Real estate worth 25 trillion yen puts Japan companies in spotlight
GLOBAL hedge funds and private equity firms are gravitating towards Japanese companies in a bid to unlock as much as 25 trillion yen (S$222 billion) in undervalued real estate.
The hidden value of property on corporate balance sheets is showing up as a theme behind some of the biggest activist campaigns and mergers and acquisitions announced in Japan this year.
In its latest move, Elliott Investment Management unveiled a 5.03 per cent holding in Tokyo Gas, which has a real estate portfolio that the US firm estimates is worth about 1.5 trillion yen – almost as much as the utility’s entire market value, Bloomberg reported last week.
The potential for unrealised gains stems from an accounting quirk when Japanese companies hold onto offices, hotels and country clubs for long periods.
The value of the real estate is recorded at book value, which is the acquisition or development cost minus annual depreciation. But in recent years, Japan’s property prices have soared, especially in metropolitan areas. That means if the real estate is sold, companies can record big profits from the difference between book and market value.
This strategy is now becoming a focus for investors who continue to see Japanese companies as undervalued. It is a driving force behind private equity deals, such as the US$4 billion buyout of Fuji Soft, and activist stakes by Elliott as well as Palliser Capital and 3D Investment Partners.
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“For decades, we have known that real estate value has been in Japan, but we have never had that key to unlock the value – and now we have it,” said Bruce Kirk, chief Japan equity strategist at Goldman Sachs. “That’s the exciting thing – you are now starting to see investors focus on it.”
Goldman Sachs estimates that there could be at least 25 trillion yen in unrealised gains across more than 250 Japanese companies whose main business is not real estate. Some of the largest holdings are at companies in the railway, construction and utility sectors.
Elliott’s stake in Tokyo Gas is centred around getting the utility to sell off its real estate holdings and put the money to better use. The company owns Shinjuku Park Tower, which houses the Park Hyatt Tokyo hotel featured in the 2003 film Lost in Translation.
Earlier this year, a move to take Fuji Soft private drew multiple bids from private equity firms attracted to the information technology company’s portfolio of office buildings across Tokyo. The process culminated in a rare takeover tussle between KKR and Bain Capital.
Singapore-based activist investor 3D, which had built a sizeable stake in Fuji Soft and pressured it to go private, said in a presentation that the company’s real estate could be worth at least 195 billion yen if sold, compared with the book value of 84.5 billion yen.
3D has also built an 18 per cent stake in brewer Sapporo Holdings, which earned about as much operating income from its real estate business as it did from selling beer in 2023.
In October, Palliser, run by Elliott alumnus James Smith, unveiled an investment in developer Tokyo Tatemono, saying it could be worth twice its current market value and encouraging the company to sell off some of its real estate holdings.
This week, local media reported that a fund linked to activist investor Yoshiaki Murakami had built stakes in Japanese train operators Keisei Electric Railway and Keikyu. Although Murakami’s intentions are not known, rail transport companies own valuable property near transit hubs and sit on some of the largest unrealised gains from real estate.
Private equity firms are also showing more interest. There has been an uptick in business around advising them on understanding the value of properties held by companies, said Shai Greenberg, the head of international capital for real estate firm JLL in Japan.
“Japanese companies have traditionally been asset-heavy,” Greenberg said. “Legacy assets often have a very different market value from long-depreciated book value, making Japanese real estate a honeypot for activists and private equity funds.”
There have already been cases where private equity firms have taken over asset-heavy companies and sold their properties.
KKR, which purchased Hitachi Transport System in 2023 for 670 billion yen and renamed it Logisteed, later sold off 108 billion yen worth of warehouses held by the company to its own real estate asset management firm, KJR Management.
After Bain Capital bought Showa Aircraft Industry for 90 billion yen in 2020, it sold a golf course resort owned by the aircraft parts maker for an estimated 130 billion yen, according to a local media report.
Some companies, influenced by corporate governance reforms and aware of circling investors, are also switching to asset-light strategies.
Seibu Holdings, a transport and hospitality provider, has offloaded ski resorts and is in talks to sell one of its landmark assets, Tokyo Garden Terrace Kioicho, in what could be a roughly 400 billion yen deal. This May, 3D showed up on its shareholder roster.
“We have had the low-hanging fruit around using excess cash to reward shareholders – now we are onto more sophisticated value unlocks,” Goldman’s Kirk said. “The unrealised real estate gain angle is particularly interesting at the moment.” BLOOMBERG
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