Mitsui Fudosan, Mitsubishi Estate to Beat Japanese REIT Shares, UBS Says
Mitsui Fudosan Co., Mitsubishi Estate Co. and other large Japanese developers have more attractive valuations and will likely outperform real estate investment trusts, the nation’s top-rated property analyst said.
Developers are trading at a discount of about 50 percent to their net asset values, while Japanese REITs or J-REITs are 10 percent less than the measure, said Toshihiko Okino, a senior analyst at UBS Securities Japan Ltd. Shares of developers may start rebounding in six months after some volatility in the next two to three months amid global economic uncertainties, he said.
“Developers look cheaper than J-REITs,” said Okino in a telephone interview in Tokyo. “If we can see some prospects of an economic recovery toward next year going forward, we can probably expect the rebound of developers’ share prices.”
The 44-member Topix Real Estate Index (TPREAL) has declined 23 percent, almost twice the 12 percent drop in the Tokyo Stock Exchange REIT Index, since the March 11 earthquake and tsunami.
Large developers are set to gain over the next six to 12 months as rents may recover when supply peaks in April, and as demand increases for high-quality buildings after the temblor, said Okino, ranked by Institutional Investor as the top Japanese housing and real estate analyst for eight straight years.
Rents for buildings less than a year old have dropped 36 percent to 23,285 yen per tsubo from a peak of 36,607 in November 2007, according to Miki Shoji Co., a privately held brokerage. One tsubo, a standard measure of property area in Japan, is 3.3 square meters or 35.5 square feet.
“Demand for class-A buildings is even stronger after the earthquake,” Okino said. “High-quality class-A buildings have become quite affordable. We will probably see some stabilization of rent decline in the spring of next year.”
Okino has a 1,500 yen target price for both Mitsui Fudosan and Mitsubishi Estate. Mitsui Fudosan climbed 2.3 percent to 1,229 yen at the close on the Tokyo Stock Exchange yesterday, and Mitsubishi Estate gained 2.2 percent to 1,231 yen.
The Bank of Japan has bought 42.6 billion yen ($553 million) in Japanese real estate investment trusts since December as part of an effort to stimulate the economy, the central bank said on its website. That includes two purchases of 1.7 billion yen each on Sept. 9 and Sept. 12.
The government should instead focus on the deregulation of REITs such as allowing them to issue convertible bonds or retaining capital gains or profits for dividend payouts, Okino said.
“The Bank of Japan’s purchase probably won’t support the J-REIT index anymore,” said Okino. “We will need a much more fundamental improvement such as vacancy rate or deregulation. That would sustain the performance of J-REITs.”
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