Patriot games
Can the 2020 Olympics Save Abenomics?
Illustration by Louise Rouse, After Yusaku Kamekura
I have always liked drinking Tokyo tap water, but it doesn’t taste any more like Kool-Aid now than it did before Abe fever took hold of the stock and real estate markets last October.
Yes, it is true that the Bank of Japan has doubled its inflation target to two percent, but nothing I have seen from the government or the central bank so far has convinced me that deflation is about to end. We are still in the honeymoon period of “Abenomics”, so given the number of domestic and international investors excited about Japan at the moment, the stock and property markets could continue to run on fumes for a few more months. At some point, though, even the most gullible investors will start looking for a new justification to keep buying.
I see little reason why pumping more money into Japanese banks will increase loan demand or loosen lending criteria. Although new Class A office supply in 2013 will be lower than average, there are so many large-scale projects under development that many tenants will be able to put off decisions to move until they are offered better deals. I have heard nothing from Prime Minister Abe on how he intends to deal with the aging and falling population, so with few foreign companies looking to set up regional headquarters or manufacturing operations in Japan, underlying demand remains stagnant.
If the stock and real estate markets can just hang on until the fall, there is something that could actually keep these markets going for years to come—the 2020 Summer Olympics. Tokyo is competing against Madrid and Istanbul for hosting rights and the International Olympic Committee will decide the winner in September. The vast majority of the 39 Olympic venues would be located in central Tokyo, and many of these would be development projects large enough to keep general contractors and manufacturers busy and happy for quite a while.
The Olympic Stadium alone, an 80,000-seat venue, which would be built on the site of the 1964 Olympic Stadium, would be a huge economic stimulus, and is scheduled for completion in 2019. According to Around the Rings, an Internet site on the business of the Olympics, Tokyo’s bid currently ranks slightly ahead of Madrid’s and Istanbul’s, but weak public support remains an issue.
Regardless of the outcome of Tokyo’s 2020 Olympic bid, and how one may view Japan’s long-term economic prospects, there are always investors ready to buy cheaply. A handful of recent market moves shows that value investors who have placed long bets on the idea that Japanese shareholders will one day wake up and realize their assets are undervalued are beginning to see their dreams come true.
Japan’s largest movie studio, Toho Co. (TSE: 9602), launched a takeover bid (TOB) on January 9 for its majority-owned subsidiary Toho Real Estate Co. (TSE: 8833) at a 33 percent premium that many investors believe significantly undervalues the company’s prime central Tokyo real estate assets. In contrast, when Sankei Building was bought out by its majority-owning parent company a year ago, the premium was 139 percent. As of the time I write this column in late January, the market price of Toho Real Estate has been hovering above the TOB price, so clearly investors are expecting a higher offer.
In another fascinating takeover fight that shows some things have changed in Japan as a result of foreign investment, PGM Holdings K.K. (TSE: 2466) admitted defeat after its TOB for Accordia Golf Co. (TSE: 2131) failed to pass the minimum threshold of 20percent. If not for the fact that both companies were originally listed by foreign companies, which both divested their holdings within the past several years, it is unlikely that there would have been enough floating shares to justify a takeover attempt. The fascinating bit is that while this looks like a value-oriented real estate play, the current key shareholders of both golf course operators are in the pachinko business, and some market observers say the takeover attempt had little to do with achieving efficiencies in the golf business and more to do with unresolved disputes in the pachinko industry.
With speculative interest for real estate rapidly growing, I expect more takeover offers this year, both for operating companies as well as J-REITs, where at least one big deal may already be in the works.
Full disclosure: my company is a small shareholder of Toho Real Estate.
