Mitsubishi Estate looks to resi for UK diversification

After 30 years of office development in London, one of Japan’s biggest real estate companies is preparing for a new set of firsts. EG meets Mitsubishi Estate London’s Yuichiro Shioda to talk about a move into residential, a potential spread outside the capital and why it is likely to be the only major Japanese player in the UK market for some time yet. Relaxed and affable, Yuichiro Shioda, the head of Mitsubishi Estate’s London and European business, settles into his chair and admits he is looking forward to summer after posing for pictures on a slightly chilly afternoon in the Soho square his office overlooks. “In summer it is fantastic to live in London, but in winter I sometimes want to go back to Japan,” the golfing fan says. It’s understandable, given that Tokyo, where he was based for 16 years with Mitsubishi Estate, is currently basking in temperatures a good seven degrees warmer than the 13°C being experienced in London and is draped in picturesque cherry blossom. Key facts As of March 2019, Mitsubishi Estate Co had total assets of $54bn (£41.3bn) It has around eight business divisions, including its overseas operations, of which Mitsubishi Estate London is part Europa Capital is held under Mitsubishi Estate’s investment management business division Shioda began in his current role as managing director and chief executive of Mitsubishi Estate London in 2016. Earlier this year he oversaw the start of construction on one of its largest office development projects to date in the capital, but now his attentions are turning to the expansion of the London business into other asset classes, which for more than 30 years has focused solely on office developments. Specifically, Shioda is evaluating a move into London’s build-to-rent residential sector. “We are talking with a possible partner and may invest in BTR in the near future in the London area,” Shioda says. “Our basic strategy for the next five years in the UK and Europe is to invest in and develop more office space and invest in the BTR space.” This expansion could also see hotels become a prospective area of interest further down the line. If the business decides to go ahead and take the BTR plunge, it would mark the first time in the UK that it has deviated from the office development market. In Japan, Mitsubishi Estate is well established in the residential sector (including BTR) and has already been exporting this expertise overseas. Just over a year ago Mitsubishi Estate Asia agreed to partner with Lendlease on a 44-storey, 719-flat tower in Melbourne, Australia. And as far back as 2014, it entered the residential condominium business in Thailand. Spreading its wings? The move into UK BTR could also see Mitsubishi Estate London spreading its wings to other parts of the UK for the first time. “It’s possible with BTR to go outside London, but for office buildings it’s impossible because we don’t know the other cities very well, and London is a huge market so we can invest in London’s office market more and more,” Shioda says. In the meantime, Mitsubishi Estate London’s interests lie solely in London development, where Shioda says it is focusing on the increasingly popular South Bank, including Elephant and Castle. “That is not to say that we are not still interested in investing in the City and west London,” Shioda adds. These latest expansion plans for the UK follow Mitsubishi Estate’s acquisition in 2010 of a majority stake in fund manager Europa Capital, which Mitsubishi Estate London has been investing in since 2017 (in core-plus assets across continental Europe). To date, office buildings in Paris and Munich, as well as two logistics assets in the Netherlands, have been acquired by a fund seeded with more than €180m by the London-based arm. “It’s a new business stream for us in Europe as it is investing in core-plus,” says Shioda. “This is just in continental Europe for the moment, but in the future we could invest in this type of stock in London.” He adds: “If we stock up on properties, [Europa] will sell down some of the equity in them to outside investors. From this, Europa Capital gains the investment management money and hopefully we will have capital gain.” [caption id="attachment_979973" align="aligncenter" width="847"] A new look for London’s Bishopsgate?[/caption] Back in the UK, Mitsubishi Estate London earlier this year gave the go-ahead for its first City tower: a 50-storey office block at 8 Bishopsgate, EC2 (pictured above). The business is expecting to attract a wide range of occupiers to the building, with large floorplates on the lower levels catering to the more traditional financial occupiers of the City, and smaller upper floors aiming to attract the TMT sector and start-ups. Co-working will also most likely feature in the building through a third-party operator. Designed by Wilkinson Eyre, the project is expected to complete by the end of 2022 and provide 560,000 sq ft of space in the City at a time when there is expected to be a dearth of new office space hitting the market. According to Radius Data Exchange, just under 1m sq ft of space currently under construction is due to complete in 2022. Shioda says the lack of supply coming into the market was a key reason for the business agreeing to start the reported £300m construction, but not everyone at Mitsubishi Estate was originally in agreement. “When we decided to move forward with this project, not all of Mitsubishi Estate Co initially agreed because they were concerned about Brexit, which since 2016 has been descending into further