Tokyo 2020 Winners Emerge as Developer Leads Gains: Japan Credit

Mitsubishi Estate Co.’s bonds gained the most in Japan this year on expectations of a windfall from the 2020 Tokyo Olympic Games for the nation’s biggest developer.

The 2 percent return compares with a 1.9 percent increase for Central Japan Railway Co., the second-best performer, and a 0.8 percent average for Japanese corporate bonds, Bank of America Merrill Lynch index data show. Sovereign debt advanced 1.56 percent and companies worldwide gained 5.34 percent.

The International Olympic Committee forecasts Tokyo’s first summer games since 1964 will attract 152 billion yen ($1.5 billion) in investment into the capital’s properties. The nation’s top three developers, including Sumitomo Realty & Development Co. and Mitsui Fudosan Co., reported the highest combined annual profit since 2008 as Prime Minister Shinzo Abe’s stimulus program boosted land prices in Japan’s three largest metropolitan areas for the first time in six years.

“Expectations for the 2020 Tokyo games are driving the buying of real estate companies’ bonds,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. “Investing in the Olympics has become synonymous with investing in the real estate sector.”

The bonds of Sumitomo Realty climbed 1.55 percent in the first half, making the developer of Hotel Villa Fontaine and Tokyo’s Izumi Garden Tower the fourth-best performer, according to the Bank of America Merrill Lynch indexes.

Mitsubishi Estate’s Tokyo-based spokesman Sho Tanaka declined to comment on bond performance.

Olympics Windfall

Tokyo Gas Co.’s notes ranked third in the first half, gaining 1.81 percent, the data show. The company’s land holdings in Tokyo’s Toyosu wharf stand to benefit from Olympics-related development, Daiwa Securities Group Inc. said in report from Sept. 10 last year.

The games will spur urban renewal, investment and an increase in tourism that will total 106.9 billion yen to owners of Tokyo real estate, according to the Daiwa report. Mitsubishi Estate’s properties in the downtown Marunouchi area will receive a boost from a proposed subway project that will cut the trip from Haneda airport to 18 minutes from about half an hour, it said.

Mitsubishi Estate’s net income jumped 41 percent to 64.3 billion yen in the year to March 31, helped by a recovery in commercial property rents and increasing demand for new apartments, the company said in May. The top three developers together booked 210.8 billion yen in profit, their biggest haul since the period to March 2008, Bloomberg-compiled data show.

Property Values

“The market improvements have bolstered balance sheets of real estate companies, generating considerable unrealized gains for Mitsubishi Estate and Sumitomo Realty,” said Kenji Serizawa, a credit analyst at Daiwa’s brokerage unit. The bond performance “is a proof of solid fundamentals in the real estate sector,” Serizawa said.

Mitsubishi Estate booked 2 trillion yen in unrealized gains in the fiscal year ended March 31, while Sumitomo Realty had 1.1 trillion yen, according to Serizawa.

The value of land in Tokyo, Osaka and Nagoya was on average 0.7 percent higher as of Jan. 1 from 12 months earlier, compared with a 0.6 percent decline in the previous year, the Ministry of Land, Infrastructure and Transport said in March. The increase was the first since 2008 when prices rose 5.3 percent in those areas, the data showed.

Tokyo’s office vacancy rate fell to 6.5 percent in May, the lowest since March 2009 and down from 8.3 percent a year earlier, according to Miki Shoji Co., a closely held office brokerage company. Average office rents gained for five straight months, the longest growth spurt since the period to June 2008, it said.

Abenomics Support

Japan’s government is considering creating test zones that will offer lower corporate taxes and looser building restrictions. Abe on March 28 announced a plan to make the region around Tokyo one such area to lure investment.

The Bank of Japan’s monthly purchase of about 7 trillion yen in sovereign debt has helped lower borrowing costs for the nation’s companies. Investors demand a 22 basis-point yield premium over government notes to own Japanese corporate bonds, the least since 2007, according to Bank of America Merrill Lynch data. That compares with 10 basis points for Mitsubishi Estate’s 15 billion yen of 0.54 percent notes due 2021.

Japan’s benchmark 10-year bond yield has dropped 17 basis points, or 0.17 percentage point, this year to 0.565 percent. The yen traded at 101.84 against the dollar as of 1:24 p.m. in Tokyo today.

“Such meager returns on corporate bonds are a sign of the market tilting heavily in favor of the issuers,” BNP Paribas’s Nakazora said. “The situation isn’t likely to reverse any time soon and spreads show no signs of widening. Investors will see more hardship in the second half.”

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