TOKYO -- Real estate shares and REITs were hit especially hard in Friday's Japanese equities market rout as traders fretted over a possible postponement of the upcoming Tokyo Olympics that have bolstered property prices in the capital.
The Tokyo Stock Exchange REIT Index closed down 187 points, or 10.5%, at 1,596 in its largest-ever one-day decline, after futures in the real estate investment trust index fell sharply enough to trigger a circuit breaker. Tokyu Fudosan Holdings took nearly 20 minutes from the start of trading to settle on a price, eventually opening down 12% from Thursday's close.
"My phone was ringing off the hook from the morning on" with calls from institutional investors, said Junichi Tazawa, senior analyst at SMBC Nikko Securities. The rush continued with calls from Europe in the evening and from the U.S. that night.
The drop came after U.S. President Donald Trump raised the possibility Thursday of delaying the 2020 Summer Olympics in Tokyo for a year.
The global attention that Olympics host cities enjoy creates a "showcase effect" that typically fuels buying of property-related stocks and REITs. Eiji Kinouchi of Daiwa Securities sees the boost lasting five years from the start of an Olympic year.
This corner of the market would lose much of its luster if the games were suspended.
More concretely, 10 major real estate companies plan to redevelop the Olympic Village in Tokyo's Harumi waterfront district into high-rise condominiums to be handed over to buyers as early as 2022. Should the games be postponed, these developers would have to wait longer to recoup their investment, dragging down their financial results.
Norihiro Fujito of Mitsubishi UFJ Morgan Stanley attributes the recent steep drop to loss-cutting by overseas investors. Foreigners were net sellers of Japanese stocks and futures for four straight weeks through last week. While the property sector had been left relatively unscathed, traders have now begun selling those shares to make up for losses elsewhere.
After the sector's dramatic decline, Mitsubishi Estate's price-to-book ratio now stands at 1.1 -- its lowest in 11 years. The company trades at 40% of its net asset value per share, which includes unrealized gains on its property portfolio.
"The coronavirus will have a prolonged impact, and a correction in the real property market looks unavoidable," said Yosuke Ohata of Mizuho Securities.
Etsuro Akiyama of Sumitomo Mitsubishi DS Asset Management bought on the dip in REITs Friday afternoon, arguing that "the bearishness is overdone."
But many investors find it hard to tell whether the prices have overcorrected or whether the property market is due for a further fall. Real estate prices are a lagging indicator, following moves in the broader economy by six months to a year.
"We haven't sold yet today, but I can't be confident that that's the right choice," said a representative at a regional financial institution that invests in REITs and real estate stocks.