Your Ticket to a Sustainable Financial Future

To begin, I would like to discuss the real estate market in Japan and the current trends that we are observing. With more than 6.5 trillion yen in domestic investment forecast for 2025, and over 2.3 trillion yen in inbound investment from foreign institutions, Japan’s real estate market stands as one of the largest in Asia and arguably the most attractive for foreign investors at the moment, especially compared with markets such as Australia, China, and others that have been facing challenges recently. How do you assess the current macroeconomic environment and the key real estate market trends in Japan today? And how do you see this momentum evolving over the coming years?

I think there are three main perspectives that I would highlight at the outset. The first is the overall quality of Japan’s investment environment. The Japanese market offers exceptionally high liquidity, and the market itself continues to expand. Tokyo in particular has become one of the largest real estate markets globally, providing both deep liquidity and a consistently high caliber of transactions. Another important perspective is Japan’s credibility and transparency as a country. Japan maintains a highly stable and reliable political system, and the legal framework governing business and investment is very clearly established. As a result, political risk for investors is extremely low, which gives international investors a strong sense of security. The processes for transacting real estate are clearly defined from legal, accounting, and taxation standpoints.

In the REIT sector especially, disclosure standards are extremely high. Each asset management company is required to provide detailed information, including property-level income data and highly transparent breakdowns of portfolio composition. This allows investors both domestic and international to clearly understand the underlying substance and performance of each REIT. Many Asian markets provide solid disclosure, but Japan distinguishes itself through the openness and clarity of its market practices.

Moving to my second point: as you mentioned, Japan’s property market remains very strong today. The office sector, in particular, continues to perform exceptionally well. Office property prices remain high, and the leasing environment especially within Tokyo’s five central wards is extremely robust. In fact, vacancy levels have returned to the low levels we saw before the COVID period. Now that we are in an inflationary environment, rents are also rising at a healthy pace.

The third point is the impact of foreign exchange. The yen remains significantly undervalued for many overseas investors, making Japanese real estate even more attractive due to currency advantages. So, in summary, these three elements a positive macroeconomic environment and strong market fundamentals, an exceptionally liquid and transparent investment environment, and the additional benefit of favorable foreign exchange conditions collectively make the Japanese real estate market highly compelling for global investors.

You explained very clearly the internal factors and the foreign-exchange effect, which indeed increases Japan’s attractiveness. But many observers outside Japan wonder whether this favorable combination weak yen, inflation, and rising interest rates might plateau or reverse at some point. How do you expect inflation and interest rate trends to affect the Japanese real estate market in the coming years? And how do you think the current momentum will evolve?

Although we are experiencing inflation today, we still see very strong underlying demand in the market. This is especially true in the office sector. One of the key drivers is the ongoing transformation of workplace strategies. Companies increasingly view office space not simply as physical floor area but as a strategic asset an essential tool for talent acquisition, employee well-being, and broader HR strategies. Because of this shift, many tenants are seeking to expand their office space or relocate to better, more premium office buildings. On the supply side, however, construction costs have risen significantly due to inflation, and this has constrained new supply. As a result, demand exceeds supply by a considerable margin, which continues to support strong market fundamentals. Beyond offices, the retail sector is also benefitting from strong inbound tourism. The surge in international visitors has created substantial demand for new retail openings particularly in central Tokyo and most notably in Shibuya.

Especially Shibuya.

Yes, especially Shibuya. The activity there is remarkable.

We will return to Shibuya in a moment. You mentioned demand outpacing supply. For investors including REITs such as yours ESG considerations have become increasingly important. Sustainability credentials, building efficiency, and certifications are now major priorities. Could you explain how important sustainability and ESG certifications are for you when investing in buildings or undertaking renovations?

ESG and sustainability have become extremely important to us at TOKYU REIT as well. We recently obtained certification under the Science Based Targets initiative, or SBT, which sets scientifically backed emissions-reduction targets. We established ambitious goals to reduce CO₂ emissions across all scopes Scope 1, Scope 2, and Scope 3. In total, these targets require us to reduce emissions by more than 90 percent.

Of course, achieving these goals requires investment, and in the short term it increases our costs. However, we view this as a strategic, long-term investment that will enhance asset value and drive future returns. Over the long run, we expect these initiatives to reduce operating expenses, improve tenant satisfaction, and contribute to maintaining or even increasing the capital value of our properties.

QFRONT: A retail property representing Tokyo facing the scramble crossing in front of Shibuya Station and having extremely high visibility with a large display screen installed on the wall.

