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

Securities In This Article
Mitsubishi Estate Co Ltd
Mitsui Fudosan Co Ltd
Sumitomo Realty & Development Co Ltd

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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