TOKYO 

 


 


REAL ESTATE DEALS

Grosvenor to invest in Japan

Grosvenor Group Ltd, the real estate firm owned by the family trust of Britain's Duke of Westminster, plans to raise 40 billion yen (S$622.3 million) for a fund to invest in Japanese properties as the market recovers.

Grosvenor, with about US$17 billion in assets, plans to invest in office buildings and apartments in the greater Tokyo area, said Ken Nakajima, Tokyo-based managing director at Grosvenor Fund Management Japan Ltd. The new fund will finance about half of the assets with loans, a ratio that will allow it to buy as much as 100 billion yen of properties, he said.

Investors have started to look at Japan again as a recovery is emerging in the real estate market. Tokyo was ranked the first in real estate transactions in the past 12 months with US$28 billion, followed by Shanghai and Singapore, according to data compiled from New York-based Real Capital Analytics Inc.

'Investors have started to show interests,' said Mr Nakajima. 'Japan remains attractive with its stability among its Asian counter parts.'

Shanghai, the financial centre of China where January home prices fell for four straight months, said last week that it's maintaining the city's housing curbs. Singapore, where fourth-quarter housing values posted the smallest gain in 21/2 years, introduced new taxes in December aimed at foreign buyers.

In Japan, the number of sites where land values were unchanged or increased in the last three months outnumbered spots that fell for the first time in 31/2 years, helped by recovering demand around the Tokyo Bay area, according to a land ministry survey on 150 locations released this month.

Mr Nakajima declined to elaborate on how much return the fund will generate as that has not been finalised.   London-based Grosvenor plans to start buying properties as early as September for the fund, which will have an investment period of five to seven years, he said.

The Duke of Westminster, whose name is Gerald Grosvenor, has a net worth of US$13 billion, according to Forbes magazine.  --   2012 February 28   Bloomberg

Mitsubishi increases Tokyo Real Estate investment

Japan's Mitsubishi Estate said yesterday that it plans to sharply increase new investments in central Tokyo outside its core district of Maruouchi to about 100 billion yen (S$1.67 billion) over three years as it sees an improvement in the market.

The plans are a rare upbeat sign for Japan's property market and underscore the better position of developers such as Mitsubishi Estate which, unlike overseas investment funds, can afford to wait until new buildings begin generating cash flow.
 
'It's a good time to buy properties for developing office buildings now because prices have come down to a reasonable level, and at the same time we are seeing signs that demand for new buildings will increase in a few years,' executive vice-president Hiroyoshi Ito said.
 
Mitsubishi Estate is one of the most active players in Japan's still stagnant property market, where no major transactions have been seen since March when Mitsubishi Estate bought an office building complex from US investment fund Lone Star for about 90 billion yen.
 
The developer also announced yesterday the sale of a 30-story office building in Tokyo for 60.8 billion yen to real estate trust Japan Real Estate Management.
 
Mitsubishi Estate plans to spend as much as 30 billion yen a year to buy land for development, while in 2009 and 2010, when the property market plummeted in the wake of the global financial crisis, the developer did not spend more than 10 billion yen each year on new land, Mr Ito said.
 
This year it targets spending of 25 billion yen for new land and has already achieved 80 per cent of the target, he said.
 
'From this year we are gearing up for new investments,' he said.
 
Tenants increasingly require safer buildings after the March 11 earthquake that devastated coastal areas of north-east Japan, and that will help increase demand for new buildings, Mr Ito said.
 
Mitsubishi Estate is in a good position to buy properties now because some companies are tempted to sell older office buildings to seek new and safer buildings, Mr Ito said.
 
It is still hard to buy properties that went under control of lenders for good prices because there is still a gap between sellers and buyers, he said.
 
'Lenders are also expecting the market to improve in the future so they want to wait to sell properties until then.'
 
In the Marunouchi district, where it dominates office development, Mitsubishi Estate says that it plans to spend 300 billion yen over the three years, the same pace as in previous years.
 
Mr Ito's focus is on properties in the areas surrounding Marunouchi such as Tokyo's Chiyoda, Minato and Chuo wards. --
   2011 November 15 
REUTERS

Demand for offices, houses likely to increase as interest rates are kept low

Investors should buy shares in Japanese real estate companies because demand for offices and houses is likely to increase as the central bank keeps borrowing costs near zero, said Bank of America Corp's Merrill Lynch & Co.