Now I would like to look more closely at your portfolio, beginning with Shibuya a neighborhood I personally love as I live there. I am very curious why Shibuya is such an appealing location for you. It commands very high prices in office, retail, and residential segments. Could you elaborate on what makes Shibuya so compelling for your investments, and why it is attractive to foreign investors as well? How do you see Shibuya evolving in the future?

As you noted, Shibuya is unique because it serves as a place to work, a place to live, and a place for entertainment. It truly offers something for everyone. The character of the district is constantly evolving every time you visit Shibuya, you discover something new. This sense of constant renewal appeals not only to younger generations but also to Japanese residents more broadly.

From a business perspective, Shibuya has a long-established culture of nurturing start-ups. Many young companies begin in small shared offices here and, as they grow, relocate into larger and more sophisticated office buildings. Our sponsor, Tokyu Group, supports these start-ups both through physical office development and through various forms of operational and community support. We have seen several examples of companies that began as small tenants in Shibuya and later expanded into major tenants occupying floors in high-rise towers.

On the retail side, Shibuya is no longer just a location for traditional shopping; it has become a place for experiential retail. One of our key properties, QFRONT, recently underwent renovation. Our main tenant, SHIBUYA TSUTAYA, has transformed itself from a traditional rental video business into a highly interactive, experience-driven space. They collaborate with major IP brands and create environments where visitors can engage with cultural content. There is also a strong phenomenon in Japan known as oshikatsu, which refers to fans passionately supporting their favorite anime characters, idols, or celebrities often by buying merchandise or participating in themed events. Shibuya hosts many pop-up events catering to this culture, and these attract not only Japanese fans but many international tourists as well. All of these elements innovation, cultural vibrancy, experiential retail, and strong commercial demand create powerful growth drivers for Shibuya’s continued appeal.

You mentioned these growth drivers, but Shibuya is quite limited in space since it is already densely built. You are undertaking renovation projects such as QFRONT. How do you balance OPEX and CAPEX in these renewal projects while maintaining long-term performance?

Buildings naturally age, so regular repair and maintenance our OPEX is essential, and we follow a well-planned schedule. We generally aim to keep total repair and maintenance expenses and CAPEX within the level of our depreciation expenses. However, when we identify projects where we can clearly expect value enhancement, we are willing to invest beyond depreciation levels. In the case of QFRONT, most of the renovation investment was made by the tenant. However, we also made targeted investments as the property owner, specifically to support enhancements that would increase the tenant’s revenue potential. In return, this generates higher rental income for us. It is a win-win arrangement that demonstrates how CAPEX can directly link to income growth.

Looking at the broader picture of your portfolio beyond Shibuya, you also hold assets across other key urban areas in Tokyo. Your numbers show extremely high occupancy rates, driven by prime locations and continuous investment to align buildings with evolving market demand. What are the key strengths of your portfolio overall, and how do you expect it to perform going forward?

One of TOKYU REIT’s core strategies is to prioritize location over asset type. Our primary target areas are Tokyo’s five central wards and properties along the Tokyu Railway network. Rather than focusing exclusively on one asset class, we focus on areas with strong growth potential and long-term urban development prospects. This means our acquisitions are not limited to Shibuya; we also consider promising suburban locations within the broader Tokyu Railway network as long as they show future growth prospects. Our sponsor, Tokyu Corporation, continues to undertake major development projects in these areas, and we collaborate closely with them to enhance the urban environment through real assets.

Tokyo’s metropolitan area continues to expand, and your sponsor is heavily engaged in redevelopment within Tokyo. But as major cities like Osaka also grow, are you considering expanding beyond Tokyo in the future?

Our primary focus remains on the Tokyo metropolitan area and the Tokyu Railway network. Even as Japan’s overall population declines, this area continues to attract net inflows of residents. Projections indicate that this net positive inflow will continue until around 2040. Tokyu Group views it as its mission to drive population growth and enhance livability in these areas, and they plan to continue their development efforts. In turn, our REIT will continue to work with our sponsor to enhance the value of these target areas.

We have a capital reinvestment model whereby TOKYU REIT and our sponsor collaborate to drive the value of Shibuya and the broader network area. When we invest in these regions, it helps fund our sponsor’s development pipeline, creating a virtuous cycle. For example, when we went public in 2003, one of our assets was the Tokyu Saginuma Building. We sold it to Tokyu Corporation in 2016, and they announced in July this year that they have begun a major redevelopment of the site around Saginuma Station. When that redevelopment is completed, there is a possibility that our REIT could reinvest in the new project.

