Message from the President

President and Representative Director
Group CEO
Nomura Real Estate Holdings, Inc.
Eiji Kutsukake

Formulation and Background of the New Mid- to Long-term Business Plan

Our Group Philosophy

New Value, Real Value

Integrating all that is precious to people and communities,
we build cities----dynamic stages that connect today with tomorrow's possibilities,
and embrace every moment of life's pursuits.
We create new value, social value, and above all, real value.

With the above philosophy as our promise to stakeholders, we carried out the previous mid- to long-term business plan (hereinafter “the previous plan”) from April 2016. During the three years of the first phase of the previous plan, we steadily built the foundations for future growth, including laying a basis for the overseas business, expanding the income real estate business, and accelerating our initiatives for complex redevelopment projects for both office and residential buildings.
Meanwhile, although the overall Japanese economy has made a moderate recovery, we are still faced with a number of social issues, including an aging society, declining population, and labor shortages. In addition to an increase in dual-income households, we are seeing rapid diversification in lifestyles and workstyles that cannot simply be summed up as “a decreasing birthrate and aging population”. In the real estate market, we’ve seen a shift in customer needs based on these changes, as well as an increase in selling prices for newly built housing as a result of high construction costs and competition for land.
Under these circumstances, the Group’s operating income for the period ended March 2019 was 79.1 billion yen, falling short of the previous plan’s target of 85 billion yen, and our ROE was 8.9%, also falling short of our 10% target. These results have highlighted the issues that each department needs to tackle, and the Group is now operating with a strong sense of urgency.
In April 2019, we announced the new mid- to long-term business plan (hereinafter “the new plan”). Building on the foundations for growth laid out in the previous plan, the new plan was formulated by backcasting from our ideal future to determine our strategies, with a mid- to long-term view that takes into account the rapid changes in the social environment. In this plan, we shall continue leveraging our strengths to create new value, aiming for the sustainable growth of the Group.

Our Philosophy and Business Strategy

In corporate management, it is essential to have a clear philosophy, a business strategy to realize the philosophy, and mechanisms for organization and governance in order to sustainably grow a company. In one sense, real estate is collection of thoughts and histories, connected in an unbroken line by land and buildings. In developing this irreplaceable real estate and providing related services, we will leverage this land and its bounties and change our role in accordance with the times to create new value, always aiming for the future. I believe that this is the social role that the Group must play.

Our Response to the Ever-Changing Social Environment

When planning and executing business strategies, it is important to accurately grasp the ever-changing social and business environments and respond to the social issues of the period. In the 60 years since our establishment, the Group has confronted an ever-changing series of social issues through the provision and expansion of diverse services related to real estate and real estate development, and we continue to do so to this day.
Our five action guidelines are: “a client-first approach”, “creating new value based on original ideas”, “always being a challenger”, “acknowledging our growth with society”, and “working with vigor and achieving wellness”. In this way, we incorporate the needs of the market into our products in response to changes and forecasts in fields relating to real estate, such as changes in housing preferences due to lifestyle and workstyle changes, changes in office leasing needs due to work style reforms and technological innovations, the evolution of IoT and digital technologies, an increase in real estate brokerage opportunities due to inheritance in a super aging society, and an increase in inbound needs. This has led to a significant competitive advantage in our business strategies.
In order to achieve the necessary growth in each phase of the new business plan, we will need to continue making full use of the Group’s strengths, including our comprehensive capabilities, our commitment to quality, and our successful track record in a wide range of asset types in both housing and urban development. Moving forward, we must work together to stay abreast of global trends and customer needs and to develop new products based on feedback from the frontlines.

The Significance of Our Four Value Creation Themes in the New Plan

In the new plan, we have established four value creation themes: (1) Realization of enriched lifestyles and workstyles, (2) Multifunctional urban development toward exceptional convenience, comfort, and safety, (3) Urban development and community building concerning the future of the global environment and local communities, and (4) Global expansion of high-quality products and services. These serve as a compass to point us in the right direction for accomplishing the ideals of the Group Philosophy. As a result, the journey to improve corporate value that the Group will embark on over the next nine years has become that much clearer.
Realizing the above four creation themes will require us to use both the competitive advantage that we have cultivated and the foundations that we have laid down. In addition, we will need to face these tasks with a challenger spirit. Each of these themes points us toward a future that lies beyond the Group’s successful track record. Moving forward, we will continue working toward the realization of sustainable value creation.
In addition to responding to changes in the social environment, we will also need to tackle the overseas business if we wish to achieve sustainable growth for the Group. There is no better time to promote a global business, setting our sights on not only the rapidly growing Asian and ASEAN countries but also the mature markets of America and Europe and the inbound needs coming to Japan from overseas.

