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Mitsui Fudosan, Japan Property Stocks May Rise as Economy Booms
By Finbarr Flynn
Nov. 17 (Bloomberg) -- Shares of Japan's property developers may rebound from a three-week slump as the companies raised earnings forecasts on signs the economy is accelerating, sustaining demand for new houses, shopping centers and offices.
Mitsui Fudosan Co., Mitsubishi Estate Co., and Sumitomo Realty & Development Co. posted average first-half profit increases of 91 percent. The Topix Real Estate Index was the best performer in Japan in the past year before dropping 12 percent in three weeks on concern economic growth may slow. The government's Nov. 14 announcement that growth last quarter was twice as fast as economists forecast may help revive the stocks.
``It isn't the end of the party yet,'' said Simon Rivett- Carnac at London-based Sarasin Investment Management, who helps manage the equivalent of $485 million in global real estate shares, including Japan's three biggest developers. ``Leasing business fundamentals continue to improve and we are still seeing operating forecasts being lifted.''
Japan's property market is still recovering from a collapse after the country's asset bubble burst in the early 1990s. Land prices in central Tokyo, up as much as 30 percent in the past year, are still 86 percent below their peak in 1990 in some areas, according to the Ministry of Land, Infrastructure and Transport.
Mitsui Fudosan's first-half profit rose 70 percent for the six months ended Sept. 30 on increased income from property leasing and condominium sales, the company said on Oct. 31.
Mitsubishi Estate on Nov. 9 raised its full-year earnings forecast to 71 billion from 62 billion and on the same day it said interim profit rose 46 percent. Sumitomo Realty said its half-year profit more than doubled, and lifted its full-year earnings forecast 6.4 percent to 50 billion yen ($423 million) on Nov. 16.
`Extremely Bullish'
The Topix Real Estate Index rose 70 percent in 12 months to a peak on Oct. 23, more than three times the gain of the broader measure. Japan's economy grew an annualized 2 percent in the three months ended Sept. 30, the government said.
``Overseas investors are extremely bullish about the Japanese real estate market,'' said Takashi Ishizawa, senior real estate analyst at Mizuho Securities Co. ``The probability of the market collapsing over the next two years is quite low.''
Land prices in Tokyo, Osaka and Nagoya, Japan's three largest urban areas, rose in September for the first time in 16 years. The office vacancy rate in central Tokyo fell to 2.92 percent in October, the lowest since December 2000, as average rents grew 7 percent from a year earlier, Miki Shoji Co., a real estate brokerage, reported last week.
``You are still seeing solid returns coming through,'' said Jim Quille, chief executive of Macquarie Global Property Advisors. The firm, a joint venture between Macquarie Bank and nine investors started its first Japan-specific real estate fund this week with $865 million from foreign investors. It was oversubscribed by more than $300 million.
Expensive
As land has become more expensive, so have real estate stocks relative to earnings. Sumitomo Realty and Mitsui Fudosan are both trading at 35 times estimated earnings for this year, compared with an average of 19 for the Topix.
``The P/Es appear high but earnings will catch up with the stocks,'' said Mark Brown, a Tokyo-based real estate analyst at Japaninvest KK, an equity research firm. ``A stronger economy means stronger demand for offices and higher rents, and higher demand for condominiums and higher prices.''
Shares of Japan's three-largest developers slipped in the last month on speculation the Bank of Japan may raise rates a second time this year to damp inflation as the economy expands.
``Selling of Mitsui Fudosan and other developer shares spread on concern about the increased interest burden on the companies' debt,'' said Kazuhiro Takahashi, general manager at Daiwa Securities SMBC Co. in Tokyo.
The three biggest developers had total interest-bearing debt of 3.5 trillion yen for the year ended March 31, against sales of 2.7 trillion yen.
Stretched Stocks
Concern about a slowdown in the Japanese economy also weighed on the stocks, said Naoki Fujiwara, who oversees $720 million at Shinkin Asset Management Co. in Tokyo.
``The equity prices of major real estate shares have been stretched, therefore we don't see a lot of attractiveness there,'' said Yuichi Chiguchi, who helps oversee $83 billion in assets at DLIBJ Asset Management Co. in Tokyo.
Japan's Topix Real Index outpaced the Morgan Stanley Capital International World Real Estate Index of 107 real estate stocks by 4.5 percent over the previous 12 months.
``As long as a sustainable recovery continues, we believe there should be further upside'' for the biggest real estate stocks, UBS Securities LLC wrote in a Global Real Estate report last month. ``We think it is too early to become bearish on their share performance.''
Sumitomo Realty and Mitsubishi Estate both climbed more than 4 percent on the day the government announced GDP figures, their biggest gain in more than four months. Mitsui Fudosan climbed 2.2 percent.
``Japan offers the best value anywhere in the world,'' Quille at Macquarie Global Property Advisors said.