Even with rising interest rates, real estate companies are profitable. So, what has changed? — A look at the game change in the real estate industry through Hulic

A quiet game change is beginning in the Japanese real estate industry.

When interest rates rise, real estate prices fall.

Generally, that is how it is explained.

However, looking at the market as of October 2026, that is not necessarily the case.

On September 18, the Bank of Japan raised its policy interest rate to approximately 1.25%.

Meanwhile, office rents in the city center continue to rise.

Office market conditions in the 5 central wards of Tokyo (September 2026)
Average asking rent: 23,985 yen/tsubo
Year-on-year change: 13.72% increase
Average vacancy rate: 1.85%

Furthermore, according to the April 2026 survey by the Japan Real Estate Institute, the expected yield for offices in Marunouchi and Otemachi was 3.2%, remaining flat for the seventh consecutive period.

The cost of capital is rising.

Rents are also rising.

Investment demand supporting real estate prices remains strong.

So, what is the problem?

I believe that the current change in the real estate industry is not the decline in prices itself, but rather the fact that the rationality of continuing to hold real estate has begun to be recalculated.

I would like to consider this structure based on Hulic’s financial results and management plan.

1. Hulic is increasing profits even with rising interest rates

Let’s look at Hulic’s financial results for the first half of the fiscal year ending December 2026.

Hulic | First Half Financial Results for the Fiscal Year Ending December 2026
Operating profit: approx. 80.3 billion yen (7.0% increase year-on-year)
Ordinary profit: approx. 70.9 billion yen (6.4% increase year-on-year)

They are securing profit growth even in an environment of rising interest rates.

However, looking at the content of the profits, there is an interesting change.

Hulic | Trends in Average Procurement Interest Rates
End of December 2024: 0.84%
End of December 2025: 1.15%
End of June 2026: 1.43%

An increase of 0.59 percentage points in a year and a half

Interest expenses for the first half increased by approximately 4.7 billion yen compared to the same period last year.

On the other hand, profits from real estate leasing and other activities increased by approximately 6.1 billion yen, and profits from real estate sales also increased by approximately 1.4 billion yen.

These are the factors for the year-on-year increase or decrease shown in the financial results briefing materials, and they do not directly constitute the profit increase for the entire company.

There are also special factors such as profit increases from M&A and goodwill amortization.

However, at least one thing is clear.

The increase in interest burden is being absorbed by the growth in earnings from business operations.

At this point, the business is functioning sufficiently.

So, will this relationship continue to hold true in the future?

This is where the real issue begins.

2. Borrowing interest rates and rents do not rise at the same speed

Companies that own real estate have two clocks.

The clock for funding and the clock for rental income.

Borrowing interest rates rise due to the revision of variable interest rates and the refinancing of existing loans.

However, rents do not change so easily.

There are contract periods.

There are renewal periods.

There are rent revision negotiations.

Even if market rents rise, the rent received from existing tenants does not increase immediately.

Even when facing the same interest rate hike, the impact differs depending on the room for rent revision for each property.

Let’s consider a simple example here.

There is a real estate property acquired for 10 billion yen.

The annual NOI is 400 million yen.

The NOI yield is 4%.

Suppose this property was acquired with 3 billion yen in equity and 7 billion yen in debt.

<If the borrowing interest rate is 1%>

The annual interest payment is 70 million yen.

After deducting interest from the NOI, 330 million yen remains.

The return on equity of 3 billion yen is 11%.

<If the borrowing interest rate is 2%>

The annual interest payment is 140 million yen.

After deducting interest from the NOI, 260 million yen remains.

The return on equity of 3 billion yen drops to approximately 8.7%.

*These are simple calculations for illustrative purposes that do not take into account taxes, repayment of loan principal, or future large-scale repair costs.

The property has not changed.

The tenants have not changed.

The rent has not changed.

Just a 1-point increase in borrowing interest rates changes the profitability relative to equity by this much.

Even so, they are still making a profit.

The problem is not that they will stop making a profit.

