Japan's Coming Real Estate Revival

| About: Mitsubishi Estate (MITEY)

Japan's recession has weighed on Mitsubishi Estate (OTCPK:MITEY), as its fiscal third-quarter revenues fell by 2.5 percent from the same period last year to JPY:654,976,000 (US:7,061,241.74). Net income in the period was also down from the prior year, falling 34.6 percent to JPY33.9 billion, while earnings per share (EPS) fell from JPY37.37 to JPY24.42, with higher quarterly expenses figured in.

The average vacancy rate in Tokyo is currently running at 8.7 percent. By comparison, Mitsubishi Estate's current vacancy rate is just 4.5 percent. While that's up a bit less than one percent versus the same period last year, it's down by 5.51 percent from the level it reported in the previous period. The company's lower-than-average vacancy rate is primarily due to the fact that while office demand is down overall, Mitsubishi Estate's properties are located in some of the best and highest demand areas of Tokyo.

While the company's fiscal third-quarter results were weaker than they have been in recent years, I look for improvement going forward.

Many Japanese companies have reported better-than-expected earnings, particularly those that are export-oriented, thanks to Prime Minister Shinzo Abe's aggressive stance on weakening the yen. While he may have just taken office in late December, his campaign rhetoric has forced a sharp devaluation since about late October, when his ultimately victorious party was widely seen as the front-runner in Diet elections.

Assuming he is successful in pulling Japan out of its recession - even if it is on the back of much higher government debt - the improving business environment will quickly prompt Japanese companies to expand their operations and take up the slack in the office space market.

Granted, Abe has his work cut out for him.

At its current level of about 11,500, the NIKKEI is well off its high of 18,000 put in during 2007 and the more than 20,000 it hit in 2000. Since last decade's highs, the Japanese economy has grown by less than 1 percent annually, land values are at levels last seen in the 1970s and government debt has grown to more than 200 percent of the economy.

To overcome those challenges, not only has Abe tackled devaluing the yen through easing credit and pushing inflation, he's proposed a JPY10 trillion stimulus program. While Abe won't make Japan an engine of major global growth, he should pull the country's economy out of its current doldrums for at least awhile.

Additionally, a weakening currency and higher inflation in any market is bullish for hard asset prices such as real estate. In the final half of 2012, Mitsubishi Estate's total assets jumped by 25.9 percent to JPY4.6 trillion versus the first half of the year, with real estate appreciation playing a major role.

Thanks to those improving asset values and the expected pickup in the business environment, Mitsubishi Estate's full-year 2013 EPS is currently expected to come in at JPY36.44. But while its fiscal third-quarter EPS was down, it was still better than expected, so earnings are on track to surprise to the upside for the full year. I also wouldn't be surprised to see revenues come in higher than expected as well, since there's still some skepticism on the Japanese recovery. See our free report, for more high-growth international investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.