chaos day by day,” he says. “For the past couple of quarters it has been awful. We are concerned about the future of London and the UK – but on the other hand, construction costs have stabilised compared with previous years, when they were continually rising. “Sterling is also fairly cheap for us currently and new supply will be limited in 2022/23 because other developers are concerned about Brexit. So this all combined has given us a good reason to proceed.” Mitsubishi Estate London’s portfolio London portfolio 8 Bishopsgate: under construction 245 Hammersmith, in partnership with Legal & General: under construction, due to complete in 2019 Central St Giles, held in partnership with L&G 8 Finsbury Circus Warwick Court (Paternoster Square) 1 Victoria Street European properties (invested in jointly with Europa Capital, which also manages the assets) 236,806 sq ft office block at Feringastrasse 10-12, Munich 85,896 sq ft office property Imagine in Paris 226,623 sq ft logistics asset at 1 Atlasstraat, Tilburg, and a 554,363 sq ft logistics asset at Markermeer 1, Oss, both in the Netherlands The decision to move forward with 8 Bishopsgate and the progression of diversification plans in the capital in spite of Brexit indicates MEC’s belief in London. “We are confident in London as it’s a gateway city for Europe, and its fundamentals – such as its education, culture, entertainment, legal system and transparency – mean it will be a good city for us in the future. It still has potential for us,” says Shioda. “I’m surprised about the depth of tenants in London’s office market, with the rise of the tech and media sector taking over from financial companies. “Likewise with the capital markets, which attract money from Russians, the Middle Eastern and, more recently, the Koreans. “London is the most international market, and so this is why we are confident in its future.” However, investing in development or core-plus opportunities in the UK or Europe is not easy at this stage in the cycle, with or without the political wranglings and subdued economies, Shioda admits. He points out that capital rates globally are “fairly compressed and the market is a little bit overheated” – with Paris, Mayfair in London’s West End and Singapore all at less than 3%. “In Japan, the low interest rate has continued for around 20 years, so maybe the basic cycle has changed,” he muses, adding that he believes the low interest rates in the UK and Europe will continue for some time. Tenant diversification Even so, he doesn’t think it is a bad time to invest. Shioda believes rents will continue to rise because of continuing diversification of the types of tenants wanting office space. He points to the surge in office take-up from the TMT sector, which accounted for 25% of take-up in 2018, according to Radius Data Exchange. There could also be investment opportunities that come out of Brexit, Shioda adds. “If there’s a hard Brexit, there could be a short period of fire sales, similar to what happened after the EU referendum in 2016, but in the medium to long term it will rebound,” he says. “But it takes the Japanese a long time to decide, so I’m not sure we could catch the opportunity – but it’s a good idea.” However, he is aware that other Japanese firms are looking at entering the UK market, which is being driven by the very mature Japanese economy. “We don’t expect any population growth [in Japan], and therefore the economic size is not expected to get bigger. So, if Japanese companies want to grow, they have two options. They have to go overseas or look at mergers and acquisitions. Most Japanese companies must go abroad.” However, Europe and the UK are not at the top of the list of places to invest for Japanese companies, in part because of Brexit. In addition, “unclear situations” around European economies such as Germany and France give cause for concern, Shioda says. “At this moment, North America is the biggest market for Japanese companies, especially for the listed firms, because of its huge size and because the US dollar is very popular for Japanese people. The second market is Asia-Pacific and Australia, because we want to tap into those emerging market opportunities. The third area is Europe and the fourth is East Asia, including countries such as China – although currently China’s market is not so clear.” But when they do choose to invest in this part of the world, London is still the most likely city for Japanese investors to start with, because of its language and transparency, Shioda says. In fact, some small private investors have already dipped into the market, spending around £222m on central London property last year. Nevertheless, the wait for Japanese investors – a wait that has been going on for around two years – carries on for London’s property market, and for the time being it seems that Mitsubishi Estate London will be one of the few well-established Japanese players in town. Who is Yuichiro Shioda? Yuichiro Shioda joined Mitsubishi Estate in 1990. Between 1993 and 2000 he was with the company’s operations in the US, including the Rockefeller Group (which is part of Mitsubishi Estate’s international business division, along with Mitsubishi Estate London). From 2000 Shioda was mainly involved in corporate finance at Mitsubishi Estate’s Tokyo HQ, but as a result of his global experience and expertise he was named as managing director and chief executive of Mitsubishi Estate London in 2016. Shioda has a bachelor’s degree in economics from Keio University. To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette Portraits by Tom Campbell