japan. There is a very low JPY exchange rate alongside a fear of missing out (FOMO) which is creating a lot of momentum. We saw Singaporean buyers invest JPY 3 billion in logistics and warehouse facilities which was followed by investment from Canadian, American, and UAE-based investors. With these developments in mind and global macroeconomic trends in place, could you highlight for us what you see as the advantages of the current Japanese real-estate market?

I believe there are three charms to the Japanese real estate industry. The first is a mindset change from deflation to inflation. Next is the stability of finance and the accommodative financial policy. The macroscopic impact is the low value of the JPY. These three factors are contributing to an increase in inbound tourism in Japan and consumption within the country.

Chinese and Russian geopolitical risks are pushing people to come to Japan. In addition to tourism, we are also seeing manufacturing coming back to Japan. Another instigator is TSMC as well as other manufacturing companies that are looking to return to Japan due to economic security reasons. Now that there is a returning strength of manufacturing within Japan’s borders.  I believe it has increased the charm of Japan. I think that overall the macroeconomic environment is changing positively for Japan.

You talked about a very positive macroeconomic environment in Japan and this has attracted a lot of activity over the past year. As such, in recent months we’ve seen a lot of Japanese and international media argue that the market was showing signs of overheating. If you divide their reasons; the first was the rise in interest, second was oversupply. How serious do you think these threats are?

I don’t consider any of these elements as threats, instead they are just management risks. I feel that there will surely be a turn in policy regarding interest rates from negative to positive, so perhaps from 0.25% to 0.5% or even 1%. However, I don’t believe it will exceed 1%, and especially with the current environment it is hard to imagine an interest rate of 2%. The stability of Japan’s interest rate is a critical component in our business operations as well as the real estate market in general.

The biggest issue is the speed with the interest rate hike by the Bank of Japan, which once decided to raise the interest rate during a shorter period than expected,  the market would respond excessively and there would be a halt in investment in real estate. This interest rate hike is accounted for in our company strategy. As long as we manage to keep our financial capability before the interest rate rises we don’t need to consider it a serious risk. From my understanding, cash management would be a key to mitigate the negative impact of the interest rate hike if it took place.

As for oversupply concerns, looking back at records you can see that there is sometimes an increase in the floor dimensions for offices or a decrease. Demand and supply change based on the timing, so although right now there is more supply eventually this will stop. The office building market is not something that keeps continuously supplying spaces. It is more of a redevelopment project, basically the refurbishment of existing buildings. I don’t have the data, but overall office supply would not be that much of an increase. What matters is the demand for offices and this changes by the era. During the post-COVID-19 era, we are seeing the demand from tenants for offices change, in addition, I will say that the demand also varies from country to country. Being able to grasp the needs and present the required office building is important for both major buildings as well as small or mid-sized buildings.

In the post-COVID world, offices are more democratized and flexible. For your business, your strengths lie in your ability to focus on the five main wards of Tokyo with some of the biggest office spaces in the world. Could you tell us how you envision the evolution of office spaces in the future, especially here in Tokyo?

We have operations in five major Tokyo wards, and the Tokyo government’s policy states that it is important to nourish an environment for startups and venture companies within the Tokyo area. As a small-sized office provider what we do is focus on providing a comfortable environment for small companies to grow. This coincides with human growth as well. For 10 years now we’ve been providing the office market with set-up offices, meaning that as a fundamental service, we provide fully-furnished offices that are ready to use with features such as partitions and conference rooms. It allows companies to just walk in and instantly be able to use the space. With people moving offices, the importance is to increase the business efficiency rather than focusing on finding a new place. The idea is to let us, the specialists, focus on the layout, freeing up the company to focus on their business efficiency, which makes them willing to pay higher rent without posting the depreciation cost for the furniture and other facilities as well as the restoration cost when they exit.

What is important in our office services is to provide a comfortable working environment for those looking for not only an office but also co-working and hybrid working spaces. This includes the provision of telecommunication booths, and conference spaces. We also have provided environment-friendly offices, which received the environmental certification.  

"+SHIFT NOGIZAKA", one of our setup offices. Setup offices have both economic and environmental merits because those offices are furnished with necessary facilities and fixtures.

Considering you have national coverage with your hotels, what pockets of opportunities do you see both in terms of hotel types and regions? How is your company addressing these pockets of opportunities with its offerings?

We have a wide range of hotel accommodation offerings from budget to high-end we’ve just operated our hotel business for less than 10 years so we still see plenty of opportunities. The business model of our hotel operations is that we purchase the land and construct the hotel building before doing the operation ourselves. Once the hotel becomes a success we then sell the real estate and retrieve the cost. We are both the operator and the developer. We are constantly looking for new opportunities from both the developer and operator perspective. The high occupancy rate and the high average daily rate determine the success of the hotel, therefore increasing those two rates is key. It is true what you said, there are so many tourism resources across Japan. The ongoing issue is the challenge of increasing occupancy rates during weekdays, so we are looking into opportunities from that perspective. We believe that the solution would be to target inbound tourists as well as factory workers or maintenance workers traveling around Japan on maintenance work.