It is that while holding the same assets, the profitability relative to the invested equity is declining.

Furthermore, if repair costs and construction costs rise, the cash flow actually remaining on hand will decrease.

To compensate for this, it is necessary to raise rents.

However, there is a contractual time lag for rents.

Procurement interest rates rise first, and rents rise later.

Whether or not this time lag can be absorbed is the first boundary.

3. Does selling solve the problem?

So, should they just sell the properties they hold?

Real estate companies have the option of asset sales.

Realize unrealized gains.

Recover funds.

Repay borrowings.

Invest the recovered funds into new real estate or other businesses.

It is a very rational method for increasing capital efficiency.

However, selling has a different problem.

The selling price is determined by the buyer’s judgment.

Let’s consider the 10 billion yen property mentioned earlier.

If the annual NOI is 400 million yen and the cap rate is 4%, the valuation will be 10 billion yen.

So, what happens if the cap rate demanded by buyers rises to 4.5%?

<In the case of a 4% cap rate>

Annual NOI: 400 million yen

Valuation: 10 billion yen

<In the case of a 4.5% cap rate>

Annual NOI: 400 million yen

Valuation: approximately 8.89 billion yen

The NOI has not changed.

The property has not changed.

The tenants have not changed.

Even so, the valuation drops by approximately 1.11 billion yen.

So, what must be done to maintain a valuation of 10 billion yen?

It is necessary to increase the NOI from 400 million yen to 450 million yen.

When the cap rate rises by 0.5 percentage points, the NOI must be increased by 12.5% to maintain the valuation.

This is why the earning power of real estate becomes important during a period of rising interest rates.

However, if interest rates rise by 0.5 percentage points, it does not mean that the cap rate will also rise by 0.5 percentage points.

If expectations for future rent growth are strong, there are investors who will purchase even at a low yield.

If it is a highly scarce city-center property, competitive acquisition prices may be maintained.

In fact, according to a survey by the Japan Real Estate Institute in April 2026, the expected yield for offices in Marunouchi and Otemachi remained flat at 3.2%.

This does not mean that rising interest rates have no impact on prices.

It means that the downward pressure on prices caused by rising interest rates may be being absorbed by expectations of rental growth and investment demand.

However, if that balance is disrupted, the profitability of the sale option itself will change.

You cannot sell at the price you want to sell at.

To maintain the sale price, an even higher NOI is required.

If rental growth stops, the basis for supporting prices weakens.

Even if you hold the property, the interest burden increases.

Even if you sell it, you cannot recover the expected funds.

There is a possibility that these two things could happen at the same time.

4. Sales profits and rental income are not the same type of profit

Here, I would like to make one more distinction.

The rental income earned by real estate companies and the profit from real estate sales have different characteristics.

Rental income is generated continuously by holding the property.

Sales profit is realized at the time the property is sold.

Of course, if acquiring real estate, increasing its value, and selling it is a continuous business in itself, sales profits can be generated repeatedly.

However, to do that, you need the next property.

The next property to acquire.

Investment to increase value.

And someone to buy that property.

If these are not all in place, profits from sales cannot be replicated.

Furthermore, if a property is sold, in principle, the rental income that would have been earned from that property in the future is also relinquished.

In other words, a sale has two effects.

The effect of recovering capital.

And the effect of abandoning future income.

If the sale price is sufficiently high and the recovered funds can be invested with even higher profitability, it is rational.

However, if the sale price drops and the yield of the reinvestment destination is not sufficient, the significance of replacing assets diminishes.

Selling does not necessarily improve capital efficiency. A judgment can only be made after considering how the recovered funds will be used next.

In an era when real estate prices were rising, it was relatively easy to justify both continuing to hold and selling.

However, when interest rates rise, those two decisions require a more rigorous comparison.

Which properties should be kept?

Which properties should be sold?

When should they be sold?

What should be bought with those funds?

And is the reinvestment destination truly superior to the existing assets?

Rising interest rates make this judgment more difficult than before.

