Activist investors are likely to find more opportunities in Japanese real estate as unrealized gains are poised to swell under new Liberal Democratic Party leader Sanae Takaichi.

The prospect of faster inflation and rising asset prices under Takaichi, who’s almost certain to become the country’s next prime minister, is seen as favoring loose monetary policy that would probably further boost paper gains in corporate property. That’s a lure to activist funds looking to raise shareholder value.

The value of such assets for about 330 major listed companies has already grown to an aggregate ¥31 trillion ($203 billion), according to compiled data, due to rising land prices and property development. That’s an increase of 26% from five years ago, and some strategists project it will rise further.

Should fiscal spending expand while the Bank of Japan is restrained from hiking rates, "a scenario is conceivable where inflation progresses, boosting firms’ unrealized gains, and activists move in,” said Daisuke Uchiyama, a senior strategist at Okasan Securities.

At least seven firms, including Mitsubishi Estate and textile maker Katakura Industries, are sitting on unrealized property gains that exceed their market capitalization, the data showed.

Activists have increasingly been urging companies to sell property and expand shareholder returns. Just last month it was reported that Elliott Investment Management had taken a stake in Kansai Electric Power, urging it to get rid of non-core assets. Kansai Electric had unrealized real estate gains of ¥220 billion.

Another example is a move by City Index Eleventh, an investment firm linked to activist investor Yoshiaki Murakami, to take a holding in department store operator Takashimaya, which has paper gains of ¥130 billion on its property assets.

Corporate governance reforms are also compelling firms to reassess their asset holdings.

Significant unrealized gains on property are hidden assets following cash and cross-shareholdings, and "companies failing to utilize them are becoming more noticeable,” said Masayuki Kubota, chief strategist at Rakuten Securities. He expects activist pressure on such firms to grow.

Including a company’s real estate market value into its price-to-book ratio (PBR) drives the ratio lower. The smaller this adjusted PBR is, the greater the unrealized gains on its real estate holdings and the more undervalued the stock is likely to be.

The gap is particularly pronounced in sectors such as real estate, warehousing and land transportation, as well as in retail, textile, and information and communications, according to calculations.

This puts them in the crosshairs of activists looking to squeeze out more corporate value.

"We are likely to see companies in the retail, textiles and warehousing sectors getting targeted,” Okasan’s Uchiyama said. He added that firms that have actually responded to activists by selling real estate remains limited so far.

The PBR of Mitsubishi Estate falls to 0.7 times from 1.7 times when its ¥5 trillion of unrealized gains are taken into account. The real estate company’s market capitalization is ¥4.24 trillion. Adjusted ratios for railway firm Sotetsu, film maker Toho and retailer Marui are also significantly below their standard PBRs.

Mitsubishi Estate spokesperson Yusuke Iwamoto declined to comment on any investments or requests for engagement from activists.

Tetsuya Murakami, manager of the management strategy office at Sotetsu, said his company hadn’t received any requests from activists for specific asset sale proposals or related engagement. Katakura didn’t respond to requests for comment, while Toho and Marui said they were unable to respond immediately.

Many institutional investors also consider that companies should review their real estate holdings to improve balance sheet efficiency.

"If they support activists’ proposals, the impact will be significant,” said Bruce Kirk, chief Japan equity strategist at Goldman Sachs Japan.

Stocks with large property holdings, and where activists have got involved, such as Sumitomo Realty & Development, Tokyo Gas and warehouse firm Mitsui-Soko, have largely outperformed their respective Topix sector indexes over the past year.