A man cycles past the Tokyo Stock Exchange building in Tokyo. Heiwa Fudosan Co., which owns some land and six buildings including the Tokyo Stock Exchange in the historic Nihonbashi district, trades at a 51 percent discount to the value of its net assets, the cheapest of any Japanese real estate developer, according to data compiled by Bloomberg. Photographer: Tomohiro Ohsumi/Bloomberg
Mitsubishi Estate Co., whose $1.4
billion Rockefeller Center investment ended in default, may find
buying Heiwa Real Estate Co. the cheapest way to profit from the
rebirth of Tokyo’s oldest neighborhood as a financial center.
Mitsubishi Estate, which currently holds an 11 percent
stake in Heiwa, will pursue acquisitions to help it overtake
Mitsui Fudosan Co. as the biggest developer in Japan, President
Hirotaka Sugiyama said last month. Heiwa, which owns some land
and six buildings including the Tokyo Stock Exchange in the
historic Nihonbashi district, trades at a 51 percent discount to
the value of its net assets, the cheapest of any Japanese real
estate developer, according to data compiled by Bloomberg.
A takeover of Heiwa would give Mitsubishi Estate, which has
turned Marunouchi into Tokyo’s most expensive business district,
a foothold in Nihonbashi, a center of commercial life in Japan’s
Edo period from 1603 to 1867. The former owner of Manhattan’s
Rockefeller Center, which projects profit will decline after it
missed three-year sales and earnings targets, would be making
inroads into Mitsui Fudosan’s most important district as tax
breaks accelerate construction in Nihonbashi.
“Buying Heiwa would open a door for them there and will
probably help boost their profit target in the long run,” said
Hideyuki Shinkai, a fund manager in Tokyo for Norinchukin Trust
Banking Co., which has $149 billion in assets. “Mitsubishi
Estate is probably aiming for participation in redevelopment of
the area around the Tokyo Stock Exchange as an international
financial center by entering Mitsui Fudosan’s territory.”
‘The Time Being’
Mitsubishi Estate’s Sugiyama said in an interview on June
22 that the company doesn’t have a plan to boost the stake,
“for the time being.” Company spokesman Ryuichiro Funo said
the stance toward Heiwa has not changed since then.
Naoto Kato, a spokesman for Heiwa, said there is no plan
for Mitsubishi Estate to raise its stake.
“We are not in the position to comment on a plan by
Mitsubishi Estate and Heiwa,” said Hideaki Yamakawa, a
spokesman at Mitsui Fudosan. The company, along with Mitsubishi
Estate and Heiwa, is based in Tokyo.
Mitsubishi Estate, Japan’s second-biggest real estate
company by sales, forecast in May that profits will drop 14
percent in the fiscal year ending in March as demand for office
space and new homes weakens after Japan’s biggest earthquake on
March 11 spurred the worst nuclear disaster since Chernobyl 25
years ago. By market capitalization, Mitsubishi Estate is
Japan’s largest developer, with a value of 2.01 trillion yen
($25 billion). Mitsui Fudosan is valued at 1.27 trillion yen.
Office Rents
Mitsubishi Estate fell short of its three-year profit
target in the year ended in March, after the global credit
crisis halted a recovery in Japan’s real estate market. It
posted net income of 64 billion yen last fiscal year, about half
of the 115 billion-yen goal it had set in 2008.
The company still announced plans last month to invest
about 600 billion yen over the next three years, 53 percent more
than the previous three-year period, to redevelop buildings in
central Tokyo in anticipation of a recovery in rents. About half
of the funds will be spent outside the Marunouchi area.
Tokyo’s office vacancy rate fell to 8.88 percent in May,
after reaching a record of 9.19 percent in March, while rents in
the city’s five main business districts slid to an all-time low
in May, according to Miki Shoji Co., a privately held office
brokerage company.
Mitsubishi Estate is still aiming to double operating
profit for its residential business to 26 billion yen by the
year ending March 2014.
‘Difficult to Neglect’
“Without purchasing a company, I don’t think the company
can achieve double profit growth,” said Masahiro Mochizuki, a
Tokyo-based analyst at Credit Suisse Group AG who has a
“neutral” rating on Mitsubishi Estate. “It’s difficult to
neglect the possibility that it may acquire Heiwa.”
Mitsubishi Estate’s largest deal outside Japan was a $1.4
billion investment in the owner of Manhattan’s Rockefeller
Center two decades ago.
The move was part of a buying spree by Japanese investors
that included California’s Pebble Beach golf course and Vincent Van Gogh’s Sunflowers painting as the Nikkei 225 (NKY) Stock Average
reached a record close of 38,915.87 in December 1989. Many of
the purchases were later sold at a fraction of their cost as the
country’s asset bubble burst.
