By Kenneth Arbour
Kenneth Arbour, President of Century 21 SKY Realty, has spent over 20 years in the real estate and relocation business in Tokyo. This is the second of four articles, in which Ken covers trends in the real estate market in Tokyo and Japan.
With his feet firmly on the ground, and with more than a little humor, Ken continues the story of his company’s growth in the first half of this article, followed thereafter by a discussion of the commercial real estate market.
The roller coaster continues
“…from the time I separated from my partners, things started to improve significantly.”
In the first of this series I described how, at an economic low point just after my partners and I had begun our business, we suddenly—and to a large part inexplicably—had a tremendous burst of sales not only in expat residential leasing (our intended main business) but also in the sale of a phenomenally expensive (albeit small) piece of Kyobashi, plus overseas investment in Guam beachfront. In one brilliant month it looked like all our travails were behind us, and our future, as the song says, was so bright we’d have to wear shades.
This view, unfortunately, did not take into account the fact that the Japanese real estate market bubble was about to burst, and with it a good deal of the rosiness in our future. Neither did our own exuberance help. With our success we had started adding more staff, far too many in fact, and advertising a great deal. It is one of the unfortunate aspects of business in Japan that when money comes in you need to try to spend it as wisely as possible for corporate benefit— or the taxman takes half. Not only that, but if you don’t spend it and your business looks too profitable, you risk the taxman assuming there must be more you are not hiding well and coming in to audit you. Thus, within a year, things had gone very sour indeed: I wasn’t being paid again, and relations with my partners were less than warm.
Into this rode a white knight, but not to save me. This white knight was the owner of a large restaurant chain who was looking to start an overseas hotel business to give his 18-year-old son something to do (company rules forbade the son entering the same company as his dad). My partners claimed this gentleman and his war chest of some US$700 million as their contribution to our company’s future. And me? All I had was a still struggling expat-oriented leasing business, which still required the injection of cash every now and then to make ends meet. Cash my partners were increasingly loathe to commit. But the fact of the matter was that I owned 40% of the company and it is difficult to kick out a partner who has a major share of a business.
Regardless of how poorly my sector was performing, the ownership of the business remained. My partners saw this as unfair and told me so. Their solution was for me now to voluntarily relinquish my share of the company to a level more akin to the anticipated value of my sector versus theirs. Needless to say this became a rather contentious issue. A war, in fact. But who wants an antagonistic partner who owns 40% when there are zillions on the table. Certainly not my partners. So we came to a deal brokered to a certain extent, strangely enough, by my wife. They would take Mr Deep Pockets and the overseas hotel chain, and I would take the expat rental business, which meant virtually everything else: that is the crummy little office, the old run down company cars, the company name, and the phone number. Boy, did I drive a hard bargain, eh? Ah, but perhaps you remember that beanstalk fairy tale?
Okay, comparing what happened next to a fairy tale is a bit of an overstatement. But nevertheless from the time I separated from my partners, things started to improve significantly. Our expat leasing business just kind of went up and up. First, however, I need to explain something. Since my partners wanted to retain control of the original company, I started a separate company— Arbour Realty. Imaginative, yes? I knew this would be temporary, so I didn’t really care about the name. Then, after spending half a year getting my realestate license and a new Century 21 franchise agreement organized, in the space of a week we had changed Arbour Realty back to Sky Realty, just after my former partners had gone from Sky Realty to something else. As a result, the company name, phone number, address, main personnel, crummy office, and cars all remained the same. To my clients nothing had changed, although the company was completely different, owned by me and my wife Noriko. And to our surprise, we proved almost as good at running a company as we did at making children. During this time, even in those few moments when my wife wasn’t pregnant, sales rose fairly consistently.
There are other, non-conjugal, reasons for this. The Century 21 name was definitely an important part. Also critical, in my view, was the fact that we were a pretty tight little sales organization concentrating on one thing—the expatriate leasing business. Certainly we dabbled in a few other things, but at this second beginning, or rebirth as it were, our focus was on leasing. And lease we did. The first year with just Noriko and I in command, our sales doubled. How neat was that! We could now pay people decently, and we gave everybody a raise. I believe, even if I do say so myself, that I have the reputation for treating my employees the best in this expat rental business in Tokyo. A fact that helps me get along tremendously well with my two Commie brothers in Canada, who because I run a business are always on guard for any anti-labour drift in my weltanshaung. In the second year, as well, the growth continued, our sales going up another 40%! This meant our sales more than tripled in two years! Okay, we weren’t Microsoft, but as far as I was concerned there was not a great deal to complain about. It was increasingly clear to me that all those Our Fathers and Hail Marys I had said as a kid, not to mention playing guitar at mass, were finally beginning to pay dividends.
Real estate tips for commercial investments
“There are several critical steps to ensuring that you are satisfied with arrangements for an office lease.”
In our first set of tips we focused on personal real-estate investments, and the considerations for searching for and purchasing a home in metropolitan Tokyo. This time I’d like to look at the considerations for office leasing, asset management and commercial investments.
There are several critical steps to ensure that you are satisfied with the arrangements for an office lease, whether you secure the lease directly or through an agent. They are: the property search; financial analysis; lease negotiation; lease language and documentation; and market research. These are fundamental steps that should always be thoroughly explored—casually dealing with just one area can have highly adverse effects down the road. In addition, you can judge the skill and mind-set of the real estate agent you are working with by how well they conduct financial analysis, and discuss with you factors that might impact on the management of your business.
The following items should also be introduced during negotiations: rentfree periods, reduced security deposits, landlord-funded building upgrades, rights to option space, rights of first refusal and timely return of excess space. Not every item here can be secured in every situation, but knowing the state of the market, and the particular background of an owner/landlord can provide leverage to securing favorable terms.
At the same time, you should consider service providers and the handling of competitive bids for interior design services, office furniture suppliers, information technology assessment and installation services. Starting to think of these services after you’ve signed the lease is often too late, and quite difficult to arrange at the last minute.
Asset and property management
If you are planning on becoming the owner of a residential or commercial property, the first key to profitability is maintaining occupancy levels above the market averages.
As a part of the management process, you should consider the following areas of activity. How well you juggle them will contribute significantly to your long-term success.
Portfolio Review: Strategic analysis and investment planning to diversify or consolidate assets as necessary.
Marketing: Tenant and agent relations, lease negotiations, lease documentation, market surveys and pricing strategy.
Operations: Maintenance and repairs, restoration supervision, capital expenditures programming, and vendor, personnel and sub-contractor relations.
Accounting: Invoicing and rent collection, payments, reporting and budgeting.
In many cases the planning for investment transactions can be applied to activities for asset and portfolio management. To maximize the value of real estate assets, you or your agents should be prepared to cover a variety of complex transactions and related business options.
By going the extra mile in the following areas, you can ensure that everything is in place to generate a decent return on investment: portfolio analysis, strategy formulation, transaction procedure guidance, property search and selection, title search, financial analysis, negotiations, public and private invitation bidding and marketing.
The methodological handling of the steps in each of these areas will eliminate a large amount of the guesswork involved in a transaction. If you are pursuing any of these areas of activity feel free to contact any of our licensed brokers and commercial sales managers to arrange a consultation.