Bottoming out: The number of condos offered for sale in the Tokyo area rose 27.8% in July while office vacancy fell for the first time since January 2008

Tokyo's office vacancy rate has fallen for the first time in 21/2 years, demand for housing is rising and a decline in land values has slowed, making real-estate more attractive, Merrill Lynch strategist Masatoshi Kikuchi said. The Bank of Japan, which kept borrowing costs unchanged on Tuesday, should also help to spur a recovery in real estate, he said.

'We can see now that the decline in demand for real estate has pretty much bottomed out,' Mr Kikuchi said. 'Also, because Japan's interest rates will remain low, we should see a recovery and investors should start buying these shares.'

The Bank of Japan kept the benchmark overnight rate at 0.1 per cent, where it has been since December 2008. The Topix Real Estate Index, measuring 44 property-related stocks, has risen 12 per cent from this year's low on July 22, compared with the broader Topix's 0.5 per cent decline during the same period.

Tokyo's office vacancy rate fell in July for the first time since January 2008, according to an Aug 5 report by Miki Shoji, a privately held office broker. The number of condominiums offered for sale in Tokyo and surrounding areas rose 27.8 per cent in July from a year earlier, the Real Estate Economic Research Institute said on Aug 16.

Japan's land values also declined at fewer sites for a third straight quarter as property companies started to purchase land amid a recovery in housing demand, the Ministry of Land, Infrastructure, Transport and Tourism reported Aug 24.

Mr Kikuchi said that Japan's stock market should recover further next year, with the Topix index rising to between 9,000 and 12,000 from January to March as the global economy strengthens. The Topix closed at 820.99 yesterday.

While foreign investors now view Japan's equities as a minor part of their global portfolios, Japan should be able to capitalise on Asia's emerging growth and increase interest in Japanese companies, he said.

Mr Kikuchi spoke at an investment seminar attended by more than 1,700 people, including 300 foreign investors. The number of foreigners at the annual conference jumped from 279 last year, an increase that shows overseas interest in Japanese equities has risen, Mr Kikuchi said.

Mr Kikuchi was rated Japan's top strategist in rankings by the Institutional Investor magazine's 2010 survey and came second in the Nikkei Veritas newspaper's Japanese strategist rankings this year, according to Merrill Lynch.

At a seminar on Jan 13, Mr Kikuchi said the Nikkei 225 Stock Average would rise to 13,000 from 10,735.03 by about May as a weaker yen bolstered company earnings. The gauge climbed 5.6 per cent to this year's high of 11,339.3 on April 5, and then plunged 12 per cent in May.

Mr Kikuchi also said the Nikkei 225 may rise 12 per cent to 8,500 by the end of March 2009 in a note to clients on Feb 27 last year. The gauge closed at 8,636.33 on Mar 26, 2009, and rose 7.2 per cent that month. -    2010 Sept 9   Bloomberg

China Acquisitions in Japan

Managers across Japan were stunned last month when a factory belonging to Ogihara, a Japanese diemaker, was sold to BYD, a Chinese carmaker that boasts Warren Buffett as an investor. In a sign of the sensitivity of the matter, the Japanese firm tried to keep the transaction quiet, never issuing a press release and refusing all interview requests.

Japan has a long history of resisting foreigners who seek to buy their way into the country. But most recent squabbles have at least been with firms from America, a political ally. Deals involving firms from the Chinese mainland are touchier because of the two countries’ uneasy relations. This has kept the number of Sino-Japanese mergers and acquisitions low, even as China surpassed America in 2007 to become Japan’s largest trading partner.

Yet the volume of deals is now increasing. The number of purchases of Japanese firms by Chinese ones almost doubled last year and their value nearly quadrupled, albeit from low bases (see chart). The deals usually involve small firms with specialist technology, which sell a stake or a subsidiary rather than the whole company, typically for a few million dollars.

Chinese firms are not attracted by Japan’s stagnant domestic market, with its declining population and chronic overcapacity; they want to acquire technologies, skills and brands that can be brought back to China or used in other countries, says Heang Chhor, the head of the Tokyo office of McKinsey, a consultancy. In return, the Japanese firm may get not only capital and new management ideas, but also better access to the burgeoning Chinese market.

