Company Reports

Sumitomo Realty & Development is Japan's third-largest listed real estate developer, but unlike its larger peers, its business is built around owning rather than recycling investment properties. Property leasing is the group's primary earnings engine, contributing roughly 70% of operating profit in fiscal 2025, while condominium sales and brokerage provide complementary earnings streams. The company is also the only one of Japan's three major developers without a sponsored J-REIT, allowing it to retain full ownership of its assets and capture 100% of future rental growth and capital appreciation.

We initiate coverage on Sumitomo Realty & Development, or SRD, one of Japan's leading real estate developers. Unlike Mitsubishi Estate and Mitsui Fudosan, SRD differentiates itself by holding assets on its balance sheet, rather than recycling them through a sponsored REIT or private fund.

We will discontinue coverage of Sumitomo Realty & Development on or about Feb. 7.

We raise our fair value estimates for Mitsui Fudosan by 6.7% to JPY 3,200 and for Sumitomo Realty by 2.5% to JPY 4,100 and maintain our JPY 2,000 fair value for Mitsubishi Estate after the Japanese developers’ earnings reports. The earnings growth outlook for the industry is brightening as the developers’ largest business—office leasing in Tokyo—appears to be reaching a cyclical turning point, while some secondary businesses such as hotel management are benefiting from a boom in inbound tourism into Japan. Meanwhile, the developers’ large office projects overseas—Mitsui Fudosan’s two Hudson Yards towers in Manhattan that opened in 2018 and 2022 and Mitsubishi Estate’s recently completed 8 Bishopsgate tower in the City of London—seem to be faring well in the postpandemic leasing environment despite the global work-from-home trend. Ongoing rises in construction costs in Japan have mixed effects, threatening to potentially reduce the profitability of future condo sales (which have done well until now as selling prices have risen robustly, particularly in central Tokyo) but at the same time potentially improving the supply/demand balance of new offices.

Sumitomo Realty & Development manages more than 230 office buildings in Tokyo. More than half of its buildings are in the Minato and Shinjuku wards, including two flagship properties in Roppongi and a half dozen in Nishi-Shinjuku. Less than 20% are in the Chiyoda and Chuo wards, which are the main areas of its two larger rivals and which generally command higher rents. Its dispersed portfolio of buildings in slightly less central locations reflects Sumitomo Realty’s relative late entry to the market—it doesn’t have a cluster of properties inherited from before World War II—as well as its record of steady growth over the past decades.

We maintain our fair value estimate of JPY 4,000 for Sumitomo Realty, equivalent to 0.49 times the net asset value and 7% above the current share price, after the Japanese developer announced the acquisition of a large piece of land for a mixed-use development in the Worli district of Mumbai. This is its third investment in the Indian city since 2019. This acquisition is significant because it is even larger than Sumitomo Realty's first two projects in Mumbai, BKC1 announced in 2019 and BKC2 announced in 2022, in which the company is investing JPY 200 billion and which will add 260,000 square meters of gross floor area by March 2028. This project will add more than 1 million square meters, with completion likely in the mid-2030s per our estimation and has a total investment amount of JPY 500 billion. Given that office rents in Mumbai are currently similar to office rents in central Tokyo, we estimate that BKC1 and BKC2 will together contribute around 3% of Sumitomo Realty's total operating profit by March 2028. The new Worli project, several times larger than BKC1 and BKC2 combined, could therefore bring India's total contribution to Sumitomo Realty profits a decade from now to almost 10%, per our estimation.

We raise our fair value estimate for Mitsui Fudosan to JPY 3,000 from JPY 2,800 and maintain our fair value estimates of JPY 2,000 for Mitsubishi Estate and JPY 4,000 for Sumitomo Realty after the Japanese developers’ earnings reports. The main reason for our 7% increase in our fair value estimate for Mitsui Fudosan is our increasing optimism for its facility operations segment, which includes hotels and resorts as well as the Tokyo Dome stadium complex it purchased in 2021. There was also a stronger outlook for office leasing at Hudson Yards on the west side of Manhattan than we previously assumed. We think retail leasing and hotels for all the Japanese developers will benefit to some extent now that China is lifting its pandemic-era restrictions on tour groups traveling to Japan, with Mitsui being a larger beneficiary than peers as a result of its higher weighting in these areas.

