Japan’s biggest real estate companies are borrowing record amounts of cheap cash to pay for the nation’s tallest skyscrapers yet.
Mitsubishi Estate Co plans to build a 390 metre (1,280 feet) tower with 61 floors above ground in front of Tokyo Station, making it the nation’s biggest building. That and 27 other urban renewal projects in Japan’s capital will generate ¥10tn ($91bn) for the economy, according to a government statement this month.
Mitsubishi Estate, Mitsui Fudosan Co and Sumitomo Realty & Development Co, the nation’s three biggest publicly-traded developers, reported profits this month and disclosed that they had record debt piles that are costing them less to service. The Bank of Japan’s adoption of a negative-rate policy in January will help boost investment in domestic commercial property by 5% this year to ¥4.3tn, Jones Lang LaSalle Inc 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 Co. Still, uncertainties in the property market have increased as the economy shows 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 operating profits will grow at a slower rate in the next three years than over the past three. Credit Suisse Group property 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.”
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 ¥7.7tn at the end of March. Shares of the three companies rose yesterday in Tokyo after declining on Thursday.
Mitsui Fudosan is forecasting a fifth year of record sales and a third year of record profits in the period ending March 2017. Mitsubishi Estate’s average interest rate fell to the lowest in 30 years as of the end of March to 0.96%, according to available data stretching back to 1986, company spokeswoman Ayaka Nagashima said.
Sumitomo Realty sold a 10-year bond yesterday at a coupon of 0.4%, down from 0.992% paid on a bond of the same maturity issued in June. The Bank of Japan released data yesterday that showed that bank lending to the real estate sector rose to a record ¥67.7tn at the end of March, up 6.3% 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, a credit analyst in Tokyo at Daiwa Securities Group, citing higher property price values and profitability at the companies.