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Japanese companies outside the real estate sector generated more than $77bn 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 across more than 250 companies in industries ranging from food production and glass manufacturing to advertising and financial services — many of them businesses that built property empires in the 1980s and have never needed to sell them.
The calculation of their 2023 gains by analysts at Goldman Sachs has emerged ahead of the June annual meeting season — the 10-day stint at the end of next month during which more than 2,000 listed companies meet shareholders.
Legal and banking advisers said the season would probably generate more friction than previous years, in part because of pressure on companies from the Tokyo Stock Exchange to focus on capital efficiency and valuations.
The glut of unrealised property gains last year follows 10 years in which prices of Japanese commercial property and condominiums have risen, and where, unlike London, New York and Hong Kong, remote working has not taken hold and Tokyo office vacancies remain low post-pandemic.
Actual real estate companies, such as Mitsubishi Estate and Tokyo Tatemono, have performed strongly, with shares for the sector up more than 20 per cent since January.
But Goldman’s Japan equity strategist, Bruce Kirk, said companies were under pressure from shareholders to justify their non-core businesses, and the vast property portfolios looked anomalous.
Bankers who have advised Japanese companies on dealing with activists said that where investors once saw the property portfolios as a peculiarity, their existence now painted a target on companies and made them vulnerable to shareholder campaigns.
Goldman’s report focused on about 250 companies in the Topix index that were not real estate specialists but had business segments operating their real estate assets.
Accounting changes made in 2010 obliged companies to disclose the book value of properties held for investment or rental, along with an estimate of market value. The difference between those two figures produces an annual reckoning of unrealised gains or losses on the property, which in many cases is office space.
Between them, those companies declared $77bn of paper gains in 2023 — not far off the $89bn of paper gains declared by the Japanese real estate industry itself.
Recent high-profile activist fund engagements with Japanese companies, including Elliott Management’s tussle with Dai Nippon Printing, have focused on non-core property assets.
“The potential value unlock from undervalued non-core real estate provides investors with yet another pressure point to focus on during their discussions with Japanese corporate management,” said Kirk.
He added there was likely to be some debate around the definition of core versus non-core, and his screening of companies with large non-core real estate portfolios deliberately omitted Japan’s railway companies, which hold significant properties around their stations.
“The corporate governance momentum is definitely on the side of investors at the moment,” said Kirk. “This could encourage a lot more scrutiny of the reasons why non-real estate companies have such extensive portfolios of real estate assets during this year’s AGM season.”