Japan´s top real estate firms are likely to hold their outlooks for rising profits steady when they release half-year results this month, but an upcoming glut of Tokyo office-space supply is casting a shadow over the industry.
With an exodus of foreign and info-tech companies from Tokyo also weighing on investor sentiment towards the sector, many analysts believe Japan´s big three real estate players are better placed than their smaller rivals to weather the tough times.
Japan´s largest real estate developer, Mitsui Fudosan Co Ltd., will unveil earnings results for the half year ended in September on Friday, while second-ranked Mitsubishi Estate Co. Ltd. and third-largest Sumitomo Realty & Development Co. Ltd. take their turn later this month.
Since half-year results can vary greatly depending on when sales are booked and the top firms are likely to post first-half earnings in line with estimates, analysts are more focused on the full-year forecasts.
Most expect all three firms to keep their full-year outlooks for rising net and recurring profits unchanged, even though Japan´s economy looks to be sputtering again and already high office vacancy rates are set to jump.
A record crush of supply will challenge a sector already battered by a relentless slide in land prices since the bursting of Japan´s asset bubble more than a decade ago.
ING analyst Mark Brown said that while firms were suffering some deterioration in their office-leasing business, the blow was mostly factored into firms´ forecasts and should be offset in some cases by a buoyant condominium business.
'That will apply particularly to Mitsui and Sumitomo given their greater dependence on the condominium business,' he said. 'With Mitsubishi Estate office rents are basically as expected, and then the condominium business is also doing as expected or maybe a bit better.' Some 2.18 million square metres of new Tokyo office space are set to hit the market in 2003.
Adding to the glut are projects like Mitsubishi Estate´s remodeling of the Marunouchi Building in Tokyo´s main business district. Mitsubishi´s ability to fully lease the 37-floor replacement for one of the city´s most famous buildings in September was a mild surprise and generated hopes the top realtors could fill their new buildings in prime locations despite the supply glut.
Mitsui Fudosan is seen as a slightly lagging Mitsubishi Estate and Sumitomo Realty in redeveloping its older properties, but has less exposure to a property market downturn and looks on track to hit its full-year forecast for a 27 percent rise in group net profit to 38 billion yen ($311.1 million).
Japan´s leading real estate developer is expected to achieve its full-year targets despite forecasts by the company and independent research firm Toyo Keizai for a 71 percent year-on-year drop in first-half net profit to 6.5 billion yen.
Solid profits from condominium sales and its non-asset businesses, cost cuts, and a rebound in its construction operations are expected to help Mitsui buck a possible downturn in leasing revenues and an expected 3.69 percent drop in full-year group sales to 1.11 trillion yen.
Mitsubishi Estate, which plunged to a 71 billion yen net loss last year on asset revaluations in preparation for more strict mark-to-market accounting rules, expects to bounce back with a 33.5 billion net profit in 2002/03.
The Tokyo-based realtor -- the one-time owner of New York´s Rockefeller Center -- is likely to see its first-half group net profit more than double year-on-year to 19 billion yen, with solid condominium sales, lower depreciation costs, and an improvement in its U.S. operations helping power its results.
Sumitomo Realty is aiming to overshadow its rivals with a 30.46 percent jump in full-year group net profit to a record 30 billion yen, but worries remain over its need to prepare for mark-to-market accounting and its dependence on leasing operations.
A recent newspaper report said it may face a 100 billion yen latent loss on