Japan Real Estate: We Raise Our Valuation for Mitsui Fudosan by 7% on Bright Tourism Outlook

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 8802 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.

Our fair value estimates put Mitsui Fudosan at 0.53 times net asset value, Mitsubishi Estate at 0.50 times, and Sumitomo Realty at 0.42 times, assuming a 30% tax on unrealized gains. Relative to book values, which mostly carry properties at historical acquisition cost rather than appraised market values, our fair multiples are 0.92 times for Mitsui, 1.18 times for Mitsubishi Estate, and 1.00 times for Sumitomo Realty.

Earnings for the fiscal first quarter of the year ending March 2024 were mostly in line with our expectations and company guidance, with the exception of Mitsubishi Estate where a softer-than-expected quarter was due to the timing of condo sales (only 72 units were delivered, compared with full-year guidance of 2,200 units) and an absence of large capital gains such as those in the year-earlier period when it sold Central Saint Giles in London to tenant Google. Nonetheless, Mitsubishi Estate’s full-year earnings are likely to be in line with guidance due to expected capital gains on property sales and condo deliveries later in the year.