5. What is Hulic trying to change?

Here, let us look at Hulic’s medium- to long-term management plan.

In the new plan covering 2026 to 2036, a policy is indicated to expand new businesses through M&A and other means while keeping the real estate business as a foundation.

What I want to focus on is the net investment plan from 2026 to 2029.

Hulic | 2026–2029 Net Investment Plan
Real Estate Business: 280 billion yen
New Businesses, etc.: 700 billion yen
Total: 980 billion yen

In fact, approximately 71% is allocated to new businesses and the like.

The net investment performance for the real estate business in 2025 was 300 billion yen.

In contrast, the plan for 2026 is 100 billion yen.

Looking at these figures alone, it may appear that investment in real estate is being significantly reduced.

However, it is not that simple.

What is important here is the difference between gross investment and net investment.

Unlike simple property acquisition costs, net investment is an investment indicator that also reflects capital recovery through asset sales.

Buy.

Increase value.

Sell.

Recover capital.

Buy again.

Accumulating assets and generating profit while rotating assets are not necessarily the same thing.

Hulic also combines property sales to group REITs and funds, real estate value-add, and asset management fees.

They do not generate profit solely by owning real estate, but also by moving real estate.

Furthermore, they are attempting to expand business profits outside of real estate as well.

Hulic | Business Profit Plan
Real Estate Business
2025 Performance: 189.4 billion yen
2029 Plan: 227 billion yen

New Businesses, etc.
2025 Performance: 17.5 billion yen
2029 Plan: 67 billion yen

They are not shrinking or withdrawing from the real estate business.

While growing their real estate business, they are attempting to allocate the company’s overall capital to more profitable areas.

I feel a major change here.

6. Rising interest rates are even changing the reasons for owning real estate

Let’s take a closer look at Hulic’s financing.

As of the end of June 2026, interest-bearing debt was approximately 2.2753 trillion yen.

The long-term credit rating is maintained at AA-.

Furthermore, in March 2026, they issued 85 billion yen in 5-year bonds with an interest rate of 2.177%.

Even for the same 5-year bonds, the issuance interest rate in April 2024 was 0.806%.

Since the issuance conditions and market environment are not exactly the same, a simple comparison cannot be made.

Even so, it is clear that the cost of new financing is rising.

If the financing interest rate for all 2.2753 trillion yen of interest-bearing debt were to rise by 1 percentage point, the annual interest burden would increase by approximately 22.8 billion yen in a simple calculation.

In reality, the impact varies depending on fixed interest rates, floating interest rates, refinancing timing, and so on.

Therefore, this figure does not materialize immediately.

However, given the scale, changes in procurement costs have a significant impact on management decisions.

Hulic’s medium- to long-term management plan clearly states a policy to curb the increase in interest-bearing debt in light of the impact of interest rate hikes.

It also advocates for improving capital efficiency through asset replacement.

It is not appropriate to interpret this as a strategy change solely due to rising interest rates.

The company is also looking ahead to the impact of a shrinking working-age population and the spread of AI on future office demand.

They are likely reviewing the composition of their held assets, including those factors.

However, it can be read from the content of the plan that rising interest rates are strengthening the reason for prioritizing capital efficiency.

When funding costs were low, it was easy to find a rationale for holding even low-yield assets.

However, when funding costs rise, simply maintaining the profitability of the same assets is no longer enough.

What will happen to future repair costs?

Can rents be raised?

How much will it be worth if sold?

Would it be better to acquire a different property?

Or would it be better to invest in businesses other than real estate?

These questions become more urgent.

Holding real estate itself is not the goal.

The issue is how much profit can be generated using limited capital.

This sounds like an obvious point.

However, is it not possible that the preconditions that made that obvious point hold true had become fixed during the long period of a low-interest-rate environment?

7. Where will the differences emerge from now on?

Thinking about it this far, it becomes clear that the changes in the real estate industry due to rising interest rates are not a simple matter of winning or losing.

You lose because interest rates have risen.

You win because you hold many assets.

That is not the case.

