Japan construction and real estate market - Record gap for Mitsui Fudosan, Mitsubishi Estate
Mitsui Fudosan's implied cap rate at 6.5%
Looking at the spread between the implied cap rates (based on our calculations) for Mitsui Fudosan [8801] and Mitsubishi Estate [8802] since 2003, we see that while the spread between the two companies' implied cap rates has narrowed from 2.6ppt in late August, it is still at an unprecedentedly high level of 1.9ppt based on 8 September closing prices. Except for the brief time when real estate stocks dropped sharply in the wake of the global financial crisis in 2008, Mitsui Fudosan's implied cap rate has been consistently higher than Mitsubishi Estate's, and the spread between the two companies cap rates has generally been around 0-1ppt. Even in September 2014, when Mitsui Fudosan's market cap was temporarily higher than Mitsubishi Estate's due to increased expectations for Mitsui Fudosan's profit growth following its capital increase in June 2014, the spread was still only 0.4-0.5ppt. We believe this is because real estate in the Marunouchi area (the focus of Mitsubishi Estate’s portfolio) is valued higher than real estate in Nihonbashi (the focus of Mitsui Fudosan's portfolio), which results in a lower cap rate.