Tokyo to get bigger skyscrapers with record developer debt

PUBLISHED : Tuesday, 24 May, 2016, 12:33am
UPDATED : Tuesday, 24 May, 2016, 8:30am

Japan’s biggest real estate companies are borrowing record amounts of cheap cash to pay for the country’s tallest skyscrapers yet.

Mitsubishi Estate plans to build a 390-metre tower with 61 floors above ground in front of Tokyo Station, making it the country’s biggest building. That and 27 other urban renewal projects in the capital will generate 10 trillion yen for the economy, according to a government statement this month.

Mitsubishi Estate, Mitsui Fudosan and Sumitomo Realty & Development, the country’s three biggest publicly traded developers, reported profits this month and disclosed that they had record debt piles that were costing them less to service.

The Bank of Japan’s adoption of a negative-rate policy in January would help boost investment in domestic commercial property by 5 per cent this year to 4.3 trillion yen, Jones Lang LaSalle said this month.

“Many developers are expanding operations as funding remains easy and property prices are set to climb further,” said Takashi Ishizawa, a senior researcher in Tokyo at Mizuho Securities. Still, uncertainties in the property market had increased as the economy showed weakness, he said.

Mitsubishi Estate plans to finish construction of its 61-floor tower, with five floors underground, by about 2027. It would be Japan’s tallest skyscraper, according to the developer.

Sumitomo Realty forecast this month that operating profits would grow at a slower rate in the next three years than over the past three. Credit Suisse Group analysts Masahiro Mochizuki and Yasuko Fukuda said in a report that the developer’s “lack of optimism about coming macroeconomic conditions left a negative impression”.

Shinzo Abe’s government in 2014 named Tokyo as a special strategic zone for international business, offering incentives to developers to build larger skyscrapers. Gains in office and residential property prices in Tokyo have exceeded increases in rents, prompting analysts at Mizuho and Deutsche Bank to warn of risks of overheating in the market.

Mitsui Fudosan, Mitsubishi Estate and Sumitomo Realty boosted combined interest-paying debt to 7.7 trillion yen at the end of March.

Mitsui Fudosan forecast a fifth year of record sales and a third year of record profits in the period to March 2017.

Mitsubishi Estate’s average interest rate fell to the lowest in 30 years at the end of March to 0.96 per cent, according to available data stretching back to 1986, spokesman Ayaka Nagashima said.

Sumitomo Realty sold a 10-year bond on Friday at a coupon of 0.4 per cent, down from 0.992 per cent paid on a bond of the same maturity issued in June.

The Bank of Japan released data on Friday that showed bank lending to the real estate sector rose to a record 67.7 trillion yen at the end of March, up 6.3 per cent from a year earlier.

“The big developers’ balance sheets are expanding, but from a credit perspective there isn’t a big problem,” said Kenji Serizawa, an analyst in Tokyo at Daiwa Securities Group, citing higher property prices and profitability at the companies.