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Nomura Real Estate's rising inventory sends bullish signal

Telecommuting, e-commerce and low interest rates keep demand up in Japan

The Proud City Kichijoji building, a Nomura Real Estate joint venture, sold out all its units by late October even amid the coroanvirus pandemic. (Photo courtesy of Nomura Real Estate)

TOKYO -- Japan's Nomura Real Estate Holdings is making a bullish bet during a pandemic.

The real estate developer has bulked up its inventories to their highest level since its 2006 stock market listing, confident that Japan's property market will remain strong despite -- or, in some ways, because of -- the coronavirus pandemic that is confining people to their homes.

The Proud City Kichijoji building, a Nomura Real Estate joint venture project that sits on a residential street near Inokashira Park in western Tokyo, had sold out its nearly 700 condominium units by late October. The properties, aimed at families, carried a median price tag of about 50 million yen to 60 million yen, or $478,000 to $574,000.

Though sales had to be put on hold earlier this year due to the virus, "we closed on all the units half a year earlier than planned," said Daisaku Matsuo, the head of Nomura Real Estate's residential division.

With people spending more time than ever in their homes amid the pandemic, including the growing number working from home, many are sparing no expense for a comfortable living space. Low interest rates have provided an additional boost, with some working couples taking out two mortgages on a single property -- an option offered in Japan. 

Inokashira Park, near Kichijoji Station, is one of the Japanese capital's most popular parks. (Photo by Arisa Moriyama)

For the six months through September, Nomura Real Estate reported an operating profit of 24.1 billion yen ($231 million), up 12% on the year. Though the coronavirus has taken a toll on employment and household incomes, the company, which is particularly strong in urban areas, sold about the same number of units as the previous year. Sales during the July-September quarter alone jumped nearly 30%.

At the end of September, Nomura Real Estate had already concluded contracts for about 90% of the total units it had planned to sell this fiscal year. The developer's estimates tend to be on the conservative side, but according to Junichi Tazawa, a real estate and housing analyst at SMBC Nikko Securities, "condo sales and property deals have been strong on the whole."

And given that sales typically pick up toward the end of the fiscal year in March, there is room for an overshoot. On average, analysts forecast operating profit of more than 75 billion yen for Nomura Real Estate in fiscal 2021, 20% higher than Nomura Real Estate's current-year forecast of 61 billion yen.

The developer's expansion of its inventory through purchases is more eye-catching. The total has risen from about 600 billion yen three years ago to 803.4 billion yen, or $7.69 billion, at the end of September. This marks an increase of 90 billion yen since the end of March, the company's largest-ever six-month jump.

Nomura Real Estate expects the coronavirus to dent property sales by about 9 billion yen, suggesting that most of the increase was intentional. The developer has increased its stock of condos aimed at single occupants and couples, an area where it had been relatively weak.

"When opportunities arise, we want to keep on buying," Chief Financial Officer Makoto Haga said.

Outside the residential business, Nomura Real Estate has also been adding to its inventories of office buildings and logistics centers in the Tokyo suburbs. The company buys land to build profit-generating properties, then sells them on to funds or real estate investment trusts.

Loose monetary policy has helped ensure a steady flow of money into the real estate market, and the rise in e-commerce amid the pandemic has fueled brisk demand for facilities to handle packages.

"We're close to reaching our fiscal-year target of 90 billion yen" in sales of commercial properties, Haga said.

But the build up is squeezing Nomura Real Estate's cash flow. Inventory turnover has increased to about 620 days in the April-September quarter from about 270 days five years prior.

Working capital for the six months has roughly doubled to almost 800 billion yen, largely due to the increase in inventory. Nomura Real Estate booked a negative free cash flow of about 170 billion yen for April-September, digging three times deeper into the red than a year prior.

While boosting inventory could help generate future growth, not all developers are pursuing the option. In fact, Mitsubishi Estate and Sumitomo Realty & Development have slashed their inventory by about 30% in the past three years, responding more cautiously to persistently high property prices.

Nomura Real Estate had the longest inventory turnover out of Japan's top five developers in the first half, though the companies have different breakdowns of residential, office and commercial holdings.

The company is forging ahead with its investment spree regardless. "There's more than enough demand on the short- to medium-term," Matsuo said. It also plans to maintain a capital ratio of 30%.

But some market watchers worry that any ratio below that benchmark would not be enough to protect Nomura Real Estate from potential risks. A healthy cash flow will be key to the company's long-term financial standing.

A large inventory also means Nomura Real Estate faces a higher risk of the market shifting before it can ink contracts to sell its properties. The company will need to slash how much time it takes to convert its inventory to cash, so it can compete better with its rivals and continue investing into its growth.

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