Real Estate in Japan: Analyzing an investment decision

Journal of Real Estate Practice and Education, 2003 by Geurts, Tom G, Gagne, Margaret L

Jim had read a number of books on negotiations in Japan; however, they were filled with rather vague comments, like "As a consequence, Americans tend to conclude that the Japanese work without a plan, in what seems to be a chaotic fashion. To the Japanese, on the other hand, the Americans appear to depend too much on forecasting, despite its obvious limitations," (Knowles and Maio, 1990:64). Problems had actually already started when Jim and his Japanese counterparts exchanged business cards. Jim glanced at the just received business card to learn the name of the person opposite of him. However, the Japanese man spent much more time analyzing the card, trying to evaluate the company Jim represented, his status and only then Jim's name. By then, Jim was already impatiently moving ahead with questions.

Jim had to admit that a fragment of another sentence he remembered from the book he read on doing business with the Japanese, namely "what is going on behind the seemingly inscrutable face of the Japanese" was something he was wondering too. He realized that the Japanese tried to protect harmony in the domestic market, but he wondered if that implied they were being obstructionistic. Jim also knew the statistics, namely that one in seven foreign ventures fail in Japan. The Japanese tend to say things intending not to offend the other person, instead of saying what they believe to be the "truth." They prefer being silent to being offensive. Silence definitely does not mean agreement in Japan! Even more complicated is the fact that "yes" (= hai) does not mean agreement, but merely that one understands what has been said.

Consensus building is the key; however, Jim did not need agreement, just information. Interestingly, the moment that Jim thought he was getting somewhere, his Japanese counterpart always needed to consult with someone at the head office in Tokyo, although it was made clear to Jim that his counterpart had full representative powers. Jim wondered if this was another tactic of the Japanese to thwart his efforts to find out exactly the correct value of the property.

Sighing, Jim decided he needed answers to the following questions before he could report back to his employers in the U.S.

1. What are the pro forma cash flows from the investment if Jim uses the information and growth rates given in Exhibit 1? Assume the company is viewing this as an eight-year investment, thus they intend to sell the investment at the end of the eighth year.

2. The vacancy allowance in Exhibit 1 is established to be 5%; however, recent market data indicate that the current vacancy rate is more than double that figure. What might cause this relatively low vacancy rate in this building? What additional analysis needs to be done?

3. Look up the current exchange rate versus the U. S. dollar. Discuss your expectations about future developments and how they would impact future returns.

4. What did the Japanese analysis (Exhibit 2) of the investment mean? Does it indicate the investment is a good one? Why or why not?