For example, there are properties where existing tenant rents can be revised even if interest burdens increase.

There are properties where vacancies can be filled and profitability improved.

There are also properties where significant value enhancement can be realized through redevelopment.

Conversely, there are properties where only the interest burden increases, there is no room to raise rents, and future repair costs are significant.

For such properties, the rationale for continuing to hold them weakens.

However, if you try to sell them but cannot find a buyer, your options are limited.

Furthermore, financing capabilities vary from company to company.

Companies that can secure long-term funds at low interest rates.

Companies that can only borrow at high interest rates.

Companies that have a lot of their own capital.

Companies whose refinancing periods for existing loans are concentrated.

Even if they hold the same real estate, profitability changes depending on the terms of financing.

In other words, at least three different changes are overlapping in the real estate market.

Changes in the cost of financing.

Changes in the earning power of the real estate itself.

Changes in the ability to move capital through sales and reinvestment.

These influence each other.

However, they do not move at the same speed.

Interest rates might rise first.

Rents might rise later.

Selling prices might be maintained until the very end.

Alternatively, the buyer’s required yield might change first.

Depending on that order, management decisions will change even for the same real estate company.

I believe this is the most important point in this game change.

8. How long will the balance hold?

So, when will the balance between borrowing interest rates, rental income, and sales profits collapse?

I do not believe there is a single threshold where a certain interest rate percentage will cause a collapse.

Rather, the relationship to check is as follows.

Can the increase in rent absorb the rising interest and maintenance costs?

When sold, can you recover more value than by continuing to hold the property?

Can the funds obtained from the sale be reinvested into businesses with sufficient profitability?

Can the company’s cash flow tolerate the time required for that judgment?

And what is important is that even if these hold true individually, they do not necessarily hold true for the company as a whole.

For example, raising rent to absorb interest.

As a result, the profitability of the property improves.

However, if the sale price is high enough, it might be more rational to sell the property.

On the other hand, while selling and reducing debt increases financial stability, future income also decreases.

Furthermore, even if you try to replace properties to increase capital efficiency, if the price of the next property to be acquired is too high, you cannot secure the expected profitability.

Hold.

Sell.

Raise rent.

Invest in new assets.

Each option brings benefits while simultaneously constraining other options.

Multiple rationales that previously coexisted are beginning to collide due to rising interest rates.

Is this collision not the very game change occurring in the real estate industry?

9. The game changes before real estate prices fall

The current real estate market remains strong.

Hulic is also increasing its profits.

Rents for offices in the city center are rising, and investors’ appetite for acquisitions remains firm.

Therefore, I do not believe the real estate industry will collapse immediately due to rising interest rates.

However, it is not guaranteed that profits can continue to be generated under the same rules as before.

In the era of low interest rates, there was a certain rationality in acquiring real estate, holding it long-term, receiving rent, and waiting for asset values to rise.

Of course, property selection and asset replacement were necessary even then.

However, the importance of those decisions is increasing due to rising interest rates.

Just holding onto assets is not enough.

Just raising rents is not enough.

Just selling properties is not enough.

Decisions regarding holding, revising, selling, and reinvesting must be continuously compared within the context of the company’s overall cost of capital and profitability.

Hulic’s management plan serves as interesting material for considering these changes.

Of course, it is unclear whether the company will be able to continue growing as planned in the future.

Investment in new businesses also carries risks different from those of real estate.

Even if capital efficiency in real estate can be improved, it does not guarantee that sufficient returns can be obtained in other businesses.

That is precisely why management from here on out will be interesting.

It is not simply a matter of whether they can withstand rising interest rates, but a competition has begun over what kind of profit structure to build on the premise of rising interest rates.

I do not think that a game change in the real estate industry begins the moment prices drop significantly.

When the reason for continuing to hold the same real estate in the same way changes, the game has already changed.

How much will the real estate sell for?

That is also important.

However, there is something I would like to consider even more than that.

Why do we continue to hold onto real estate that can still be sold at a high price?

I believe an era where we are required to answer that question has begun.