Japanese property group Tokyo Tatemono targeted by UK activist fund

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A UK-based activist fund has taken a stake in one of Japan’s biggest property groups and is calling for divestments and a strategy overhaul, as foreign investors continue to pressure the country’s boardrooms.

Palliser Capital has taken a position in Tokyo Tatemono to become a top-15 shareholder, according to people familiar with the fund.

The real estate company, founded in 1896 and owner of some of the country’s most prominent buildings, including Otemachi Tower in the capital’s business district, is the latest in a lengthening line of property groups targeted by activists. Japanese companies have been under growing pressure to improve market valuations, raise corporate governance standards and increase returns on equity.

People familiar with Palliser’s thinking said the fund saw a yawning discount between Tokyo Tatemono’s intrinsic value, which Palliser put at $6.4bn, and its market capitalisation of $3.3bn. It recognises some attempts by the property group to address this discount but aims to press for an acceleration.

Palliser is said to want a clear road map for identifying non-core assets, disposing of unnecessarily held properties and unwinding a significant portfolio of equity stakes in other listed companies. The largest of those cross-shareholdings is a roughly 5.3 per cent stake in Hulic, a Japanese property group with close ties to Tokyo Tatemono.

Palliser is expected to unveil its investment at the 13D Monitor annual activist investor gathering on Tuesday in New York. The fund, said the same people, has compared Tokyo Tatemono’s position to that of Japan’s biggest property group, Mitsui Fudosan, targeted by US activist Elliott Management this year.

Palliser believes the two companies share similarities in terms of asset mix, low asset turnover and potentially unrealised gains, but Mitsui’s valuation has increased since Elliott’s campaign and the company’s decision to launch a new strategic plan and a shareholder capital return programme.

Despite the public pressure being brought to bear, contact between the Palliser and Tokyo Tatemono’s top management has been constructive, said the people familiar with the activist investor.

It is the fund’s second big investment in Japan in the past 12 months, after it targeted Keisei Electric Railway, which runs trains in Tokyo, including one of the main lines from Narita airport into the city centre.

In a recent report on the continuing rise of investor activism in Japan, CLSA’s chief Japan equity strategist Nicholas Smith noted that in the first three months of 2024, the number of activist events was 156 per cent higher than in the same period a year earlier. Crucially, there had been a qualitative change in activism, he said.

“Activism is . . . now about unbundling directionless conglomerates and agitating for mergers in mature sectors with diffuse market share,” said Smith. “Both are critical issues for the Japan turnaround story. Prominent activists have demonstrated leaving companies in better condition than they found them, so have government support.”

Palliser declined to comment on the stakebuilding. Tokyo Tatemono did not immediately respond to a request for comment.