Japan developers: spaced out

Going home before the boss is a longstanding taboo in Japan. But what if the boss is already at home? The pandemic has helped put a stop to physical office presenteeism. Sony, Toshiba and Fujitsu are among the companies now working from home. Fujitsu plans to halve its office space. But an improved work-life balance for employees means gloom for Japan’s developers.

Six consecutive years of rising rents and record low vacancy rates have encouraged local developers to hoover up properties. Mitsui Fudosan, Japan’s largest developer, has nearly doubled its property assets under management over the past 15 years. It makes more than 90 per cent of its leasing revenues from offices and commercial spaces.

Those revenues are under threat as office vacancies rise in Tokyo’s business districts. In May, the vacancy rate was close to 2 per cent — the fourth straight month of increase and the largest monthly percentage rise in more than a decade.

This is just the beginning. As companies limited by fixed-term leases opt not to renew their contracts, vacancies are expected to more than double by the end of the year. Rates are likely to remain high over the next two years.

Shares in Mitsui Fudosan are already down a third this year. Peer Sumitomo Realty’s are down 28 per cent. Smaller rivals Tokyu Fudosan and Ichigo are down more than 40 per cent.

They will have further to fall unless companies return to offices. Portfolios are overly concentrated. Most properties are in highly populated areas — the more crowded the better. About 80 per cent of Mitsui’s leasing properties are in five neighbourhoods in Tokyo and about 90 per cent of Sumitomo Realty’s. They cannot take advantage of the growing trend of companies opening smaller offices in the suburbs.

Rising vacancies may presage a lasting shift in Japan’s workplace culture. The pandemic threatens both presenteeism and a jobs-for-life culture, as unemployment rates rise. The glory days for developer stocks are coming to an end.

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