Mitsui Fudosan Co Ltd 8801

Japan Real Estate Developers: Tokyo Office Vacancy Rate Appears To Be Approaching a Turning Point

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.