Mitsubishi Estate learns from Rockefeller debacle
TAKAHISA TODA, Nikkei staff writer
TOKYO -- Japanese old enough to have experienced the country's bubble economy in the late 1980s -- an era marked by the purchase of New York's landmark Rockefeller Center by a Japanese investor, may remember the mixed feelings of fear and exultation of the period.
Rockefeller Center is located on New York's legendary Fifth Avenue. The complex, anchored by a 70-story skyscraper, was completed in 1939, during the Great Depression, by the Rockefeller family, one of the world's richest at the time.
In 1989, the $846 million deal by Mitsubishi Estate to buy a 51% stake in Rockefeller Group Inc. (RGI), the complex's operator, set off a wave of Japan-bashing in the U.S.
Rockefeller Center earned the dubious nickname "Tower of Bubble," and soon the wildly inflated property bubble did burst. The operator of Rockefeller Center collapsed, filing for Chapter 11 bankruptcy protection in 1995. Mitsubishi Estate had no choice but to book an extraordinary loss of just over 150 billion yen for the year ended March 1996 as a result of the bankruptcy, the first for the Japanese property developer since it listed in 1953. The story of Mitsubishi Estate's New York misadventure became a symbol of the excesses of the period.
Life goes on
For most Japanese, the story of Rockefeller Center ends there, but the final chapter has yet to be written.
On Oct. 31, 17 years after Mitsubishi Estate wrote off the Rockefeller Center loss, Jo Kato, the company's representative director, said at a press conference announcing the company's earnings that solid overseas business lifted its April-September group operating profit 26% on the year to 73.7 billion yen. For the year ending March 2014, it expects its operating profit to rise 35% to 160 billion yen. In the first half, the company's operating profit from its overseas business rose about 400% on the year to 20.1 billion yen, or 27% of the total. For the full year, Mitsubishi Estate expects to generate 15% of its total operating profit from overseas operations.
The rise in the company's first-half profit is due in large part to the sale of a building in London, where property prices are surging as money has poured into the city from around the world. The building, located in Paternoster Square in London's financial district, houses the London Stock Exchange. Details of the transaction have not been disclosed, but the Japanese developer is thought to have made hundreds of millions of dollars from the sale of the property, which it began developing in the early 1990s.
Commercial property markets in rich countries slumped following the 2008 collapse of Lehman Brothers, but they have bounced back in the U.S. and in London more quickly than in Japan. Some real estate market watchers warned of overheating and an official with one foreign brokerage praised Mitsubishi Estate for having unloaded the London property at the right time.
Of clouds and silver linings
Ironically, Mitsubishi Estate can trace its successful European business to its Rockefeller Center deal. After the bubble burst in Japan, it made RGI a wholly owned subsidiary in 1997. At the time, many other Japanese companies were pulling the plug on their U.S. real estate businesses.
In a move to deal with the once-failed RGI, Mitsubishi Estate sold 12 of the 14 buildings it owned in the Rockefeller Center complex, holding onto just the Time-Life Building and the McGraw-Hill Building. RGI retains these two properties to this day. According to an executive at Mitsubishi Estate, the company's (smaller) overseas operations are run by local employees who have a solid understanding of the U.S. real estate market.
Still in the game
RGI has now about 30 ongoing projects in 10 U.S. states. Only nine of RGI's 350 employees were sent over from the parent company in Japan. In 2006, Mitsubishi Estate sold big U.S. real-estate brokerage Cushman & Wakefield, which was part of RGI, to an Italian investment firm for slightly more than 60 billion yen. In 2010, Mitsubishi Estate brought Britain's Europa Capital Group, which manages real estate funds in Europe, under its umbrella. This summer, RGI raised 25 billion yen for a new real estate investment trust, called the Rockefeller Group U.S. Premier Office Fund, aimed at Japanese institutional investors.
The Japanese real estate firm's strategy is clear. It continues to hold office buildings Tokyo's main business districts, where the company has its headquarters, including the Otemachi, Marunouchi and Yurakucho areas. Meanwhile, it has sold off other properties, both domestic and overseas, when it felt the time was right to turn a profit. With this strategy, Mitsubishi Estate has been able to make up for periods of sluggishness in its other operations, as it did in the most recent half-year. Mitsubishi Estate's operating profit fell 10% on the year during the period due to sluggishness in its building management business, which depends heavily on rental revenues in the domestic market. But it made up for that with gains from property sales. The company aims to raise the share of its overseas operating profit to 20% of the total.
Mitsubishi Estate's shares are currently trading at about 10% below their year-to-date high of 3,350 yen logged April 5. The stock is seen as a laggard compared with Mitsui Fudosan, Sumitomo Realty & Development and other Japanese property issues. Daisuke Fukushima of Nomura Securities said vacancies at new buildings in the Otemachi, Marunouchi and Yurakucho districts, where Mitsubishi Estate is a big player, need to be filled and rents of existing buildings must recover to send the stock higher.
This view is based on Mitsubishi Estate's role as a big landlord in Marunouchi, but that may not tell the whole story. If growth in the company's overseas business becomes more apparent over the medium to long term, the shares may get a further lift. Mitsubishi Estate may have gotten its fingers burned with Rockefeller Center way back when, but it still has things cooking.