Rockefeller Group
Mitsubishi Estate purchased 80 percent of The Rockefeller
Group in three stages in 1990 and 1991. It lost Rockefeller
Center to creditors in 1996 and booked 150 billion yen in losses
and writedowns, according to the company. Mitsubishi Estate
bought the remaining 20 percent of Rockefeller Group, which
invests in and manages commercial real-estate, in 1997.
Now, Mitsubishi Estate’s 53 billion yen ($656 million)
acquisition of Towa Real Estate Development Co. could serve as a
guide for future deals, Sugiyama said in the June 22 interview.
The developer first announced the partnership with Towa in 2004,
buying one-third of the Tokyo-based company three months later.
It increased its ownership to 100 percent by April 2009.
The acquisition of Towa, which develops apartments in
western Japan, enabled Mitsubishi Estate to sell apartments in
areas where it didn’t have a strong presence, Sugiyama said.
“We would like to look at deals that will boost business
feasibility,” said Sugiyama, 62, citing Towa as an example.
Mitsubishi Estate bought its Heiwa stake in a deal that
closed on March 7. The magnitude-9 earthquake four days later
and crisis at the Fukushima nuclear plant sent the Nikkei
average down 18 percent in three days through March 15.
Stock Market Slump
Heiwa has lost 22 percent to 178 yen since the earthquake,
double Mitsubishi Estate’s 11 percent drop to 1,447 yen and
about five times the 4.5 percent retreat in the Nikkei. That
means Mitsubishi Estate could buy the rest of Heiwa for 23
percent less than the 230 yen it paid for the March stake,
excluding a possible premium, data compiled by Bloomberg show.
Heiwa currently trades at the cheapest valuation relative
to net assets of the 22 Japanese real estate developers with a
market value greater than $250 million, data compiled by
Bloomberg show. Heiwa, with a market capitalization of $441
million, trades at 0.49 times book value, or assets minus
liabilities. That compares with a median multiple for the group
of 0.98. Mitsubishi Estate fetches 1.67 times, and Mitsui
Fudosan 1.24 times, the data show.
The quality of office buildings Heiwa controls and lower
sales for the Tokyo Stock Exchange may account for Heiwa’s
cheaper valuations, according to Satoshi Yuzaki, a Tokyo-based
analyst at Takagi Securities Co. Revenue for the TSE, Heiwa’s
main tenant, may be curbed by a weaker stock market, he said.
Operating Margins
Still, Heiwa has generated more operating income per dollar
of sales than Mitsubishi Estate and Mitsui Fudosan. Heiwa’s
operating margin almost doubled to 28 percent last fiscal year,
compared with 16 percent for Mitsubishi Estate and Mitsui
Fudosan’s 8.6 percent, data compiled by Bloomberg show.
An acquisition of Heiwa would intensify a century-old
competition between Mitsubishi Estate and Mitsui Fudosan, which
are each part of two of Japan’s largest so-called keiretsu, or
groups of companies that often share business relationships and
own shares in each other.
About 43 percent of the floor space Mitsui Fudosan holds in
central Tokyo is in the ward that includes Nihonbashi, according
to the company. Besides the TSE, the area is home to one of the
flagship stores of Isetan Mitsukoshi Holdings Ltd., Japan’s
biggest department store operator, and the headquarters of
Nomura Holdings Inc., Japan’s largest brokerage.
Edo Period
The revival of Nihonbashi, which includes plans to bury a
highway and resurrect a river-cruise route that hasn’t been used
since the Edo era, could boost the area’s economy by as much as
3.1 trillion yen through higher property values and revenue
generated by more visitors, according to Nihonbashi Michikaigi,
a group of academics that advocates for the redevelopment.
Fueling the development are tax breaks on property
acquisitions as well as financial assistance offered by the
government for specific zones including Nihonbashi. The latest
of these were established on June 22 by Japan’s Cabinet Office.
Office rents in Marunouchi are still the highest in Japan
at 24,200 yen per tsubo, according to Los Angeles-based CB
Richard Ellis Group Inc. (CBG) One tsubo, a measure of property area
in Japan, is 3.3 square meters, or 35.5 square feet.
“Mitsubishi Estate continues to create an entire portfolio
of relatively new buildings in Marunouchi, but they also know
that pretty soon there are going to be much younger crop of
buildings in Nihonbashi,” said James Fink, senior managing
director at Colliers International in Tokyo. “They will want to
have some participation in that.”
To contact the reporters on this story:
Kathleen Chu in Tokyo at
kchu2@bloomberg.net;
Katsuyo Kuwako in Tokyo at
kkuwako@bloomberg.net
To contact the editors responsible for this story:
Daniel Hauck at dhauck1@bloomberg.net;
Katherine Snyder at ksnyder@bloomberg.net;
Andreea Papuc at apapuc1@bloomberg.net.
