High returns: how CBRE has thrived on the 'white hot' real estate market in Tokyo

Japan, Inc., Summer, 2007 by Peter Harris

CBRE's man in Japan

It's no wonder that Ben Duncan is smiling. CB Richard Ellis' 35 year-old Representative Director has the look of a man in the right place at the right time, but this wasn't always the case. When Ben first came to Asia he was stationed in Hong Kong in 1996, at which his friends quipped that he wouldn't have much trouble finding a seat on the plane given that most foreign real estate executives were sprinting home before the impending 'handover.' As a relatively new graduate however, Duncan was finding the London rat-race less than stimulating and had his eyes set on more exotic climes. Frankly armed with his certification as a Member of the Royal Institution of Chartered Surveyors, he headed to Asia and quickly rose up the ranks. Hong Kong provided him with the opportunity to cut his teeth on some substantial deals and get experienced with the major players in Asia's real estate markets.

After 8 years Ben was married and looking for a change of scene, and he chose Japan. Not longer after arriving in Tokyo, his first child was born in the Aiku Hospital near Hiro-o. When he does get a break he has some property in Niseko where he likes to ski or is happy visiting the zoo with his daughter. A keen rugby player, Duncan, together with some of his colleagues from the Tokyo office, form a strong contingent of the Yokohama Country & Athletic Club (YCAC) rugby team. As fly-half he has a tough job negotiating the ball between the forwards and backs and one wonders if it was out on the pitch that he gained his first lesson in business.

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The 'white hot' real estate market in Japan

Essentially, it was Japan's real estate market that drew him further east. In his own words, the attraction lay in Japan being "the most opportune market in Asia, if not the world." Crucially, the opportunity lies in grade A property. If you scan the Tokyo skyline from Roppongi Hills it may look like a city to rival Manhattan but in reality only an estimated 17% is in the grade A category compared with at least 60% in Singapore and Hong Kong. Businesses are hungry for high-end office locations and so far demand is far in excess of supply. Combine this with the wide gap between rates on borrowing and rates of return and it easy to see why the market is moving so fast. The Financial Times reported in March that property prices in Tokyo have enjoyed an annual rise of 30-40% and this, together with the necessary know-how and experience has enabled CBRE to boast an annual global revenue of $4.3billion.

Over the last few years, the real estate market in Japan has taken an interesting-course and, as with other industries, doing business in real estate in Japan has its particular quirks and challenges. For a start there is the continuing influence of the five major landlords: Mitsubishi, Mori, Mori Trust, Sumitomo and Mitsui. Between them they account for 60% of the market but Duncan sees that in the future, given the level of growth, they will need to outsource their services arm in order to focus more on their core businesses. The foreign players already here such as AIG, GE and Morgan Stanley may be the first to do so but where they lead, domestic corporations might follow. A caveat would be that there are, unsurprisingly, some structural barriers to overcome first.

The problems for foreign corporations attempting to offer real estate broking, leasing and other services may strike a chord with those in other industries. For one, there is the issue of transparency. During the period of high activity of the Japanese Real Estate Investment Trusts (JREITs) there was not only a growth in investment but also an improvement in practices with a higher demand for reliable data and accountability. In short, it created a "window of clarity." However, in the last 18 months JREIT activity has dropped off (although technically the number of JREITs has grown, their pricing/capital is not as competitive as it was two years ago). This decline of activity has resulted in a return to more opacity and less scrutiny. Ben Duncan also mentioned that the industry needs more regulation; there is a grey area regarding the role of the trust banks, "should they actually be out there in a brokerage capacity trying to sell assets on behalf of their trustees?" This coziness has often prompted the opinion that the Japan market is a tough environment to work in.

Indeed, for outside investors, such as large global funds, actually finding assets in Japan can be tough because nothing ever seems to be on the market. For primarily cultural reasons, the Japanese don't like to be seen selling their assets. Being seen selling off an office building in Japan leaves the action open to being interpreted as confirmation that the seller is undergoing financial difficulties--a nightmare in a country where reputation often takes precedence over reality. In business terms, Ben Duncan finds this puzzling, "you've got the hottest market since the bubble era and Japanese owners only try and sell to one selected party, it's crazy." This is where CBRE come in. By virtue of their on-the-ground presence and connections, they are able to source off market assets, and when it comes to selling, they are comfortable managing a wide range of competitive tenders--unusual in Japan.