Sustained by low interest rates and the lifting of COVID restrictions, Japanese land prices have surged in the last year leading into 2023. Attracted by the performance, low interest rates, and the devaluation of the JPY, foreigners have also poured into the market, accounting for 45%. Big names such as Singapore’s Sovereign Wealth Fund as well as the Norwegian Pension Fund are among the investors. Considering the global macroeconomic outlook, why do you think Japan is currently trending so much when it comes to real estate investment?
One of the reasons for the significant increase in foreign investment is that Japanese real estate has long been undervalued. It is only recently that developers have focused on the high-end residential market, bringing Tokyo closer to more mature cities like Hong Kong, New York, and London. Following this string of investment, Japan is now on the same stage as major global hubs.
COVID-19 was a driving force in the demand for residences. Due to stay-at-home measures, people were motivated to purchase properties. Two to three years ago, there was a boom in residential purchases, with a surge in demand for residential buildings. Furthermore, the depreciation of the yen has attracted more foreign investors looking to take advantage of the economic situation.
Abenomics, the economic policy of the late former Prime Minister Shinzo Abe, are gradually starting to show effects, with the ultimate goal to end deflation. While we can say that progress is being made, it is still uncertain if this will continue sustainably in the near future.
As Nikkei stock prices have surged, people’s wealth has increased. Higher stock prices have led to an increase in high-net-worth individuals in Japan, resulting in more land and real estate purchases. In addition, investments from wealthy individuals from Western countries and from China are increasing, making the attractiveness of Tokyo even more recognizable.
Chinese investors, in particular, are seeking to mitigate country risk by moving their fund overseas. Japan is seen as one of the safest and most viable options, making it very attractive for investment. We have sold properties ranging from JPY 300 million to JPY 3 billion to Chinese individuals in prime areas like Shibuya. They choose these prime locations to secure higher rent and NOI. Due to higher rent and guaranteed returns, in their view, condominiums costing millions to billions of yen are not considered expensive. Our high-end condominiums, which are branded under the name of “Excelsior”, have been developed to meet those needs.
Rising land prices and construction costs have caused yields to decline. However, in the prime areas where we operate, rent is catching up with inflation, allowing investors to recoup their investments. If investors cannot find tenants after raising rents, it indicates that the rent is too high. Finding the best combination between location, branding, building plans, and rents is important, as some areas may not achieve high occupancy rates. When these factors are properly balanced, the asset value of the property will increase. This is especially true for our “Excellence” and “Excelsior” series, for which we expect to see prompt sales.
Excelsior Hozukachou
In recent months, we have seen observers express some skepticism as to the future outlook of the market. There are two big arguments at the core of this skepticism: fear of rising interest rates and inflation, and since material prices have gone up, developers have decided to focus on luxury projects where they can protect their profit margins. This has led to a fear of oversupply in certain locations and asset classes. How serious do you believe these two threats are?
The Bank of Japan’s debt is the second largest among developed countries and six times that of the United States. When interest rates rise, the debt of the Japanese central bank also increases. In light of this, foreign institutional investors realize that the Japanese government and the Bank of Japan cannot raise interest rates sharply. Thus, they are steadily increasing the amount they invest in Japan to take advantage of this opportunity.
The Japanese government has about 1,500 trillion yen in liabilities, but there are about 700 trillion yen in government assets. The Japanese government also holds about 400 trillion yen in foreign assets and 200 trillion yen in other assets. By subtracting liabilities to assets, we can see that the Japanese government’s net debt is about 200 trillion yen. Japan’s annual gross domestic product (GDP) is approximately 590 trillion yen, and at current GDP levels, the likelihood of the country going bankrupt is therefore very low. Foreign investors have done thorough research and believe that the BOJ will not raise interest rates rapidly. As such, we believe that this is the time for foreign investment, at least for the next few years, to take advantage of the weak yen.
