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Property

TSE's landlord faulted by hedge fund for charging rock-bottom rent

Heiwa Real Estate should not fill board with bourse alumni, Hong Kong investor says

The Tokyo Stock Exchange: the landlord of the bourse is accused of charging below-market rent. (Photo by Rie Ishii)

TOKYO -- The owner of the Tokyo Stock Exchange Building faces a shareholder resolution from Hong Kong hedge fund LIM Advisors calling for an end to giving board seats to former executives at the TSE and its parent, a practice LIM says results in offering the bourse below-market rent.

Heiwa Real Estate has customarily appointed ex-officials of the TSE -- its biggest tenant, leasing the entire building -- to directorships. President Kiyoyuki Tsuchimoto is Heiwa's fourth consecutive chief to have started his career at the Tokyo bourse. Including Tsuchimoto, three of Heiwa's five inside directors are TSE alumni.

This could create a conflict of interest, LIM says.

The ties are likely to stir debate, given that TSE operator Japan Exchange Group (JPX) is essentially the standard-bearer for corporate governance reform at the nation's listed companies.

Formed in 1947 to manage stock exchange facilities across the country, Heiwa is known as the "landlord of Kabutocho" because it owns a large portfolio of properties in the area, considered the Wall Street of Japan.

LIM Advisors is apparently proposing three main changes at Heiwa: no board candidacies for anyone who has worked at JPX for five years or longer; filling at least two-thirds of the board with real estate professionals with 10 or more years of industry experience; and selling off roughly 3.2 million JPX shares held by Heiwa. The activist fund also points out that the TSE building's rent is a bargain compared with market rates. If the rent is low because former JPX executives are on the leadership team, this would constitute a material conflict of interest, the shareholder says.

Heiwa had once linked the TSE building's rent to the value of trading on the bourse but switched to a fixed rate negotiated with the tenant every two years or so starting in fiscal 1998. The rent tumbled subsequently, declining to 2.7 billion yen ($25 million at current rates) for fiscal 2015 -- less than half the 7.3 billion yen of fiscal 1997.

Encouraged by the strong leasing market in the area, Heiwa raised the rent in fiscal 2019 to 3 billion yen for the first hike in a quarter century. The new rate translates to around 16,600 yen per 3.3 sq. meters a month. Meanwhile, the average in Tokyo's five central wards -- including Chuo Ward, where the TSE building is located -- came to 29,296 yen as of this March, according to office space brokerage Sanko Estate. This is nearly 80% higher than the TSE building's rate.

"It's undeniable" that the TSE building's rent "deviates from market rates," an analyst at a domestic asset management company said.

Heiwa declined to comment on LIM's resolution, saying the company is discussing its response. Meanwhile, JPX said it is not in a position to comment on its landlord's personnel matters but said JPX does not influence Heiwa Real Estate's management through personnel connections.

The fate of the resolution may hinge on how big Heiwa shareholders vote. Local firm Simplex Asset Management held a stake of a little over 12% as of last September, emerging as an effective top shareholder, according to a large-shareholdings report. Mitsubishi Estate owned slightly more than 11% of Heiwa as well. Heiwa is listed on the TSE's first section.

Heiwa is finalizing resolutions to be presented to its shareholders meeting slated for June, where its takeover defenses are set to be renewed. When these measures were last updated in 2018, a relevant resolution squeaked through with 55.8% support.

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