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Mitsui Fudosan to pour $13bn into overseas projects

Developer's plan meets with market skepticism due to Japan's poor track record

An artist's rendering of the Hudson Yards complex on the West Side of Manhattan.

TOKYO -- Mitsui Fudosan plans to spend 1.5 trillion yen ($13.7 billion) on buildings in the U.S. and Europe as well as housing projects in greater Asia over the next seven to eight years, devoting nearly half of its investment budget to overseas real estate. 

A long-term business plan released in mid-May sets the goal of expanding foreign operations. The company aims to boost operating profit to 350 billion yen around 2025, with about 30% of this generated abroad.

Operating profit is forecast to rise 2% to 250 billion yen for the current fiscal year ending March 2019, with overseas business responsible for around 30 billion yen. This means that more than 70% of the envisioned long-term profit growth would come from beyond Japanese shores.

The market is skeptical. "In the real estate industry, business practices are quite different from country to country," noted Dalton Capital Japan's Fumio Matsumoto, who said Mitsui Fudosan's prospects for succeeding abroad are difficult to know.

The company's shares surged 9% on May 14 as investors welcomed buybacks announced along with its latest results three days before. But the market clearly did not like the overseas investment plan, sending the stock on a nine-session losing streak through Friday. The decline reached 10%, wiping out the gain from buying by investors who cheered enhanced shareholder returns.

Success stories are the best way to dispel concerns. Mitsui Fudosan will have a chance to deliver with the Hudson Yards redevelopment project in New York City. The roughly 11-hectare site on Manhattan's West Side will be home to five towers serving as office and commercial space, condominiums, a hotel and a school. The project is led by American developer Related and others, and Mitsui Fudosan will work on developing two office towers, taking a 90% stake in each for a total investment of some 500 billion yen.

One of the towers, a 51-story building to be completed this autumn, already has 80% of its tenants, so "we are signing leases at rents higher than initially planned," managing director Masatoshi Satou said. The other, a 58-story building slated for completion in 2022, is already scheduled to house the new headquarters of U.S. investment fund BlackRock.

Even the competition acknowledges the Hudson Yards project's strong start. There is no doubt that it is extremely successful at this point, said a representative of Mitsubishi Estate unit Rockefeller Group in front of investors and analysts.

Differences in Japanese and Western business practices may have helped Mitsui Fudosan take part in Hudson Yards. In the U.S. and Europe, developers and investors stick to their designated roles, with the former focusing on project planning and the latter on funding. Furthermore, developers usually have their own fortes, such as the office, commercial, residential or logistics sectors. And they rarely have an opportunity to develop such mixed-use complexes as Mitsui Fudosan's high-end Tokyo Midtown minicity.

Real estate companies in Japan double as developers and investors. Many investors were likely hesitant to pour billions of dollars into a five- to six-year project.

But "because we are a comprehensive real estate company capable of handling all the steps from development to ownership, we were able to take the plunge with the investment," Mitsui Fudosan President Masanobu Komoda said.

One-stop operations may generate a high return if a project succeeds, but the market is wary of the risk of owing massive debts. Thorough financial risk management will be key to success in the U.S., where interest rates are inching up.

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