In the U.S. market, defaults on commercial and commercial mortgage-backed securities (CMBS), and more recently in the housing sector, indicate that the situation is deteriorating. However, lessons from the Lehman Brothers collapse have taught us that predicting the timing of an economic collapse is difficult, and it is impossible to predict exactly when it will occur. Investors are now looking for ways to avoid the risk of collapse and find the optimal soft landing should it occur. Japan is considered one of the least risky countries in which to invest. During the Lehman Shock, prices in Shibuya and Ginza fell by one-third. Had they invested at that time, they would have earned three to five times the return. Global investors are aware of land price fluctuations and have experience in the London and New York markets. Considering this, it is no surprise that Japan is seen as a prime investment opportunity.
After a decline in 2020, the population of Tokyo’s Metropolitan area reached a record high in August 2023, driving demand for residential facilities. It is therefore no surprise to find that the price for new condominium in central Tokyo doubled year on year, with luxury housing also experiencing a surge in prices. Following this stark increase, some argue that the market presents certain risks. As material costs increase, the profit margin of developing affordable, cost-effective apartments is shrinking. In turn, developers are looking at luxury housing as a segment that allows them to protect their profit margins; thereby pushing supply. What advantages do your original developments, the EXCELLENCE SERIES and MORE EXCELLENCE SERIES offer to differentiate themselves from similar projects?
The population decline in 2020 was primarily due to the COVID-19 pandemic and the government’s stay-at-home orders. This led to more people moving from Tokyo to rural areas, such as the Fuji Lake area and Karuizawa. At first, remote work allowed people to live outside the city, but it soon became apparent that face-to-face work is necessary. In 2023, lockdown measures were removed, and people returned to Tokyo, leading to an increase in the population.
During the pandemic, there was a significant rise in demand, and we were able to sell more residences in the JPY 100 million to JPY 200 million range. This range is considered high-end, and purchasers tended to be power couples who pooled their large salaries together, resulting in an annual income of about JPY 20 million. However, what is considered luxury has now increased to the JPY 500 million to JPY 1 billion range. These properties are typically purchased by wealthier individuals, such as CEOs and wealthy Chinese investors, rather than typical power couples.
Prime areas in Tokyo have been developed to meet the needs of upper-class individuals, resulting in a matured luxury housing market. Matching the right property to the buyer is crucial. Design, specifications, and services are all important factors, and combining these elements is key to successful sales. Planning prime locations to meet the needs of high-net-worth individuals is critical. Once we develop and construct these properties, they sell quickly. Currently, we have no inventory; everything has already been sold.
In the luxury condominium market, all companies fulfill the same basic construction needs, so differentiation comes down to branding. To be successful, it is essential for our company to brand our products well within the market. Polishing our branding is key to elevating the value of our properties. Increased attention and interest for our brands will inevitably drive prices higher.
Despite the impact of COVID, hotel transaction volumes saw movement throughout the last 3 years, even reaching $1.9 billion for the first 8 month of 2023. 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 group trips of three or more people, as well as a lack of facilities that can cater to long-term stays. What gaps-in-demand does your ENT TERRACE line seek to address?
The uniqueness of ENT TERRACE is that we develop small portions of land in commercial areas, with each floor containing a maximum of one room. For example, a ten-story building would have nine rooms. Average room sizes range from 40 to 60 square meters, with elevators stopping at each floor.
The best aspect of having one room per floor is the privacy it offers. For security reasons, children will also never get lost since there is only one room per floor. Each room is fully equipped with a kitchen and can comfortably accommodate 4 to 6 people, making it ideal for families with two to three children. The surrounding area is also convenient and offers access to local restaurants.
Our hotels are very popular among foreign visitors. Our first hotel was completed 18 months ago in Asakusa. Before moving forward with this project, we gained experience from running a private home stay (Airbnb) business for family guests, and received a Superhost rating of 4.9 stars on Airbnb. Our Asakusa hotel is so popular that it achieved a 9.5-star rating on Booking.com. Additionally, the Akihabara hotel was awarded the Traveller Review Awards 2024 by Booking.com. This clearly shows that we are meeting the specific demands of inbound tourists by having hotels in commercial areas.
