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Factoring in rising interest rates, potential rise in equity market risk premiumsWe have trimmed our TSE REIT Index range estimate to reflect recent developments and future prospects on the financial/capital markets and within the REIT sector.
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Near-term earnings likely to depend on real estate sales and condo business
Tokyu Fudosan Holdings has no major projects under development for long-term holding and rental until the planned completion of the Shibuya Dogenzaka 1-chome and Shibuya Nanpeidai projects in 20/3 and the Takeshiba and Shibuya Station Sakuragaoka Exit projects in 21/3. We expect the company to sell Yokohama Minatomirai 21-32, which is being developed near condominiums and slated for completion in 18/3. After completion, we expect a stable contribution to profit growth from the sale of the Higashi Ikebukuro 1-chome Cinema Complex, a project in which the company disclosed its involvement on 9 August 2016, as well as retail stores, restaurants, and business hotels in Futako Tamagawa, Ginza 1-chome, Shimbashi 3-chome, and Osaka Shinsaibashi 2-chome. Our views are unchanged, and we maintain our forecasts, target price, and Buy rating. Our target price is based on NAV calculated from a cap rate of 4.3%, and the shares look undervalued considering the implied cap rate of 5.3% based on the 8 September closing price.
Daisuke Fukushima
Vacancy rate continues to improve on multiple demolitions, rent upside strengthens
According to major real estate brokerage Miki Shoji, the office vacancy rate in Tokyo’s five central wards improved 4bp m-m to 3.90% in August 2016. Growth in advertised rents remained weak, up only 4.75% y-y, but this nevertheless represents a gradual improvement on 3.98% in January 2016, the weakest recent month. Office demand, a key indicator, fell 5,794 tsubo (3.3m²) m-m, thereby registering its third consecutive monthly decline. However, the vacancy rate improved because eight office buildings were demolished and therefore removed from the survey/statistics, which are now based on 2,591 office buildings, with the result that leasable office floor space fell 9,430 tsubo m-m to 7.28mn tsubo while vacant space fell 3,636 tsubo to 283,896 tsubo. While three straight months of falling demand for office space will warrant ongoing attention as it constitutes the first such move since end-2009/early 2010, the summer is not a particularly strong season for office demand to start with, and we therefore think it would be premature to say that demand has moved into a sustained downtrend along the lines of 2008, when the global financial crisis occurred. We think it would be prudent to maintain a wait-and-see attitude for now. We continue to recommend Mitsui Fudosan [8801] and Tokyo Tatemono [8804] for rising rents and low P/NAV ratios.
Stocks should benefit from BOJ buying, REITs seem also to be in favor
TOPIX rose 2% on 29 August from the previous trading day. The main factor was likely the yen's retreat following the Fed chairwoman's lecture and comments by BOJ Governor Haruhiko Kuroda at the symposium at Jackson Hole, Wyoming, on 26 August. Amid these conditions the TSE REIT index rose 0.5% on 29 August despite it being the ex-dividend date for REITs with August-ending fiscal periods (ie, 11 of the 54 REITs). After nearly doubling its annual ETF buying target to roughly ¥6trn (from ¥3.3trn) at the 29 July Monetary Policy Meeting, the BOJ bought ¥71.9bn in ETFs on both 25 and 26 August, roughly double the daily amount of BOJ ETF buying up to 3 August. Even so, TOPIX continued to fall d-d on 25 and 26 August. On the other hand, the BOJ did not buy REITs on 25 or 26 August, but the TSE REIT index rose each day nonetheless. Judging from these market conditions, our view is that market participants feel safer in REITs than stocks.
Real estate business also warrants attention
In Apr-Jun 2016, operating losses narrowed to ¥0.3bn, from ¥0.6bn the year earlier, although Apr-Jun results make only a small contribution to full-year results owing to seasonal factors. Losses narrowed owing to an increase in revenues in the machinery systems business, offsetting an increase in provisions against construction losses in the facilities construction business, which includes the HVAC systems for buildings business. As announced by the company on 23 June, the government suspended the company from participating in bids and contracts for 30 days, from 8 July to 6 August, in connection with antitrust law violations. We will be paying close attention to the effect of the suspension on earnings in Jul-Sep and beyond. Peers that were similarly suspended in 15/3 saw earnings adversely affected in cases where the companies also refrained from actively taking on work in the private sector. We make no change to our operating profit forecasts, but we lower our target price as we cut our target P/E to 11-12x, from 16-17x previously, to reflect trends in the benchmark P/E and other factors.