This is the case with Laox, an atrophying electronics retailer in which a Chinese franchisee and Suning, a big Chinese appliance retailer, recently bought a 51% stake. The new owners have revamped the firm’s Japanese stores to cater to Chinese tourists who flock to Tokyo to shop, and plan to open 110 Laox outlets in China over the next three years. By that time they expect sales in China to surpass those in Japan.

Importantly, the Chinese owners want to learn from Laox. They want to improve their relations with suppliers and bring Japan’s famed standards of service to China, says Luo Yiwen, Laox’s new boss, a Chinese national who has lived in Japan for two decades. Before the acquisition Laox’s share price had fallen as low as ¥10 ($0.11); it now trades at around ¥110.

Many Japanese are uneasy working for Chinese (much as Americans disliked working for Japanese carmakers in the 1980s). When Honma, a high-end golf-club maker, was acquired by China’s Marlion Holdings in March, the staff were “very shocked”, admits one employee. But the firm, whose clubs are handmade and individually numbered, had recently been in bankruptcy. “So we’re just happy to have jobs,” he adds. Honma’s sales are expected to boom as the new owner tempts China’s newly-rich golfers with its posh clubs. But the Japanese employee suspects that recruiting new workers at its factory in Sakata will be a problem: people would rather work for a completely Japanese firm.

In some cases, differences in business culture make the tie-ups unstable. In 2003 companies from China and Taiwan, along with a Japanese partner, paid ¥1.2 billion for a struggling producer of colour filters for LCD panels. But the new company, Japan Optical Display Technology, was shuttered after four years because of clashes. The Chinese owners were reluctant to pay for environmental compliance. Moreover, they tolerated manufacturing defects that the Japanese partner was unwilling to ignore, explains Osamu Mizoguchi, the former boss. “The philosophies on quality were too different,” he says.

Despite the difficulties, investors assume such deals will continue to proliferate. The expected appreciation of the yuan will fuel foreign deals by making them relatively cheaper (just as a strong yen did in Japan’s heyday in the 1980s). The fear of being bought, in turn, may be galvanising Japanese firms. Japanese businessmen are familiar with the concept of gaiatsu, or “foreign pressure” to change. But these days the pressure is coming as much from Chinese firms as from the Western ones to which the phrase has most commonly been applied.   - 2010 May  THE ECONOMIST

Tokyo's office bargains entice Australian institution

 Australia's largest institutions have joined other global investors in hunting for bargains in the world's largest office market, Tokyo

The head of the capital market and institutional property division of CB Richard Ellis Asia, said potential Australian investors included the Future Fund, QIC and AMP Capital Investors.

He said the first major transaction of a prime Tokyo office block since the onset of the global financial crisis was last month when Shinsei bank sold Pacific Century Tower in central Tokyo for $US1.5 billion.

Mr Mackay said daVinci Holdings had bought the building from Richard Li -- son of the Hong Kong tycoon Li Ka-shing -- in 2006 for $US2bn.

He said AMP Capital could be the first to make an acquisition, possibly as early as the middle of this year.

"Its office in Tokyo has been researching the office and retail property markets for some time," he said.

AMP Capital set up an office in Japan in 2007 and its managing director, Stephen Dunne, said last month that its focus was on Japan, China and Singapore.

Mr Mackay said the Future Fund and QIC were more "low key" in their due diligence of the market.

QIC had $1bn of equity earmarked for new investment locally and offshore.

He said Japan was the main real estate investment target for global investors from 2005 to 2007, when four property trusts owning Japanese real estate were listed in quick succession on the ASX.

Collectively, they owned property worth $5.6bn at the end of 2008.

He said the new crop of institutional investors would not be highly geared and would seek quality rather than high yields.

"The cycle has turned and the days of Japan-centric listed property trusts are over," he said.

Mr Mackay said $1.5-2bn worth of assets belonging to Australian-listed Japanese real estate trusts was on the market, but most were "B-grade" buildings and difficult to sell.

Rubicon Japan Trust, which had assets of $1.2bn at its peak, is being wound up by its administrator after its parent, the Allco Group, collapsed.

