I have written extensively over the last two years about why I believe Japan offers one of the most compelling investment opportunities globally. Broad shareholder governance reform, reinforced by the Tokyo Stock Exchange and bolstered by enthusiasm for new Prime Minister Sanae Takaichi, is transforming the long-term roadmap for corporate Japan. Japan is the largest absolute and relative position in Hosking Partners' global portfolio, with a basket of 73 holdings, trading at a 1.4x median price-to-book and a $3.91bn median market cap.

We have recently uncovered a new hidden gem in Star Mica, a $340mn market cap Japanese real estate company focused on the niche of tenanted condos. After initiating a position in Q4 2025, my colleague Luke Bridgeman and I recently had the opportunity to speak with Founder and CEO Masashi Mizunaga.

Masashi Mizunaga, who still owns 36% of the business today, founded Star Mica 26 years ago to exploit an arbitrage in the pricing of tenant-occupied condominiums in Japan. Strong tenant protections mean that occupied units trade at a 15–20% discount to vacant ones, a spread that has persisted for three decades. The business model is simple: buy occupied units, collect the rental income, renovate when tenants move out, and sell to capture the discount.

However, buying single units is cumbersome, the risk per unit is high, and banks are reluctant to lend against them because of uncertainty about tenant departures. Building a portfolio with more predictable characteristics requires years of steady accumulation of at least 500 to 1,000 units. In this scale-up phase, the model is low-profit, capital-intensive, and requires real operational skill to manage the complexity of hundreds of individual units. Other large domestic housebuilders have tried and failed to replicate this unusual model, lacking local expertise and the right team incentives.

Where others failed, Masashi Mizunage succeeded, gradually building a large enough portfolio to access debt financing in the first decade, which in turn accelerated growth (sometimes by buying units from those who had struggled). In 2025, the portfolio reached 3,900 units, which we estimate is more than 10 times that of the next-largest player. The firm is cleverly structured so that rental income, currently at Y4.6bn, covers the cost base. This has enabled it to remain consistently profitable across cycles, including through the GFC. As a result, the gross profit margin of c15% on renovated unit sales drops to the bottom line.

It is useful to understand that Japanese residential property does not operate in the same way many investors in the UK or the United States might expect. Buildings are treated as depreciating assets rather than long-duration stores of value. As such, new builds have historically dominated, and the secondary market has been much smaller than in most developed markets – at c16% of total transactions, compared with 75-85% in the UK, France and the US. However, the secondary market share is starting to grow due to government initiatives that promote pre-owned homes, affordability given ~40% discount to new builds, limited new land availability in major cities, and urban migration driven by population decline, all of which are leading more buyers to consider pre-owned stock.

The leadership team has been bold in its scaling ambition but rational with its capital allocation. One example is in 2025, when Star Mica launched its first fund in partnership with the Development Bank of Japan to improve capital efficiency. By selling existing units into the fund, Star Mica can recycle capital, grow its asset base with limited balance sheet strain, and retain exposure to future upside through its continued stake and fee stream. Another is buying back ~8% of its shares in 2021/22 of an early backer at a steep discount.

Holding a position in Star Mica, and having met its founder multiple times, it is clear that management is taking considered steps to create an enduring franchise. From the initial scale-up phase to the present day, Masashi Mizunaga and team have been patient and deliberate, a quality perhaps best symbolised by the firm’s culture and compensation philosophy. Contrary to other real estate companies, there are no individual deal-based incentives that risk acquisition teams overpaying to get deals done. Instead, a team-based profit-sharing scheme is tied to company performance, with equity participation for senior leaders (Masashi receives all his compensation in equity). Staff turnover is low, and decision-making autonomy is decentralised to harness local knowledge that other players miss.

It is this combination of structural opportunity, disciplined capital allocation and proven leadership that gives us cause for excitement about the upside potential. We think the business can more than double in size over the medium term and still trades at a discount to NAV. This company is emblematic of the unique opportunities we at Hosking Partners can exploit, given our unconstrained, diversified approach, which allows us to invest down the cap scale and own a large number of stocks within a basket to exploit a broader capital cycle opportunity.