Obayashi Corp, Japan’s second-largest construction company by market value, plans to invest 200 billion yen (S$2.6 billion) in property

Obayashi Corp, Japan’s second-largest construction company by market value, plans to invest 200 billion yen (S$2.6 billion) in property to take advantage of rising values and reduce its dependence on the building business.

The company’s construction operations have suffered from soaring raw material prices and intensified competition, said Yasuo Kodera, a finance manager at Obayashi, in an interview. The builder announced its five-year investment plan on Tuesday.

‘This is our first time to set an investment target for our real estate business,’ said Mr Kodera. ‘While construction and civil engineering will continue to be our core businesses, we would like to expand real estate operations, such as leasing, which will provide stable income.’

Public works spending was cut by 3.5 per cent this fiscal year, the sixth year of cuts. That’s increased competition among builders that have also been hurt by rising materials costs and public sanctions for bid rigging.

The Topix Construction Index is at the lowest level in three years.

Obayashi is seeking to profit from a rebound in real estate as Tokyo office rents stand at a 13-year high and nationwide commercial land prices rose this year for the first time since 1991.

Real estate operations accounted for a quarter of operating profit, or sales minus the cost of goods sold and administrative expenses, last year from 18 per cent a year earlier.

Obayashi’s operating profit from construction fell to 695 million yen in the six months ended Sept 30, from 7.98 billion yen a year earlier.

The Tokyo-based company expects net income for the year ending March to be 23 billion yen, a 43 per cent decline from last year.

Half of the company’s real estate investment in the next five years will be spent on property to be leased out, while the other half will go to buy land with the aim of reselling it at a higher price, the company said.

Shares of Obayashi, have fallen 33 per cent in the past six months. — Bloomberg

Source : Business Times - 15 Nov 2007