07 October 2013 Asia Pacific/Japan Equity Research Real Estate Management & Development (Real Estate (Japan)) / OVERWEIGHT Real estate sector Research Analysts SECTOR REVIEW Masahiro Mochizuki 81 3 4550 7389 [email protected] Don't fight the BoJ: “Kuroda put” looms as Atsuro Takemura 81 3 4550 7372 buzzword in 2014 [email protected] Figure 1: TSE Real estate sector stock price index and monetary policy (Pt) 2500 Feb 2007 Mar 2007 Basel II Sep 2007 Mar 1990 0.5% policy interest rate Financial Instruments Total volume control and Exchange Law 2000 Dec 2006 Real estate loan restriction Mar 2006 April 2013 End of QQE quantitative easing Mar 2011 1500 East Japan Jul 2006 earthquake Unlock Zero interest rates 0.25％ 1000 Jan 2009 Consider real estate Dec 1991 investment 500 Release of Total volume control corporation bonds Mar, Aug 2011 and as eligible collateral After Apr 2003 Oct 2010 April 2012 BoJ Raise target of current account balance Establish foundation to purchase J-REIT etc. increased from ¥22tn to ¥35tn Raise collateral value of investment corporation its J-REIT budget 0 Jan-02 Jan-09 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Jan-90 Source: BoJ, Thomson Reuters, Credit Suisse ■ Action: We reiterate our OVERWEIGHT stance on the real estate sector, as we expect share prices to rise for the five reasons noted below. ■ Focal points: Real estate stocks should rise on: (1) continued monetary easing, (2) a decline in office vacancy rates in Tokyo’s five central wards and rent increases from next year, (3) an orderly increase in transactions in the income-generating property market, (4) a rebound in the condo market, and (5) an improved financing environment. ■ The upcoming consumption tax hike could stunt demand in the office market, but we think monetary policy is the key factor for sector share prices. One should not forget that the BoJ has adopted an inflation target. If the economy slows, the BoJ will likely respond with further easing, which should boost real estate share prices. The term “Greenspan put” was once popular in the US, and we think “Kuroda put” will come into common use if the BoJ responds to economic slowdowns with additional easing. ■ Given expected changes in the economic environment, we will likely have to reexamine our stance on real estate stocks sometime in 2H 2014 or in 2015, but we expect sector stocks to perform well over the next 12 months or so. ■ Stock call: Our top picks are Mitsui Fudosan (8801) and Tokyo Tatemono (8804). Our recommended pair trade for the next six months is to go long on Mitsui Fudosan while shorting Mitsubishi Estate (8802). DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 07 October 2013 Table of contents Still bullish on real estate sector 3 Recommended stocks, pair trades 5 Share price performance 8 Relation b/w monetary policy and real estate stocks 10 Contracted rent trends in Tokyo office market 13 Trends in market for office space in five central Tokyo wards 16 Trends in property transactions 20 Condo market in recovery 25 Improved debt-funding conditions 28 Real estate sector 2 07 October 2013 Still bullish on real estate sector Five factors favoring higher sector share prices Factors affecting share prices We regard the five points below as the key macro and sector-specific factors that impact Monetary easing and real estate sector share prices. We think the foreseeable trend for each will support higher improving fundamentals share prices over the next 12 months. should drive share prices higher (1) Monetary policy (2) Office vacancy rates and rents in Tokyo’s five central wards (3) Transaction volume in the market for income-generating properties (4) Condominium market trends (5) Financing environment Focus is on trends in 2015 We maintain our bullish outlook on the real estate sector and expect share prices to rise over the next 12 months. However, we will probably have to reexamine our investment stance sometime between 2H 2014 and 2H 2015. Once the BoJ’s inflation target is achieved and the central bank’s quantitative easing measures are halted, investors probably should move quickly to realize gains on their real estate sector holdings. Investment decisions should also take into account the demand surge caused by the consumption tax hike and its aftermath. (1) Expectations for a “Kuroda put” We think expectations for additional monetary easing by the BoJ will support real estate BoJ’s adoption of an sector share prices. A decline in consumption following the consumption tax hike could inflation target implies the cause Japan’s economy to enter a slowdown from April 2014. This would