Sora Niwa Terrace Kyoto Bettei, from which you could see the breathtaking scenery of Higashiyama in Kyoto, a famous sightseeing city in Japan.

Each room of "Sora Niwa Terrace Kyoto Bettei " has a hot spring bath and a terrace.

How are you optimizing your hotel operations? Are there any technologies or strategies you are implementing?

It is a secret of the company. There is no magic formula, we work hard to provide our hotel guests with heart-warming services after trial and error. As a hotel operation, hospitality is the most important thing, so we are talking about practices such as greeting customers with a smile and training staff to multitask.

You mentioned taking care of the full lifecycle of a hotel, from acquiring the land to the operation of the hotel. It is the same as what you do for offices, basically a one-stop service. When we look at this process, what would you say are the advantages of Sun Frontier, and what would you say are the unique selling propositions you have at each stage of your process?

One advantage we have is our concentration of resources in the central Tokyo area, and to that end, we can provide a one-stop service in revitalization by having all functionalities in-house including staff members.

The uniqueness of our company is that we have each independent department operating on its own. Each department even has its business clients, and whenever there is a project we gather knowledge and know-how of these departments as one project and fully leverage our in-house capabilities.

Currently, we conduct property management on nearly 500 buildings within our target area, and on top of the five major areas that we operate, we have 3,000 tenants within these buildings. These tenants may move out within buildings under our management and some of them may want to purchase those buildings from us. We want to fully leverage this contact point with potential customers by integrating all in-house capabilities and providing a one-stop solution.

Your business is relatively young, only 25 years old, and some of the established players have been around since WWII. Can you elaborate a bit more on the advantages of your management style, and how it distinguishes you from more established players?

I don’t think I could describe it as an advantage but our company philosophy is altruism or contributions to others. It is a philanthropic approach where we take good care of others. We are very considerate of others and operate righteously. We read our company philosophy every morning. There is even a booklet on the company philosophy that has different themes every day. Today’s theme tells us to “Do your best for your clients and peers.” It is important to create a company culture to voice out the importance of altruism. This company's culture is unique to ours. Having cross-collaboration within the company is the key to our advancement, while saying it is good, you need to go out and create the system to enable this sort of cross-collaboration and raise company management resources with the participation of all staff members.

The participation of all staff in the company’s operations and management is leading to a non-hierarchical horizontal collaboration structure.

March 2025 will mark the end of your current mid-term plan where you had two very big targets of reaching JPY 100 billion in sales with a JPY 20 billion recurring profit. Have you already started formulating a new mid-term strategy and what will your next big targets look like?

I cannot share any numerical values but we have started planning. We are targeting to have an annual increase of two digits in profit in the upcoming mid-term as well. As mentioned today, we are looking to diversify our businesses, and this might include things such as going into residential areas in addition to our office approach. As for hotels, we are about to reach our target of 4,000 rooms, but in the next 10 years, we are looking to expedite this and reach a number above 10,000.

We know from our research here in Japan that retail investors have a huge amount of cash tied up; JPY 2 quadrillion or USD 13 trillion in saving accounts and government bonds. Your firm is a listed business and you mentioned overseas as something you would like to grow in the future. Do you see this aspect as being key to unlocking retail investment and what would those potential new locations be?

By targeting retail investors we are now providing investment opportunities with about JPY 5 million per minimum unit and making one building into 20 or 50 lots. The yield is about 3% to 3.5% which is much higher than having it in the bank. According to the Act on Specified Joint Real Estate Ventures, we are providing our clients with those small lot property investment products.

Another business model that we are conducting is the sale of hotel condominiums in Okinawa. We lease them back from the owner and operate as a hotel. This sort of hotel operation is also contributing to retail investment.

As for our overseas residential facility in Vietnam, there are regulations to limit foreign investors, 30% of whom are allowed to purchase rooms there I think it is 20% but I’m not exactly sure right now. We take that to the maximum so that Japanese investors can invest in one unit of the residential facility in Vietnam. In addition, we have a real estate revitalization business in New York by renovating and selling several residential properties to Japanese investors. The prices of those NY residential properties range from JPY0.5 billion to JPY1 billion, which Japanese individual affluent people could afford to pay.

In October 2023 you announced that Advantage Partners invested in your company. What synergies have you been able to create between your two companies?

They can facilitate the better execution of our strategy. They have extensive knowledge in procurement, planning, and M&As.

Imagine that we come back and interview you again in 2029. What goals or dreams would you like to achieve by the time we come back for that new interview?

The sole purpose of company management is the actualization of the corporate philosophy. Ours is to achieve both the material and psychological happiness of our employees. Becoming a company that is loved and desired is something we need to achieve by 2029, basically becoming a comprehensive real estate company.

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