Scope#27 | Japan REIT Advisors
Entering the J-REIT Market
J-REITs are real estate investment trusts in Japan that are listed on the Tokyo Stock Exchange (TSE). J-REITs invest in real estate with funds collected from numerous investors and distribute the earnings to those investors. The first two J-REITs went public in 2001. Now, as of March 2019, a total of 63 J-REITs are listed on the TSE with a combined asset value of more than JPY 18.3 trillion.
The Marubeni Group’s Japan REIT Advisors Co. Ltd. (JRA) became the asset manager of a J-REIT called United Urban Investment Corporation (United Urban) when they joined the market in 2003. By fully utilizing Marubeni’s expertise in finance and real estate, JRA has successfully grown the asset size of United Urban tenfold since their listing.
However, JRA’s to its current success has been far from smooth. When United Urban went public in 2003, the J-REIT market was still in its infancy and its potential for future growth remained uncertain. As the 10th J-REIT to be listed, United Urban was relatively small compared to its peers, and had a lot of catching up to do in terms of both portfolio size and quality.
Marubeni’s expertise in finance and real estate was crucial in enabling JRA to overcome these initial hurdles and achieve substantial growth for United Urban. In order to attain this success, JRA employed three overarching strategies: Diversify investment property types; increase asset size through M&A; and improve the profitability of each property under management.
Strategy 1: Diversify the Investment Property Types
While many other REITs were investing primarily in office buildings, United Urban distinguished themselves by distributing its investments among diverse property types, including retail facilities and hotels. Consequently, United Urban was able to tap into attractive markets like hotels ahead of other J-REITs, while also avoiding competition. Furthermore, Marubeni’s wide-ranging network in retail and logistics aided JRA in the acquisition of properties from clients in those industries who were looking for potential buyers.
Strategy 2: Increase Asset Size through M&A
During the 2008 Global Financial Crisis, many REITs struggled to survive. But United Urban never wavered. Despite the overheated market, they were able to sustain a strong financial base generated by a solid acquisition and financial approach, and as a result, they were able to overcome the hurdles of the financial crisis relatively quickly. United Urban also merged with Nippon Commercial Investment Corporation by leveraging Marubeni’s proficiency in M&A, and used this as an opportunity to expand its business scope, quickly rising to the 5th ranked J-REIT in the market.
Strategy 3: Improve the Profitability of Each Property Under Management
The third and final strategy employed by JRA was to enhance the competitiveness of each of its managed properties by continuously reviewing rent and operational costs with the help of Marubeni’s accumulated knowledge and expertise in the field.
Recently, JRA was able to capitalize on the deregulation of the retail electricity market in Japan by switching the electricity provider of many of their properties to Marubeni Power Retail Corporation. This has allowed the company to achieve major cost savings in electricity, while liability insurance arrangements made by Marubeni Safenet Co., Ltd. enables JRA to hedge against real estate risks and make further cost savings.
The Challenge Continues
So what has been the result of all of this? In the 14 years up to the 2018 fiscal year, United Urban’s AUM has grown by a factor of 10, and currently exceeds JPY 600 billion based on acquisition prices.
Of course, this is not the end. JRA will continue to accumulate even more knowledge and experience, develop new perspectives and methods as a part of the Marubeni Group, and continue to take on the challenge of increasing United Urban’s size and improving its profitability.
All information contained in this article is based on interviews conducted in September 2018.
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