Company Reports

Mitsui Fudosan is one of Japan's largest real estate developers, with property leasing forming the core of its business. Its flagship office assets are concentrated in Tokyo's key commercial districts, particularly Nihonbashi, Yaesu, and Otemachi. We view Mitsui Fudosan as being particularly skilled at machizukuri, or district creation, integrating offices, retail, hotels, residences, and public spaces to create vibrant mixed-use precincts that are more valuable than single-use developments. While office leasing remains the largest contributor to recurring earnings, the company has also built a leading retail platform through its LaLaport shopping malls and Mitsui Outlet Park portfolio. Beyond leasing, Mitsui Fudosan has developed a diversified real estate platform spanning residential development, property management, brokerage, logistics facilities, hotels and resorts, and investment management. The company also maintains a healthy development pipeline across its office, retail, logistics, and mixed-use businesses. Most notably, its long-term redevelopment of the Nihonbashi district is expected to further expand its recurring rental income base as new projects are completed over the coming decade.

We initiate coverage on Mitsui Fudosan, one of Japan's largest real estate developers by revenue. The group generates the majority of its earnings from the leasing of its office, retail, and logistics properties, as well as the sale of condominiums and residential housing developments.

We will discontinue coverage of Mitsui Fudosan on or about Feb. 7.

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.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

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 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.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

We are revising the Morningstar Uncertainty Ratings for 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 having assigned High ratings we now think visibility over future office demand is sufficient to revert them back to the Medium level. This lower Uncertainty level has the effect that the threshold for a four-star investment rating when our fair value estimates are above the current share prices becomes smaller.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

We maintain our fair value estimates of JPY 2,800 for Mitsui Fudosan, JPY 2,200 for Mitsubishi Estate, and JPY 4,000 for Sumitomo Realty following the Japanese real estate developers’ results for the second quarter in their fiscal years ending March 2023. Our fair value estimates are equivalent to 0.54 times net asset value for Mitsui Fudosan, 0.57 times for Mitsubishi Estate, and 0.45 times for Sumitomo Realty, assuming 30% tax on unrealized gains, and represent 17% upside for Mitsubishi Estate, 11% upside for Sumitomo Realty, and 6% upside for Mitsui Fudosan from their current share prices.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest by total assets and book value and rivaling Mitsubishi Estate in terms of market cap. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

We maintain our fair value estimates of JPY 2,800 for Mitsui Fudosan, JPY 2,200 for Mitsubishi Estate, and JPY 4,000 for Sumitomo Realty after the Japanese real estate developers’ results for April-June, the first quarter in their fiscal years ending March 2023. Our fair value estimates are equivalent to 0.54 times net asset value for Mitsui Fudosan, 0.58 times for Mitsubishi Estate, and 0.46 times for Sumitomo Realty, assuming 30% tax on unrealized gains, and represent 17% upside for Mitsubishi Estate and 15% upside for Sumitomo Realty from their current share prices. Mitsui Fudosan’s current share price is near our fair value estimate.

In the five central wards that comprise Tokyo’s main business district, 6.39% of total office space was available for lease in June, up slightly from 6.37% a month earlier, according to real estate brokerage Miki Shoji. Tokyo’s office vacancy rate has thus stayed roughly flat in a range between 6.2% and 6.5% for a year now after having previously quickly deteriorated from a cycle low of 1.5% in March 2020 to reach its current range by mid-2021. Assuming the rate does not start to move higher again, the vacancy rate appears to be slightly more benign than what we had projected in May 2021, when we had forecast it might to peak around 8% or 9% by early 2023. Still, notwithstanding the slightly better-than-projected trend in the headline vacancy rate, we see the outlook for the Tokyo office leasing market as being in line with the base-case scenario we adopted at the beginning of the pandemic in March 2020 (see our March 25, 2020 note for details) for a downturn roughly half as deep as the one experienced after 2008.

We maintain our fair value estimate of JPY 2,800 per share for Mitsui Fudosan, 12% above the current price and equivalent to 0.59 times net asset value assuming a 30% tax rate on unrealized gains. The shares rose 2.5% today following the company’s December-quarter results, which overall were in line with our forecasts. On the positive side, Mitsui Fudosan announced an increase in its planned dividend per share for the current year ending in March from JPY 44 to JPY 55 (30% of our forecast earnings for the year) and a new JPY 15 billion share buyback program valid through September, which represents 0.6% of shares outstanding at the current price. We had already forecast a JPY 15 billion buyback for the year starting in April, so the buyback is in line with our existing forecasts unless Mitsui Fudosan follows it up with an additional one in the second fiscal half after October, which we think is possible but not certain.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest by total assets and book value and rivaling Mitsubishi Estate in terms of market cap. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest by total assets and book value and rivaling Mitsubishi Estate in terms of market cap. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

We raise our fair value estimate for Mitsui Fudosan to JPY 2,800 from JPY 2,700, which we calculate as being equivalent to 0.60 times net asset value. Net profit for July-September was JPY 52 billion, 32% of Mitsui Fudosan’s guidance for net profit of JPY 160 billion for the fiscal year ending March 2022. Together with the JPY 34 billion Mitsui Fudosan earned in April-June, the company has achieved 54% of guidance halfway through, and we expect the full-year target to be reached rather easily, assuming no major new outbreak of the pandemic or other situation occurs this winter. Our new fair value estimate is 8% above today's closing share price.

Mitsui Fudosan is historically Japan’s second-largest real estate developer after Mitsubishi Estate, but since Mitsui expanded its capital base with a 12.5% equity offering in 2014, it has grown to become the largest by total assets and book value and rivaling Mitsubishi Estate in terms of market cap. Compared with Mitsubishi Estate and Sumitomo Realty, for both of which office leasing generates close to two thirds of operating profit, Mitsui Fudosan is more diversified into retail leasing with its Lalaport malls and Mitsui Outlet Parks (although Mitsubishi also has a successful outlet joint venture with Simon Property). We see Mitsui as being skilled at “machizukuri”--integrating office, retail, hotels, and residential properties to create a new area that thrives more than a district dedicated to a single use alone. Prime examples of this are the ongoing redevelopment of the Nihonbashi district in the center of Tokyo--Mitsui’s historical home--and the Hudson Yards project on the far west side of Manhattan.

We maintain our fair value estimate of JPY 2,700 for Mitsui Fudosan, equivalent to 0.59 times net asset value and 5% above the current share price, after it reported results for April-June, the first quarter in its fiscal year ending March 2022. Net profit for the quarter was JPY 34 billion, 21.5% of its full-year guidance of JPY 160 billion. Operating profit of JPY 35 billion was only 15.3% of full-year guidance of JPY 230 billion, but Mitsui Fudosan recorded a JPY 24 billion extraordinary gain on the sale of investment securities that bolstered the bottom line.

We raise our fair value estimates for Japanese developers Mitsui Fudosan, Mitsubishi Estate, and Sumitomo Realty by 2.3%-2.6% as we roll our model forward a year. Mitsui Fudosan's valuation goes from JPY 2,640 to JPY 2,700, or 0.56 times net asset value, Mitsubishi Estate's from JPY 2,050 to JPY 2,100, or 0.62 times, and Sumitomo Realty's from JPY 3,800 to JPY 3,900, or 0.47 times, implying upside of 6% for Mitsui and Sumitomo and 16% for Mitsubishi. Mitsubishi Estate is our investment preference in the sector at current prices.