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Cash-rich firms seek gold in Japan’s property blues

  Cash-rich firms and funds are swooping in on blue-chip commercial properties in Japan, where a number of struggling developers are selling assets at distressed prices.


Buyers want top-notch properties in the country as these are expected to yield steady returns even in an economic slowdown. More attractive properties are expected to be put up for sale on signs of falling land prices, a slump in sales and tighter bank lending which are also hitting small and mid-size developers. Recent financial turmoil and a pull-out of foreign money from Japan’s property market, may also fuel such moves.

Germany’s biggest property fund manager DekaBank said last month it was keen to boost investment in Japan’s property that carries an average of 4.7% capitalization rate - annual rent as a proportion of a building’s value. That beats a 1.5% yield that the benchmark 10-year Japanese government bond carries, and the US government bond’s yield of 4%.

Dekabank has spent $358 million this year to buy three buildings including one that houses Apple Inc’s store in Osaka. “It’s just a matter of time that more attractive offerings will come out, although the number of such deals would likely be limited,” said Credit Suisse analyst Yoji Otani. Citing strong financials, Otani said domestic real estate giants such as Mitsubishi Estate Co, Mitsui Fudosan Co and insurers, could become potential buyers. “These companies, especially life insurers, have little to worry about financing and capital,” Otani said. “They are ready and everything is set. They just need to decide which one to grab.”

Dresdner Bank’s property investment fund DEGI also made a first purchase in Japan in September, paying ¥1.4 billion for a building in Osaka in which Spanish fashion chain Zara owns a flagship store, according to a Nikkei Real Estate market report. The bluechip S and A class buildings - relatively new and located in central Tokyo with a superb infrastructure - have been popular investment targets due to stable yield backed with a vacancy rate of below 3% in the past three years.

But most buildings sold so far by struggling developers are secondary class and have less appeal to big buyers. But some analysts said buyers would find more targets as more attractive deals should become available as the financial crisis dims the global economic outlook and developers’ business prospects.

Land prices started to recover only in recent years from a long slump following the bursting of Japan’s asset bubble in the early 1990s. In the country’s three biggest metropolitan areas - Tokyo, Osaka and Nagoya - where two in every five Japanese live, commercial land prices increased in the year to July 1 with Tokyo up 4%. But that was well below a 12.1% rise a year earlier, and land ministry officials said prices are now falling in most parts of downtown Tokyo.



A number of banks in Japan have tightened lending to small and midsized property firms, triggering a string of failures including those of Urban Corp and Zephyr and prompting others to tighten their belts. A total of 17 listed Japanese companies have failed so far in 2008, 12 of which have been in the real estate or construction sectors. But large firms have been relatively unaffected and those such as Orix Corp and Tokyu Land Corp are viewing the downturn as an opportunity to shop for bargains.

Analysts said Deutsche Bank, Royal Bank of Scotland and ING were also showing interest. Previously these buyers had struggled to compete on price with highly leveraged buyers such as Morgan Stanley and Goldman Sachs that dominated the market and helped boost Japan’s property prices for a couple of years. But with leveraged buyers having trouble tapping banks’ financing, these players are ready to chase deals, analysts said. A US Federal Reserve survey showed about 80% of US banks were tightening their lending standards on commercial real estate loans as of July, well before the latest turmoil battered global banks.

In Japan, banks’ lending to real estate companies grew 0.6% in the year to March, failing to match a 0.9% rise in overall lending growth, according to Tokyo Shoko Research data. Goldman Sachs analyst Sachiko Okada said some buyers are still waiting for a decline in property prices, which is why few big deals have been signed to date. “There’s a big gap between sellers and buyers’ offering prices. Some buyers are saying they’re keeping to the sidelines until land prices fall 20-30% (from current levels).”

In 2006, Tokyo and big cities’ average commercial land prices had their first rise in 16 years with shoppers’ mecca Ginza’s priciest spot increasing by 23%. But prices have leveled off or slipped in recent months in many areas as the economy has slowed and money flows from funds have dwindled, latest data showed. (Reuters)