Japanese Real Estate Developers: We Revise Our Uncertainty Ratings to Medium From High

We are revising the Morningstar Uncertainty Ratings for the 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, we now think visibility over future office demand is sufficient to revert to the Medium Uncertainty Rating. This has the effect of narrowing the threshold for a 4-star investment rating when our fair value estimate is above the current share price.

Our fair value estimates for Mitsui Fudosan 8801 and Sumitomo Realty 8830 remain JPY 2,800 and JPY 4,000, respectively (5% and 19% above the current prices), while our fair value estimate for Mitsubishi Estate 8802 declines to JPY 2,000 (25% upside from the current price) from JPY 2,100, as we incorporate recent company guidance into our forecasts. Our estimates put Mitsui Fudosan’s fair value at 0.50 times its net asset value (compared with the five-year average of 0.54 times), Sumitomo Realty’s fair value at 0.43 times net asset value (versus its five-year average of 0.49 times) and Mitsubishi Estate’s at 0.51 times net asset value (versus a five-year average of 0.55 times). The fair value estimates are 12.2 times our forecast earnings for Mitsui Fudosan this year, 10.8 times our forecast earnings for Sumitomo Realty and 15.1 times our forecast earnings for Mitsubishi Estate. With our Uncertainty Ratings at Medium, Sumitomo Realty and Mitsubishi Estate are undervalued in 4-star territory, and Mitsui Fudosan is fairly valued in 3-star territory, in our view.