Real Estate
J-Insight: Risks the Market
Ignored Remain
Fundamentals not improving; stay In-Line: Present
stock prices seem to reflect the bulls’ view that office
market will emerge from its slump (rising vacancy rates
leading to lower rents), and soon enter (if not already) a
recovery phase (lower vacancy rates leading to higher
rents). Such a view is based on Miki shoji vacancy rate
data nearing the peak of 2003, rent declines gathering
steam, and offices becoming easier to fill due to cheap
rents. Improvement in the market’s cash position
thanks to policy support post-Lehman has also backed
this view. We fear the market is overlooking risk factors
that will cause stocks to correct in time: (1) Office supply
is rising amid stagnant corporate earnings, and it may
take longer than expected for vacancy rates/rents to
improve; (2) price cutting among condo developers is
intensifying, and there is no sign of margin improvement;
(3) risk of losses from off-B/S SPCs is still high; (4)
investment in real estate from overseas will not be as
brisk as in the past; (5) an excessive focus on near-term
earnings has led to sale of prime properties to cover
writedown losses for condos and SPCs with sales gains
– even if earnings look good, future value may have
been sacrificed.
Debates: (1) How do we see the recent rise in vacancy
rates and fall in rents? (2) What does the condo contract
rate breaking the 70% mark imply? (3) Is the outlook
clear for SPCs? When do we become bullish again? (4)
What do we do in the meantime?
What’s new: We lift all PTs, having cut our discount to
FV by 5-10pp as some risks of writedowns on inventory
assets and SPCs are priced in. We cut Sumitomo R&D
from OW to EW with the stock now above our PT.
Ranking: Mitsubishi Estate (valid concern over
worsening metro office prices, but the stock looks
comparably cheap) on top, followed by Sumitomo R&D
(limited writedown risk as property acquisition was well
timed) and NRE (earnings stabilizing on Toshiba Bldg
consolidation), then Mitsui Fudosan, Tokyo Tatemono,
and Tokyu Land.