Morningstar | Sumitomo Realty Company Report
Sumitomo Realty manages more than 220 office buildings in Tokyo, the most of any real estate company. More than half of its buildings are in Minato and Shinjuku wards, including two flagship properties in Roppongi and a half dozen in Nishi-Shinjuku. Just 20% are in Chiyoda and Chuo wards that are the main areas of its two larger rivals and which generally command higher rents. Its dispersed portfolio of buildings in slightly less central locations reflects Sumitomo Realty’s relative late entry to the market--it doesn’t have a cluster of properties inherited from before World War II--as well as its track record of steady growth over the past decades. On average, the book values of its properties are closer to their market values than is the case for its rivals that have larger off-balance-sheet unrealized gains on land acquired long ago. This is one factor behind Sumitomo Realty’s higher financial leverage and higher ROE, but even adjusting for this factor Sumitomo Realty has more leverage and its returns on market-value-adjusted equity and assets are better. In short, we see the company as somewhat more profitable than its two large rivals even after adjusting for differences in financial leverage and accounting.One of the differences in Sumitomo Realty’s operating model is that most (60%) of its office buildings are redevelopment projects. The company has extensive know-how in the process of purchasing plots of land one by one and putting together several parcels to redevelop the land on a larger scale. This requires the formation of a consensus among multiple property owners and extensive consultations with local administrative bodies, resulting in longer development times, but it has the advantage of reducing initial investment cost compared with locations that are prime to begin with. In many cases, the company is able to benefit from government subsidies and approvals for higher ratio of total floor space to land area by tying its projects to the urban-development objectives of local authorities. Also, Sumitomo Realty has not sponsored J-REITs and retains all the properties it develops.Sumitomo Realty & Development is mainly engaged in the real estate business. Co.'s principal business segments are real estate leasing, real estate sale, construction, brokerage, and others. It is engaged in the development, direct leasing and management of office buildings and condominiums, the sublease of properties leased from special purpose companies, the provision of hotel business and the operation of event halls and conference rooms; the development and sale of condominiums, buildings, detached houses, housing land and other properties; the construction and remodeling of houses; the brokerage and sale of real estate; and the operation of fitness clubs and restaurants.
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