The Daily Yomiuri

Kenedix boss unites U.S. know-how, Japanese spiri

Kenedix Inc., one of Japan's leading property funds, marked its 10th year in this country in 2005. Originally a subsidiary of U.S. real estate powerhouse Kennedy-Wilson Inc., Kenedix, under President Ryosuke Homma, has struck out on its own and achieved remarkable results.

The Daily Yomiuri spoke recently to Homma, 60, about his innovative approaches to the real estate market and his background.

Operating primarily in the currently buoyant real estate investment trust (REIT) market, Kenedix posted strong results for fiscal 2005 and the first quarter of fiscal 2006. In the first quarter of this fiscal year, net profit was up 250 percent, year on year, to ¥2.72 billion, a result due to the recovery in Japan's economy—emerging from 15 years of recession or flat growth—overseas interest and, taking into consideration the fact that around half of Japan's REITs are not performing strongly, Homma's astute management skills.

Following the Bank of Japan's decision to end its ultra-easy monetary policy, Homma is concerned the business environment will soon change. "Sooner or later, the Bank of Japan will raise interest rates. Maybe this summer, the end of this year or the beginning of next year. But I'm wondering if they'll raise interest rates too much," Homma said. "We think the increase will not be too big, but we're still preparing for a large interest rate rise."

"We're seeking a capitalization rate of around 5 percent because, even if interest rates go up, after debt servicing we can still secure a good positive cash flow. Some competitors may decide to buy properties at higher prices, which [results in] a lower yield. That type of investment may be affected," he said. "Also, Japanese banks may evaluate the value of properties according to their own standards, which has nothing to do with the capitalization rate aggressive buyers may offer to buy at. This will result in a difference between loan-to-value and loan-to-purchase prices—so there could be financing problems [for aggressive buyers] coming up. That creates chances for us."

Homma is cautious about the Tokyo real estate market, describing it as too competitive. Speaking about Tokyo's shopping districts, such as Omotesando, he said: "We like to buy good properties in those areas, but the chances are slim. Prices are too high, returns too low. We like to stay with a 5 percent capitalization rate, so it's nearly impossible to buy in those areas."

So, while scouting Tokyo for increasingly rare worthwhile investments, Kenedix has also started to diversify and look for opportunities further afield. This has resulted in different property types being acquired, investment in properties in cities across Japan, important international tie-ups and, most importantly, a move away from profit from fee income toward profits from development transactions.

To ensure higher margins, Homma has moved into new property sectors. "Diversification of product types is the way to go," Homma said. "We're teaming up with Mitsui & Co. to create a REIT focusing on industrial properties, such as warehouses."

Homma's forward-looking approach is matched by his attention to internal restructuring of Kenedix's profit bases to cope with the competitive situation that has arisen in Japan.

"In addition to the strategies of looking for investment opportunities in other areas of Japan and overseas, changing our product types, we're chasing development transactions. We've been depending on fee income for the last decade, and we're still relying on fee income, but in fiscal 2006, '07 and '08 we'll probably achieve better profit from development transactions," Homma said. "We've changed the nature of our business slightly—we've gone from 50 percent income from fees, 30 percent from development and capital gain and 20 percent from rental income to a figure of 42 percent fees, 43 percent development and capital gain and 15 percent rental income."

Time in Baghdad

Homma's resume is as maverick as his business decisions. At 33, working for Mitsubishi Corp., he was posted to Baghdad, to help manage a project for the Iraqi Information Ministry. There, he oversaw the building of a radio and television station in Baghdad—"A radio and TV station for [former Iraqi President] Saddam Hussein," Homma said, adding, "It's since been bombed."

Having spent many years in Baghdad, Homma had no misapprehension about the likely outcome of the Iraq war. "I was thinking that after Saddam Hussein was removed there would be chaos among many interested parties," he said. "There is religious division there, and the culture is so diversified."

Following his stint in Baghdad, Homma headed to Los Angeles, where he headed Mitsubishi's foreign countries department under its engineering division before, in 1992, becoming director of the firm, followed by an appointment as the company head of MC Realty Inc.—Mitsubishi's real estate investment trust in the United States.

Quitting at the top

But, in 1996, at the age of 50, Homma made the unorthodox decision to leave Mitsubishi, while at the top, to head Kennedy-Wilson.

"In those days, when I was 50, only a few people decided to change jobs," Homma said. When asked why he moved, Homma's answer was remarkably candid: "It was a challenge. I'd been working for Mitsubishi for quite a long time, 30 years, and I'd got bored."

Homma said he learned many lessons in the United States he has applied since returning to Japan to head Kennedy-Wilson, now Kenedix. "When I started Kennedy Wilson Japan, as it used to be known 10 years ago, we imitated the way they do business in the United States, and we imported a lot of their financial techniques," Homma said.

However, Homma remains unconvinced that Japanese businesses should copy the U.S. model. "We can import techniques, but we should be Japanese. The Japanese spirit should remain. We need 'wakon yosai'-—foreign technique and Japanese spirit," Homma said.

The blend of imported techniques and Japanese spirit has allowed Kenedix to become a global player on the REIT stage.

Homma's Japanese spirit comes through as he describes the type of shopping centers he is buying up. "Big developers are going to parts of Japan looking for places to build supermarkets or shopping malls. But this means the center of small cities would be a city of shutters—all closed. What we're trying to do is buy smaller, neighborhood shopping centers," Homma said. "We're aiming to accumulate the size of this type of asset to the extent of ¥40 billion or ¥50 billion in size. We'd like to make it a special REIT, either private or public."

Due to competition in the Tokyo market, Kenedix has found itself acting as a conduit for investors looking to escape Tokyo for parts of the country or the world that offer better investment opportunities. And Homma has already made important moves into Britain, the United States and, perhaps most importantly, China. "We recently established Kenedix Hong Kong, to find investment opportunities in China," Homma said. "I believe there'll be a Chinese REIT coming up in one or two years, so in order to prepare for such a time we need to invest in Chinese properties. Our investments there will be a pre-REIT investment fund."

"Sooner or later Japanese investors will be investing abroad," Homma said. "That's why we'd like to accumulate a track record in foreign investment—to prepare for this time."

Homma believes Kenedix is well placed to adapt to changes in the Tokyo market, and it seems wakon yosai will enable the company to meet the challenges in the global market.