Similarly, in Shibuya, we sold an asset to our sponsor explicitly to enable redevelopment. But it was not a one-way divestment; it was part of an asset-recycling process. After selling that building, we acquired a new property from our sponsor. This collaborative cycle is one of the distinctive strengths of our platform.

I’m very interested in how you decide which assets to recycle meaning which ones to sell back to Tokyu Corporation or to a third party, and which ones to retain or reacquire.

We constantly assess our portfolio and replace assets when appropriate. When we consider a divestment, we first determine the best possible buyer for that particular asset. Some properties may not align with Tokyu Corporation’s redevelopment territory, so in those cases we approach third parties as well, and we sell to whichever party offers the best price.

However, even for assets located within Tokyu Corporation’s core areas, we always prioritize what is most beneficial to our unitholders. If a third party offers a higher strategic advantage or better price, we will sell to that third party. But if a transaction with our sponsor creates additional value as part of our capital recycling model, we may choose that route instead. Conversely, when our sponsor sells assets for example, to fund future development they are required to give TOKYU REIT the first right of refusal. This structure ensures that high-quality opportunities can flow to us.

The Shibuya Scramble Crossing in front of QFRONT, where redevelopment continues to refresh the cityscape.

If you are able to share, when you sell assets to third parties rather than to your sponsor, do you see interest from foreign investors? Have overseas investors purchased assets you have divested in recent years?

Yes. When we sell assets to third parties, we typically conduct an open bidding process. In several transactions, we received strong interest from multiple bidders, including foreign investors. In some cases, the highest bid came from an international investor although I cannot disclose specific names. Ultimately, those assets were purchased by overseas buyers. So yes, foreign investors have shown significant interest in our divestments.

My last question before I hand over to Sasha relates specifically to your REIT. Given your high occupancy rates, your structured capital-recycling strategy, and your efforts to deliver the best possible renewal projects in response to market needs, what performance targets are you aiming for in the coming months? And how do you assess the interest of foreign investors in TOKYU REIT itself?

In recent years, our activity has leaned more toward selling than acquiring, but we are now looking to resume growth in our AUM. The investment environment remains challenging, however. One of our competitive advantages is our strong sponsor relationship. Our collaboration with Tokyu Group is mutually beneficial far beyond simply buying or selling properties. It creates opportunities associated with future redevelopment and urban regeneration.

Our core operational areas the central five wards and the Tokyu Railway network remain among the most vibrant and promising markets in Japan. We intend to continue strengthening our presence and performance in these areas.

Now let me ask questions intended directly for our global audience executives, investors, and corporations around the world. This year, you mark Tokyu REIM (TOKYU REIT's Asset Management Company)’s 24th anniversary since establishment in 2001. If we were to return for another interview six years from now, what would you hope to tell us then? What goals or ambitions would you like to accomplish over the next six years?

Over the past few decades, Japan has faced many challenges including financial headwinds and intense competition but REITs have continued to operate in a very advanced and established market environment. Looking ahead to 2030, we recognize challenges such as interest rate shifts and heightened competition. From an asset-management perspective, these create a tough environment.

However, there are also opportunities unique to TOKYU REIT, thanks to our strong sponsorship and the deep relationship we have with Tokyu Group. Shibuya, in particular, continues to generate new business opportunities and income potential as it evolves. So despite challenges, we plan to implement various initiatives to strengthen our position. By 2030, I hope we will be able to report a larger AUM and higher distributable income than we have today. And as you have seen around Shibuya Station, Tokyu Corporation is advancing major development projects scheduled for completion around 2030. We aspire to be a REIT capable of owning and operating these next-generation flagship properties as part of our portfolio.

That is wonderful. They say in Japan, ganbatte, when someone has an ambitious goal so good luck with that. Now, my final question is for our Bloomberg Businessweek readers. These are global executives, investors, and financial institutions looking for opportunity in the Japanese real estate market. Next year marks Tokyu REIM’s 25th anniversary. In one simple sentence, how would you like your company to be perceived by the global market?

It is difficult to reduce everything to a single sentence, but what I want to convey is this: together with our sponsor, we aim to continue elevating the value of Shibuya as a global city and enhancing the broader Tokyu Railway network area.

For more information, visit their website at: https://www.tokyu-reit.co.jp/eng/