Sumitomo Realty & Development manages more than 230 office buildings in Tokyo. More than half of its buildings are in the Minato and Shinjuku wards, including two flagship properties in Roppongi and a half dozen in Nishi-Shinjuku. Less than 20% are in the Chiyoda and Chuo wards, which are the main areas of its two larger rivals and which generally command higher rents. Its dispersed portfolio of buildings in slightly less central locations reflects Sumitomo Realty’s relative late entry to the market—it doesn’t have a cluster of properties inherited from before World War II—as well as its record of steady growth over the past decades.

We are revising the Morningstar Uncertainty Ratings for Japanese real estate developers in our coverage to Medium from High. We have maintained the High uncertainty rating since August 2020 due to the risks of secular destruction of demand for office leasing from the work-from-home trend, but after close to three years having assigned High ratings we now think visibility over future office demand is sufficient to revert them back to the Medium level. This lower Uncertainty level has the effect that the threshold for a four-star investment rating when our fair value estimates are above the current share prices becomes smaller.

We maintain our fair value estimates of JPY 2,800 for Mitsui Fudosan, JPY 2,200 for Mitsubishi Estate, and JPY 4,000 for Sumitomo Realty following the Japanese real estate developers’ results for the second quarter in their fiscal years ending March 2023. Our fair value estimates are equivalent to 0.54 times net asset value for Mitsui Fudosan, 0.57 times for Mitsubishi Estate, and 0.45 times for Sumitomo Realty, assuming 30% tax on unrealized gains, and represent 17% upside for Mitsubishi Estate, 11% upside for Sumitomo Realty, and 6% upside for Mitsui Fudosan from their current share prices.

Sumitomo Realty & Development manages more than 230 office buildings in Tokyo. More than half of its buildings are in the Minato and Shinjuku wards, including two flagship properties in Roppongi and a half dozen in Nishi-Shinjuku. Just 20% are in the Chiyoda and Chuo wards, which are the main areas of its two larger rivals and which generally command higher rents. Its dispersed portfolio of buildings in slightly less central locations reflects Sumitomo Realty’s relative late entry to the market--it doesn’t have a cluster of properties inherited from before World War II--as well as its record of steady growth over the past decades.

We maintain our fair value estimates of JPY 2,800 for Mitsui Fudosan, JPY 2,200 for Mitsubishi Estate, and JPY 4,000 for Sumitomo Realty after the Japanese real estate developers’ results for April-June, the first quarter in their fiscal years ending March 2023. Our fair value estimates are equivalent to 0.54 times net asset value for Mitsui Fudosan, 0.58 times for Mitsubishi Estate, and 0.46 times for Sumitomo Realty, assuming 30% tax on unrealized gains, and represent 17% upside for Mitsubishi Estate and 15% upside for Sumitomo Realty from their current share prices. Mitsui Fudosan’s current share price is near our fair value estimate.

In the five central wards that comprise Tokyo’s main business district, 6.39% of total office space was available for lease in June, up slightly from 6.37% a month earlier, according to real estate brokerage Miki Shoji. Tokyo’s office vacancy rate has thus stayed roughly flat in a range between 6.2% and 6.5% for a year now after having previously quickly deteriorated from a cycle low of 1.5% in March 2020 to reach its current range by mid-2021. Assuming the rate does not start to move higher again, the vacancy rate appears to be slightly more benign than what we had projected in May 2021, when we had forecast it might to peak around 8% or 9% by early 2023. Still, notwithstanding the slightly better-than-projected trend in the headline vacancy rate, we see the outlook for the Tokyo office leasing market as being in line with the base-case scenario we adopted at the beginning of the pandemic in March 2020 (see our March 25, 2020 note for details) for a downturn roughly half as deep as the one experienced after 2008.