Profit Plan and Business Portfolio

Regarding our new profit plan, we have set business profit*1 goals at 85 billion yen for phase 1, 100 billion yen for phase 2, and 120-140 billion yen for phase 3. This plan was created taking current and future real estate market conditions and business environments into account. However, I’d like to especially convey the importance of our business portfolio.
Thus far, our goal has been to grow through a well-balanced combination of our property sales business, which realizes development profits in a relatively short period of time, our leasing business, which generates stable cash flow, asset management such as REITs, property brokerage & CRE, and property & facility management. In the new plan, in accordance with the overall business scale, we’re going to increase asset turnover while keeping total asset volume down, aiming for high levels of ROE and ROA. Therefore, over the next nine years, we’re going to increase the profit ratio of the property sales business and service management sector until they each make up 40% of our total profit ratio in March 2028.
Property sales businesses that realize development profits, such as our leading housing sales business Proud and income real estate businesses like PMO, will become the Group’s major earners. In addition to accelerating this process, we plan to manage our total assets, including existing leasing assets, in anticipation of the completion of future large-scale leasing assets, manage our balance sheet to an appropriate scale, and aggressively realize development profits.

*1 Business profit = Operating income + equity in net income of affiliates + amortization of intangible assets arising from acquisitions

Strategic Initiatives for the Overseas Business

For the overseas business, we will continue to build on the foundation that was laid out in the previous plan. In the new plan, we will strategically increase the size of our investments and the number of target countries, actively working toward the profit expansion stage. By accelerating the investment and recovery cycle in each stage, we plan to increase the profit ratio of the overseas business to 15-20% of our overall profits by the final year of the new plan.
Due to the influence of local laws, cultures, business customs, and histories on lifestyles and workstyles, the real estate business differs greatly in each country. As such, an important part of our strategy is to establish joint businesses with reliable local partners. In addition to funding, we will have many opportunities to provide the problem-solving skills and know-how cultivated in the Japanese real estate business, and we will aim to develop businesses that create new value.
At the same time, there are also various risks inherent in overseas operations, such as foreign exchange risks. Our overseas planning department, which has been established as a head office function, will cooperate with the divisions in each country to research and monitor overseas real estate markets, and we will strive to accelerate and expand our overseas operations. Meanwhile, the overseas business will also provide a valuable opportunity to develop the mindsets and perspectives of our officers and employees. New environments broaden horizons and sharpen senses, so I hope that we’ll see a positive influence in both the domestic and overseas businesses.

Realizing a ROE That Exceeds Cost of Capital and Expanding Shareholder Returns

The new plan emphasizes capital policy, especially measures to increase capital efficiency and shareholder returns. Taking into account the cost of capital anticipated by our investors, the new plan dictates an ROE of over 10% as a medium- to long-term KPI. To realize this, we will aim for an ROA of over 5% through a combination of the highly asset efficient service management sector and development profits from the property sales business.
Regarding shareholder returns, in addition to increasing dividends for the seventh consecutive year, we also became the first company among our industry peers to repurchase treasury stock on March 31, 2018, and we will continue to do so. In this way, we have been managing the business based on dialogues with the capital market. In the new plan, we are aiming for a total return ratio of around 40-50% in phase 1.

Deepening CSR/ESG Initiatives

We will need to operate with a greater awareness of CSR/ESG initiatives in order to increase sustainable corporate value. When considering how to sustainably increase corporate value and profitability, what are the opportunities and risks from environmental and social perspectives? How can we capitalize on the opportunities and minimize the risks? Moving forward, we must convey the answers to these questions both inside and outside of the Group. The Group has also incorporated environmental and social initiatives into performance evaluations for executives.
In May 2019, we signed the UN Global Compact and registered as a participating country, thereby placing CSR/ESG at the front and center of our management and business activities. In the process of formulating the new plan, we not only considered business opportunities and risks but also used backcasting to determine how to effectively distribute management resources, capitalize on our strengths, and compensate for our weaknesses, carrying out discussions with outside directors from a variety of perspectives. These factors play a role in improving governance and corporate value for the Group. We also have great expectations for our new outside directors, who were approved at the last general meeting of shareholders in June 2019. Taking into account the results of effective board evaluations, which we have been carrying out for several years, we will continue working toward better governance.

Realizing Development Profits and Improving Corporate Value

I believe that NAV (Net Asset Value), which is based on the fair market value of assets that develop the land/area and create value, should be used as the appraisal standard for corporate valuation in the real estate industry. However, upon studying the capital market, you’ll note that many domestic developers, including our Group, continue to be rated below our NAV. REITs that generate a stable cash flow through rental properties generally achieve a ROA of 2-3% (although it depends on market conditions) and receive accurate appraisals that are roughly equivalent to their NAVs. Meanwhile, major developers like our Group, which generally achieve a higher ROA of about 4%, are rated below our NAVs. As such, I feel that our accumulated profits, growth, and expansion of unrealized gains do not receive a fair market evaluation.
During repeated talks with investors, we have discovered that our evaluations have not inspired sufficient confidence in unrealized gains. Receiving an appropriate evaluation from the capital market for the value that we generate is essential to sustainably grow our corporate value. Thus, in the new plan, I shall take action to obtain higher evaluations from stakeholders through the appropriate realization of value.

In Conclusion

The new plan will run for nine years, from April 2019 to March 2028. As mentioned in the beginning, the new plan is based on the creation of new value in anticipation of a drastically changing social environment, as well as a profit plan to realize this and mechanisms such as capital policies.
Through the new plan, I would like us to be a group whose mid- to long-term corporate value is acknowledge and supported by stakeholders. Thank you for your continued understanding and support.

September 2019