Hidden billions in Tokyo real estate lure activist hedge funds

THE long-concealed market value of Tokyo’s largest skyscrapers is being unveiled by activist investors.  

In Japan, there is a huge gap – 22 trillion yen (S$195 billion) by one estimate – between how companies value their real estate assets on their books, versus what those same properties would fetch if sold in the current market. That comes from two factors: First, many of the island nation’s firms have held onto properties for decades, each year writing down the cost of fixed assets due to annual depreciation, a common accounting practice. But at the same time, property prices have soared.

The result is that billions in value can be unlocked by pressuring companies to sell off these holdings, a tactic that activist funds are now employing. This was illustrated last week when Japan developer Mitsui Fudosan announced it would aim to sell off two trillion yen in real estate assets over the next three years as part of a new business plan – just two months after news that New York-based activist hedge fund Elliott Management had built a stake in the company.

Elliott’s campaign is partly focused on realising the value of Mitsui’s properties – including prized skyscrapers across Tokyo – by selling them off, a point the investment firm has discussed with the developer, according to a source familiar with the matter.

It is a strategy that more activist funds could turn to this year, as they work with Japanese corporations under pressure to change and increase value. Japan is now one of the world’s hottest markets for activist investing, with government agencies and institutions such as the Tokyo Stock Exchange asking companies to better manage their balance sheets and focus their business strategies to boost returns for shareholders.

“I expect this year we will see more and more examples of activists and engagement funds wrestling with companies over not just excess financial assets but redundant real estate holdings,” said John Seagrim, a broker at CLSA.

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In aggregate, those real estate assets are carried on balance sheets at 44 trillion yen in book value, but together have an estimated market value that is 50 per cent higher – around 66 trillion yen, according to Seagrim’s calculations.

Consider the large difference between book value and market value in Mitsui’s Tokyo Midtown building – a 54-story skyscraper in the heart of the city’s buzzy Roppongi area that includes offices, a Ritz-Carlton hotel, and retail and dining facilities. Mitsui developed and opened the property in 2007.

This building is currently valued at 190 billion yen on Mitsui’s balance sheet – a book value figure that accounts for the cost of land and construction, minus depreciation over the last 17 years. If it were sold, the property would likely be worth more than 500 billion yen, according to a recent market assessment.

Another example is the properties held by Mitsubishi Estate, although the firm is not currently the target of activists. This top Japanese developer bought land in the Marunouchi neighbourhood between the Imperial Palace and Tokyo Station – now the most prominent business district in the city – more than a century ago. Its Marunouchi Building is worth 100 billion yen on the company’s books, but analysts expect it could fetch more than five times that amount – 570 billion yen – if sold.

A Mitsui spokesperson declined to comment on individual shareholders, and said the company would look to sell properties including prime office towers. Elliott said after Mitsui’s business plan announcement that it was “a positive step forward”, and the firm declined to comment further. Representatives from Mitsubishi Estate declined to comment.

New hunting ground

Holding on long-term to real estate that has likely jumped in value is not unique to property developers. There are about 700 publicly traded Japanese companies with property leasing as part of their operations, and only 55 of them are in the real estate business, Seagrim said.

Many of these companies could become new hunting grounds for activists, and some have already been targeted. Strategic Capital, a Tokyo-based activist fund, has asked construction and engineering firm Wakita & Co to sell off its rental properties, saying there is “no rationale” for the company to have a real estate leasing business.

Singapore-based 3D Investment Partners, which has stakes in software company Fuji Soft and beermaker Sapporo Holdings, has also been calling for change at the companies – including selling off real estate holdings so the firms can focus on their core business.

In Mitsui’s case, its shares have benefited from the activist stake, rising 8 per cent since the announcement of the new business plan last week. The stock has gained 29 per cent to 1,677 yen since Elliott’s position was disclosed. It is still trading below the 2,400 yen that Elliott estimates the shares to be worth apiece, the source familiar said.

The developer’s most recent annual report showed that its property holdings had a fair market value of 6.7 trillion yen at the end of March 2023, even though the company marks it at book value of 3.4 trillion yen – meaning there is a huge opportunity to realise more gains.

In its discussions with Mitsui, Elliott has suggested the firm sell off some of its long-term holdings into Japan real estate investment trusts (J-Reits) held by the company, which are similar to Reits in the US and trade publicly, according to the source familiar with the matter. Such a move would mean the properties’ higher market value would be more accurately reflected.

“The debate here is about how to increase asset efficiency,” said Koki Ozawa, a senior analyst at SBI Securities. “With the ownership of buildings, there is not a lot of significant upside apart from rent increases. So it could be more profitable to sell them and use the proceeds for investment.” BLOOMBERG