We maintain our fair value estimate of JPY 4,000 for Sumitomo Realty, equivalent to 0.47 times net asset value assuming a 30% tax rate on unrealized gains and 9% above the current share price. Net profit for October-December was JPY 37.9 billion (annualized return on equity of 9.4%), bringing total profit for the nine months from April to December 2021 to JPY 129.0 billion, 86% of Sumitomo Realty’s guidance of JPY 150 billion for the fiscal year ending in March. Nine-month operating profit of JPY 193.8 billion was 85% of full-year guidance of JPY 228 billion, with the core leasing segment reaching 83% of its guidance of JPY 160 billion, the property sales segment reaching 94% of its guidance of JPY 50 billion, and the housing-construction and brokerage segments reaching 63% and 93% respectively of their full-year guidance of JPY 18 billion and JPY 16 billion. In general, the results show steady progress despite the deteriorating office market, with operating profit up 8.0% from a year earlier and up 5.2% from 2019, the previous historical high recorded before the coronavirus pandemic. The company’s office vacancy rate rose to 5.9% at year-end from 5.6% in September but did not prevent leasing segment profit from topping 2019 (when the vacancy rate was only 1.6%) due to rent contributions from buildings in Kojimachi and Ochanomizu completed last year, as well as a reduced impact than in 2020 from closures of event halls and hotels. Sumitomo Realty believes the worsening of its vacancy rate has subsided for the time being. It has nearly completed leasing of new buildings in Tamachi and Kanda, with the focus now on filling its redevelopment project in Mita to be completed next year. Condo sales were in line with original guidance. Other businesses are up versus 2020, with brokerage exceeding prepandemic levels and housing construction still below 2019 but on a rising trend.

We raise our fair value estimate for Sumitomo Realty to JPY 4,000 from JPY 3,900 after its July-September results.

Sumitomo Realty & Development manages more than 230 office buildings in Tokyo. More than half of its buildings are in the Minato and Shinjuku wards, including two flagship properties in Roppongi and a half dozen in Nishi-Shinjuku. Just 20% are in the Chiyoda and Chuo wards, which are the main areas of its two larger rivals and which generally command higher rents. Its dispersed portfolio of buildings in slightly less central locations reflects Sumitomo Realty’s relative late entry to the market--it doesn’t have a cluster of properties inherited from before World War II--as well as its record of steady growth over the past decades.

We maintain our fair value estimate of JPY 3,900 for Sumitomo Realty, equivalent to 0.47 times net asset value and 5% above the current share price, after it posted solid results for April-June, the first quarter in the fiscal year ending March 2022. Operating profit of JPY 71 billion and net profit of JPY 49 billion were 31% and 33%, respectively, of the company’s full-year guidance.

We raise our fair value estimates for Japanese developers Mitsui Fudosan, Mitsubishi Estate, and Sumitomo Realty by 2.3%-2.6% as we roll our model forward a year. Mitsui Fudosan's valuation goes from JPY 2,640 to JPY 2,700, or 0.56 times net asset value, Mitsubishi Estate's from JPY 2,050 to JPY 2,100, or 0.62 times, and Sumitomo Realty's from JPY 3,800 to JPY 3,900, or 0.47 times, implying upside of 6% for Mitsui and Sumitomo and 16% for Mitsubishi. Mitsubishi Estate is our investment preference in the sector at current prices.

Sumitomo Realty & Development manages more than 230 office buildings in Tokyo. More than half of its buildings are in the Minato and Shinjuku wards, including two flagship properties in Roppongi and a half dozen in Nishi-Shinjuku. Just 20% are in the Chiyoda and Chuo wards, which are the main areas of its two larger rivals and which generally command higher rents. Its dispersed portfolio of buildings in slightly less central locations reflects Sumitomo Realty’s relative late entry to the market--it doesn’t have a cluster of properties inherited from before World War II--as well as its record of steady growth over the past decades.

On Tuesday, Japan’s Ministry of Land, Infrastructure, Transport, and Tourism released its official land prices as of Jan. 1, 2021. Along with the Prefectural Land Prices as of July 1, released by the ministry each year in September, it is one of the most important comprehensive indications of nationwide land price trends in Japan. Nationwide for all land uses, prices were down by 0.5% in 2020, compared with rises of 1.2% in 2018 and 1.4% in 2019 and the first decline since 2014. Central Tokyo residential land prices fell 0.4% after rising 6.0% in 2018 and 6.4% in 2019, while central Tokyo commercial land prices declined 2.8% after rising 8.8% in 2018 and 9.6% in 2019.