Looking ahead, we plan to complete and open a new hotel in our “ENT TERRACE ” series in Ginza by the end of this year. We have also secured land for ten different locations, mostly in the Tokyo area, and are preparing to open 16 hotels across Japan.
Our hotels offer spacious rooms that can accommodate 4 to 10 people. Our goal is to become Japan’s number one extended-stay hotel chain.
ENT Terrace, Akihabara
LEAD REAL ESTATE recently launched GLOCALY, a membership-only online platform that connects real estate buyers and seller. Through the utilization of AI technology the platform also offers related procedures, including translations and communications related to each asset. Why did you decide to venture in this business? What advantages do you expect having your own DX platform to bring to your core operations?
One of the primary reasons we entered this field was the COVID-19 pandemic. During that time, people were no longer able to visit in person. However, we had this platform ready even before the pandemic hit. Before COVID, we recognized the importance of providing real estate information remotely. For instance, an American looking to purchase a residence in Tokyo faces the challenge of long flights back and forth. Furthermore, by providing an online experience with automatic translation and AI chatbots, we can cater to multilingual investors.
When we initiated this project, we announced it on our website to recruit talent. Interestingly, we received more interest from non-Japanese of Asian descent than from Japanese people. The people who were interested were very bright and talented, fluent in Japanese, Chinese, and English. We were able to attract highly skilled professionals whose video production abilities were very professional, so the entire process was done in-house. In addition, we were one of the first Japanese companies to implement our own AI chatbot.
Glocaly is providing us with new business opportunities, leading to increased contact from foreign investors and developers. They want to use our platform to sell their properties, and some are interested in investing in properties we offer. As an international platform, Glocaly allows us to gain trust and build our brand.
LEAD REAL ESTATE has expanded its operations internationally. At the core of the company’s international strategy is the USA, with offices in LA and Dallas, where the company both invests in local assets and acts as a bridge to individuals seeking to invest in Japan. Furthermore, the firm has also opened offices in HK, and made targeted investments in the Philipines. Can you run us through your international strategy and the markets that you foresee to have the highest growth potential?
First and foremost, the population decline and domestic market shrinkage have been key concerns for us over the past 15 years. Companies operating within Japan are fighting for survival.
Back when the yen was strong, we strategically invested overseas and established an international presence. Although small in scale, we have experience in the apartment remodeling and resale business, as well as in the detached development business and the luxury detached rental business in the United States.
In addition, we acquired condominiums and office space in the Philippines during the period of yen appreciation. Currently, the value of overseas assets is increasing due to the weak yen. Overseas markets are extremely important to our business, especially given the devaluation of the yen and declining population in Japan.
To become a first-class company, it is essential to be competitive in the global market.
Is that why you decided to list your company on the Nasdaq in September 2023?
Yes, that’s right. Our goal is to make our branding world-class. Looking at the future, we also aim to be listed on the Hong Kong Stock Exchange.
Imagine that we come back in ten years and have this interview again. What goals or dreams do you hope to have achieved by then?
I believe that our hotel business has been a great success, so I hope to continue growing it. In the medium-to-long term, we aim to be listed in Hong Kong. After that, we envision expanding into the Chinese market, which would significantly increase our company’s value.
Real estate is a truly amazing business, but there are many rival companies in the market and competition is intense. When competition intensifies, securing properties in prime areas becomes more difficult. Our company specializes in purchasing small lots in prime areas, enabling us to avoid fierce competition. However, global issues such as war and natural disasters do pose concerns for our business. The Middle East is suffering from conflicts and tornadoes; parts of Europe are at war; there was a recent earthquake in New York and wildfires are becoming a problem across the world. In truth, you never know when a natural disaster might occur. With this in mind, it is very important for our company to diversify its business operations.
To discover more about GLOBALY: https://glocaly.tokyo/en/
To discover more about Lead Real Estate: https://www.lead-real.co.jp/en/
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