Japanese companies’ $77 billion in real estate gains offer a target for activists

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Japanese companies outside the real estate sector generated more than $77 billion in paper profits last year from their non-core property portfolios, increasing pressure on them as investors demand asset sales to unlock value.

The paper profits were spread among more than 250 companies in industries ranging from food production and glass manufacturing to advertising and financial services; many of them companies that built real estate empires in the 1980s and never needed to sell them.

The estimate of its 2023 earnings by Goldman Sachs analysts emerged ahead of the June annual meeting season – the 10-day period at the end of next month during which more than 2,000 publicly traded companies meet with its shareholders.

Legal and banking advisers said the season would likely create more friction than previous years, partly due to pressure on Tokyo Stock Exchange companies to focus on capital efficiency and valuations.

Last year’s excess of unrealized real estate capital gains follows 10 years in which Japanese condo and commercial property prices have risen and in which, unlike London, New York and Hong Kong, remote work was not possible. has taken hold and office vacancies in Tokyo remain low after the pandemic. .

Real estate companies such as Mitsubishi Estate and Tokyo Tatemono have done well, with shares in the sector up more than 20 percent since January.

But Goldman Japan equity strategist Bruce Kirk said the companies were under pressure from shareholders to justify their non-core businesses, and the vast property portfolios seemed anomalous.

Bankers who have advised Japanese companies on how to deal with the activists said that while investors once saw the property portfolios as an oddity, their existence now represented a target for the companies and made them vulnerable to the campaigns of the shareholders.

Goldman’s report focused on about 250 companies in the Topix index that were not real estate specialists but had business segments that operated their real estate assets.

Accounting changes made in 2010 required companies to disclose the book value of properties held for investment or rental, along with an estimate of the market value. The difference between those two figures produces an annual calculation of unrealized gains or losses on the property, which in many cases is office space.

Between them, those companies declared $77 billion in paper profits in 2023, not far from the $89 billion in paper profits reported by the Japanese real estate industry itself.

Recent high-profile activist fund commitments to Japanese companies, including Elliott Management’s fight with Dai Nippon Printing, have focused on non-core real estate assets.

“The potential unlocking of value from undervalued non-core real estate gives investors another pressure point to focus on during their conversations with Japanese corporate management,” Kirk said.

He added that there would likely be some debate over the definition of core versus non-core, and his selection of companies with large non-core real estate portfolios deliberately omitted Japan’s railway companies, which own significant properties around their stations.

“The corporate governance push is definitely on the side of investors right now,” Kirk said. “This could encourage greater scrutiny of the reasons why non-real estate companies hold such extensive portfolios of real estate assets during this year’s AGM season.”

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