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Japan’s retail market proves resilient despite Covid-19 instability

Interview - February 26, 2022

As the asset manager of Frontier Real Estate Investment Corporation, a J-REIT specializing in retail facilities, Mitsui Fudosan Frontier REIT Management has targeted prime retail facilities in the greater Tokyo area to create a strong investment vehicle for both domestic and international real estate investors. We spoke with Mr. Ono about what the impact of Covid has been for Japan’s market and when we can expect retail to fully recover.


In the leadup to the COVID-19 pandemic, Japan saw six consecutive years of real estate and land price increases and a steady investment yield. Furthermore, the Japanese market was less affected by the pandemic compared to other Asian markets, with transaction volumes falling around 20% compared to 60% in Hong Kong and 40% in Melbourne. As the asset manager of Frontier Real Estate Investment Corporation, a J-REIT specialising in retail facilities, can you give us your analysis of Japan's real estate market?

Alleviation measures in the financial sector are being implemented globally. Lower interest rates and steady yields on investment lead to more interest from investors in real estate and other sectors, especially when we compare long-term interest rates and the return on investment in the real estate market. The J-REIT for housing and logistics facilities has naturally risen during the pandemic. Also, while the trend of increased remote working has greatly affected the office market, commercial facilities that incurred months of lockdown and limited operating hours are now resuming business.

Compared to data from the European and US markets, the impact in retail has been relatively minimal. The retail sector is doing well as people are still paying their rent, which keeps the payment cycle going. Our profits depend on our tenants: if they manage the business well, we can adjust the rent accordingly.Luxury brands, telecommunications, and companies in other segments continue to seek excellent locations in urban areas, which is beneficial to us. Based on our sales revenue, we can also say that the suburban area is performing quite well because the impact of the pandemic has been felt less and everything is slowly going back to normal. 

In fact, middle-scale shopping centres in the suburban areas were not significantly impacted even in the worst times. In addition, large-scale shopping centres such as the Mitsui Shopping Park “LaLaport”, Mitsui outlets and AEON malls have been getting back on track over the past two months. While there may be potentially negative news like the spread of the Omicron variant of the SARS-CoV-2 virus, I foresee Japan's property market making observable progress from early next year.


In 2021, your company made a capital increase and its sixth public offering to raise funds and acquire three facilities: Mitsui Shopping Park LaLaport in Shin-Misato, in which you have a 34% co-ownership stake, Ginza 5-chome GLOBE and Takeshita-dori Square. What was the reasoning behind the timing of your sixth public offering?

This is an extension of what we have always done: we look for prime locations and acquire available properties. The first reason for this venture was to continue our policy of maintaining a balance between facilities in suburban areas, such LaLaport, and city centres. One of our goal is to enrich our portfolio in both areas. In addition, the opportunity to increase our shares was offered to us. When we look back at March 2020, there was a decline in our investment unit price, but this segment is quickly regaining momentum to almost the same level as before the pandemic. Therefore, we decided that it was the right time to do the public offering, increase our capital and move forward with our acquisitions.

Furthermore, our LTV(Loan to Value ratio) was around 40% to 50%, and we tried to control it within that range; the public offering allowed us to be in a better position and stay within that range. Another factor that we considered is that, while city centre sites have not fully recovered to pre-COVID-19 levels, the contract terms of these properties were quite advantageous because they assure a stable income flow. We believe that once the pandemic subsides, we will be able to secure a good flow of income from these acquisitions. I also think that it would be better for us to reach 100% acquisition of LaLaport in Shin-Misato as soon as possible.

One of the barriers to foreign investors entering the Japanese market is the lack of transparency. However, there has been a stark increase in the ratio of foreign buyers in the Japanese property market: from 21% in 2019 to 38% in 2021. What changes are we seeing, and why do you believe foreign investors are coming to Japan now?

As a J-REIT company, for the past 20 years we have been performing better than conventional Japanese listed companies in disclosing information to foreign investors. Along with progress in this area, the J-REIT market size is attractive because it has been expanding over the past two decades. 

The good thing about doing regular IR activity is getting more insightful and useful information about how our counterparts outside of Japan such as in the United States and Singapore are doing. Through these connections, we can demonstrate the resilience and stability of the Japanese real estate market, which builds confidence among foreign investors and helps the market grow, setting off a positive cycle. 


Some foreign entities may be reluctant to invest in the Japanese market because of cultural and linguistic hurdles. How does your company overcome these challenges? What role does attracting foreign buyers play in your investment model?

Indeed, there are linguistic and cultural barriers. Foreign investors must have a good understanding of the Japanese market, the policies we implement, the way we run our investments, and why we make certain decisions in building our portfolio. We endeavour to deliver stable returns and dividends to our investors. Our financial performance analysis, which shows steady growth and returns, earns their confidence to continue investing in us. The lease contracts of our other properties also secure our income. We work better with our investors when we clearly and repeatedly explain the goals and direction we are trying to achieve. In fact, we have been receiving more enquiries from global investors compared to before. 

Although the Coronavirus pandemic has also led to an increase of the use of e-commerce in Japan, Japan’s population is about a third that of the United States, but the number of retail stores is roughly the same. If we look at the performance of the e-commerce sector in Japan, the figure is relatively low compared to countries such as the US and UK because we have managed to set up numerous physical stores even in big cities with limited space. Even the latest increment in e-commerce in the food industry is just 3%. This is a consequence of Japanese people’s habits when it comes to grocery shopping; people would rather go to physical shops to purchase products.

I explain the nature and characteristics of the Japanese people to our foreign investors using this kind of information. Moving forward, we want to provide this kind of information and regularly reiterate the direction of our investments to expand our asset profile and help our investors get to know us better. 


As you mentioned, urban retail was strongly impacted by the pandemic. Many managing firms are providing support to hard-hit businesses in various ways, such as deferring or in some cases cancelling rent payments. How do you expect the situation for urban commercial facilities to evolve in the coming years as we hopefully emerge from the pandemic?

Retail covers a wide spectrum; it is highly diversified and includes many different business models. The most affected businesses have been establishments where people gather, like restaurants and cinemas. Interestingly, however, there has been some growth in other businesses such as pet stores, second-hand shops, and those selling teeth whitening products. During the toughest times for the retail industry, we reduced rents, gave discounts, and deferred payments because we wanted to preserve our good and long-standing relationships with our tenants.

I would say that, despite the emergence of new variants of the virus and other uncertainties, we can continue moving forward. Many people are returning to work on-site, although several people will keep working from home. Even though e-commerce is not especially popular in Japan, figures show some growth in this type of transaction. We used to look at physical stores and e-commerce as two different worlds, but they are linked now. For example, a person can order something online and pick it up at the store or return a product at the store, or items ordered from a store’s stock can be delivered to consumers’ homes. It is difficult to decide whether the revenue should be classified as coming from a physical shop or from online channels. I believe we need to keep a close eye on these transformations in the coming years. Furthermore, supermarkets have done extremely well, especially over the past two years. We were able to sign two new contracts that included rent increases. In one of the two contract renewals, we were able to negotiate a better deal because sales were stronger by considering sales from deliveries as part of its revenue.


Imagine we come back to interview you again in five years’ time. What goals or ambitions would you like to have achieved by then?

I do not have a specific number that I want to achieve over the next five years or so but given the size of the assets we are managing we are trying to expand our asset base. Each morning I wake up, look at our performance and see if we are in good shape. I want to strive to maintain the quality of our portfolio while increasing the size of our assets, making Frontier Real Estate Investment Corporation the most attractive commercial REIT compared to international REITs.