Mitsubishi Estate Co., Japan's largest developer by market value, said seeking higher rents from tenants moving into new buildings has become ``difficult'' amid the economic slowdown resulting from the credit crisis.
Mitsubishi Estate, the owner of about 30 buildings in areas adjacent to Tokyo Station, Japan's most expensive business district, earned record operating profit on rising leasing income for a third-straight year in the period ended in March.
It was forecasting a fourth year of record profits until the credit crisis struck, prompting a downward revision on Oct. 31.
``It is unclear how long the economic slowdown will affect Japan's property market,'' Toyohisa Miyauchi, executive vice president of Mitsubishi Estate, said in an interview. ``While we will continue to raise rents for existing tenants, we are seeing a softening in the market for new tenants.''
Before credit markets ground to a halt, the highest monthly rent agreed upon for new buildings in the area peaked at 80,000 per tsubo ($250 per square meter), for the Marunouchi Park Building, a 34-story commercial tower set for April completion.
London has the world's highest office rents, followed by Moscow and Tokyo, according to a May report by CB Richard Ellis Inc., the world's largest commercial brokerage. The highest rents obtained for the Marunouchi Park Building would lift Tokyo to second place after the yen's 8.4 percent appreciation against the dollar since May 31.
Office Vacancies
The commercial real estate market has since weakened, with Tokyo officevacancies rising to a three-year high in October, as companies cut spending and Japan's economy fell into recession. The Topix Real Estate Index is the worst performer among 33 industry groups this month, having fallen 24 percent.
``The vacancy rate is going up in Tokyo. That's one signal for us to reduce our holdings of some large real estate stocks,'' said Yuichi Chiguchi, who helps manage about $8.6 billion in assets at DIAM Co. in Tokyo. ``We have to admit demand is slowing down in the office property market.''
Mitsubishi Estate shares dropped 4.5 percent or 58 yen to 1,222 as of 2:01 p.m., bringing the rate of decline over the last six months to 57 percent.
Mitsubishi Estate expects an increase in leasing income in the year ending March 2010 after the completion of the Marunouchi Park Building. The developer is trying to attract tenants that will be relatively insulated from the current slowdown, such as law firms, accountants, and merger and acquisition consulting companies, Miyauchi said.
20 Billion Yen
``There will always be companies that are financially sound even in a downturn,'' said Miyauchi. ``We will focus on attracting those companies.''
Nippon Steel Corp., Japan's second-biggest maker of girders; Mitsubishi Corp., Japan's largest trading company; and Mori Hamada & Matsumoto, a law firm, will occupy all of the office space in the Marunouchi Park Building. Mitsubishi Estate expects annual rental income of 20 billion yen for the facility, Miyauchi said.
The company earned 380.6 billion in leasing profit in the year ended in March.
Japan's economy, the world's second largest, unexpectedly shrank in the third quarter, entering its first recession since 2001 as companies cut spending. Europe also entered a recession last quarter, a report showed last week.
The U.S. economy shrank at a 0.3 percent annual rate last quarter, the most since the 2001 downturn, advance Commerce Department figures showed on Oct. 30.
``Unlike what happened after the collapse of the asset bubble in Japan, what's causing the rents to drop this time is the economic downturn in the U.S.,'' said Miyauchi. ``We need to keep an eye on how big the impact will be on Japanese companies.''