be negative for central bank will counter sector share prices, as lower consumption could reduce corporate earnings, depress economic slowdowns with demand for office buildings, and curtail real estate purchases by households. However, we additional easing assume the BoJ would respond by continuing or expanding its quantitative easing measures until its 2% inflation target is reached. Just as the term “Greenspan put” once became popular in the US, “Kuroda put” could become widely used among market participants if the BoJ responds to economic slowdowns with additional easing. However, the BoJ’s monetary easing will end once the inflation goal is reached. The BoJ has said it expects to continue quantitative easing for about two years. If so, the program started in 2013 should end in 2015–16. At that time, investors should move without hesitation to take profits on their real estate sector stockholdings. (2) Office vacancy rate likely to fall through 2015 We expect the BoJ’s monetary easing to produce the desired effects and look for With Tokyo’s office vacancy increases in government spending and public works investment to continue through 2015. rate likely to continue falling Under this scenario, strong demand for office space should drive down vacancy rates in through 2015, asking rents Tokyo’s five central wards from now through 2015. In 2016, however, we expect the office should begin to rise from vacancy rate to rise as new supply becomes available and the consumption tax hike’s mid-2014 economic impact blunts demand. Meanwhile, we look for asking rents in Tokyo’s five central wards to begin rising from mid-2014 and show a 5% YoY gain in December 2014. Real estate sector 3 07 October 2013 (3) J-REIT property acquisitions likely to increase The transaction market for commercial property is seeing an orderly improvement. J- Property sales seeing REITs are the main buyers and sellers of income-generating property and transaction orderly surge in activity prices are constantly monitored by investors. As a result, we haven't seen property without buyers jumping at purchases at high prices as private funds did from 2006 to 2007 by taking advantage of higher priced deals their financial leveraging. We expect the current trend to continue and look for a recovery in real estate liquidity as more JREITs are listed and others issue new shares to raise the capital needed to purchase more properties. We also think overseas investors will become more attracted to Japanese real estate investments as the yen weakens. Japanese real estate prices in dollar terms have already fallen about 20% since October 2011. When overseas real estate funds aggressively bought Japanese properties back in 2007, the weak yen was a supportive factor. With forex rates affected by central banks’ monetary policies, we expect overseas investors’ investment in Japan’s real property market to accelerate if the BoJ moves to increase monetary easing. (4) Condo market supply to increase Inventories in Tokyo’s condominium market are currently at rather low levels. Encouraged While we expect condo by the recently high contract ratio on newly offered condos, developers that have refrained supply in the Tokyo from purchasing land for development will probably become more aggressive about metropolitan area to acquiring land. increase, we must be cautious about impact of the However, we must also be cautious about the impact of the falloff in demand caused by falloff in demand after the the consumption tax hike. Homebuilders’ order volume is running at 20–30% previous- tax hike-related surge year levels, and condo demand could decline over the next 3–6 months from this October. (5) Financing environment is improving Japanese banks are becoming more positive about lending to real estate companies, and Improving environment for banks’ outstanding loans to the real estate industry are increasing. Along with monetary direct and indirect financing easing by the BoJ, the improved credit risk picture is providing a tailwind for real estate sector stocks. In addition, real estate developers and JREITs are taking advantage of low interest rates and procuring low cost funds via new bond issues. Real estate sector 4 07 October 2013 Recommended stocks, pair trades Top picks are Mitsui Fudosan and Tokyo Tatemono Considering our expectations for monetary easing and trends in the office market, we Positive on Mitsui Fudosan recommend investors pick stocks of companies with: (1) high financial leveraging and and Tokyo Tatemono for (2) the ability to increase earnings by tapping into strengths in real estate development.