Global hedge funds and private equity firms are gravitating toward Japanese companies in a bid to unlock as much as ¥25 trillion ($165 billion) in undervalued real estate.
The hidden value of property on corporate balance sheets is showing up as a theme behind some of the biggest activist campaigns and mergers and acquisitions announced in Japan this year. In the latest move, Elliott Investment Management unveiled a 5.03% holding in Tokyo Gas, with a real estate portfolio that the U.S. firm estimates is worth about ¥1.5 trillion — almost as much as the utility’s entire market value.
The potential for unrealized gains stems from an accounting quirk when Japanese companies hold onto offices, hotels and country clubs for long periods. The value of the real estate is recorded at book value, which is the acquisition or development cost minus annual depreciation. But in recent years, Japan’s property prices have soared, especially in metropolitan areas. That means if the real estate is sold, companies can record big profits from the difference between book and market value.