We upgrade our sector stance from Neutral to Bullish: From a macro
perspective, we are beginning to see signs that the economy may be bottoming
out, including a decline in credit risk and improvements in the industrial
production index, diffusion index of business conditions, and other semimacroeconomic
indicators. In microeconomic terms as well, condominium
prices are firming, office building vacancy rates are leveling off, and the
government is supporting REITs, and all of this suggests a turning point in real
estate sector fundamentals. Additionally, the earnings of major real estate
companies likely bottomed out last fiscal year or will bottom out in FY2009.
Based on SOTP valuations for the six real estate companies we cover, we think
sector stock prices currently have about 25–60% upside potential. We believe
now is a good time to buy the sector, and we therefore raise our sector stance
from Neutral to Bullish.
• We look for positive catalysts to emerge through 2H FY2009: We expect the
following positive trends to emerge in 2H due to a steady improvement in the
general economy: (1) a significant decline in developers’ condominium
inventories; (2) improved operating cash flows as inventories are reduced; (3)
the peaking out of office vacancy rates in 4Q 2009; and (4) a rebound in REIT
prices thanks to support from public-private funds.
• Investment ratings and price targets: Our top pick in the sector is Mitsui
Fudosan (8801); we upgrade our rating on the stock to Overweight from Neutral
and raise our price target to ¥2,500 from ¥1,500. Likewise, we raise our earnings
forecasts and price targets for the following companies: Mitsubishi Estate (to
¥2,500 from ¥1,600), Sumitomo Realty and Development (to ¥2,500 from
¥1,500), Tokyu Land (to ¥560 from ¥400), Tokyo Tatemono (to ¥700 from
¥430), and NTT Urban Development (to ¥130,000 from ¥120,000).
• We doubt that equity financing poses downside stock price risk: Sumitomo
Realty and Development, Tokyu Land, Tokyo Tatemono, and NTT Urban
Development all have multiple projects lined up, but they also have high levels
of financial leverage. We therefore expect these companies to raise funds
through equity financing. However, as we saw when the stock price of Nomura
Real Estate Holdings rose 4.5% through June 25 after that company announced
on June 1 that it will issue new shares (TOPIX rose 0.3% during the same
period), we do not think equity financing announcements necessarily pose
downside risk to stock prices. We think the stock market is currently more
concerned about financial stability and future growth than about equity dilution.