Galileo Japan Trust secured an investor in Forum Partners, which injected Y=11bn into the trust to reduce Shinsei bank's exposure to Y=43.5bn late last year.

Galileo will begin a selldown over the next three years.  - 2010 January 17      AUSTRALIAN 

LVMH Cancels New Tokyo Store
Luxury-Goods Sales Are Sinking in Japan as New Markets Are Also Pressured

Some young women in Japan are losing interest in luxury goods. Above, a Louis Vuitton display on the exterior of a department store in Tokyo.

VMH Moët Hennessy Louis Vuitton SA, the world's largest luxury-goods company, canceled plans to rent a 10-story building in central Tokyo for a new flagship store, showing how hard the global economic downturn has hit one of the most important markets for the luxury-goods industry.

Louis Vuitton's Japan arm informed property developer Hulic Co. about a month ago that it wouldn't follow through with plans for a new Tokyo flagship, a Hulic official said Tuesday. The developer was rebuilding its property in Tokyo's glitzy Ginza district for a planned store opening in late 2010, but it is now looking for new tenants, Hulic said.

Officials at Louis Vuitton Japan confirmed that plans were canceled for the store, which would have been one of the brand's biggest in the world, but declined to give a reason.

Japan has historically been a major market for luxury goods, and it has been especially key for Louis Vuitton, which has 56 stores in the country. Now, as the growth in emerging markets

 is showing signs of strain as well, the falloff in the previously stalwart Japanese market is especially troubling for luxury-goods companies.

Emerging markets make up about 15% of the luxury-goods sector's overall sales and had in some places been reporting double-digit growth. But as the global financial crisis has knocked down Chinese and Russian stock and property markets, wealthy consumers are under pressure to cut spending.

Japan, meanwhile, makes up 12% of the luxury sector's global sales of €175 billion ($240 billion), according to a Bain & Co. study released last month. But the Bain study said Japan's luxury sales are expected to decline 7% in 2008, after a 2% decline in 2007. LVMH reported that in the first nine months of 2008 Japan sales were down 7%, as its world-wide sales grew 4.5% in the period to €11.6 billion.

The deepening recession is just part of LVMH's woes in Japan. There are increasing signs that young Japanese women are finally tiring of the luxury brands that previous generations snapped up.

[Japanese Cutbacks]

"If it looks good, I don't care what the label is," says Izumi Sugano, a 21-year-old shop assistant in central Tokyo. A few years ago in high school, she coveted any bag with a Louis Vuitton monogram. "Now that I'm working, I realize it's silly to spend so much on a single bag," says Ms. Sugano, who recently sported a no-brand bag that cost her less than $100.

That's a sea change for Japan, where women have flocked to buy brands like Louis Vuitton since it entered the Japanese market in 1978. Luxury labels have tapped Japan's big middle class, and Louis Vuitton has long counted on Japan as one of its most profitable markets.

Japan is still Louis Vuitton's No. 1 profit contributor, according to Melanie Flouquet, an analyst at J.P. Morgan. But Japan's share of overall LVMH sales, which also include smaller luxury brands like Marc Jacobs and Fendi, has fallen in recent years to 10% in 2007 from 40% in 2001, as emerging markets like China and India showed strong growth.

"Younger Japanese prefer to be stylish and follow trends, but not spend too much money," says Andrea Fenaroli, Japan president of Furla of Italy, part of the Furla SpA Group, an Italian midrange handbag maker.

Since 2000, as Japan's birth rate falls and its population ages, there are 2 million fewer women in their twenties, the most fashion-conscious age group.

And an increasing number of women view luxury brands with indifference, marketers say. A recent survey by the Nikkei Marketing Journal, a trade publication, shows the percentage of women in their twenties who own at least one luxury-label bag falling from 57% in 2000 to 44% in 2008.

Some brands have cut prices. Bally and Salvatore Ferragamo have offered discounts of 25%-30% on their goods sold in Japan since earlier this year. Furla, which makes 20% of its revenue in Japan, is selling more bags that use nylon and less expensive parts.

In November, Louis Vuitton lowered prices on nearly all its products by an average of 7%. Last year, it introduced cheaper lines like its "Neverfull" handbags, with have no inner lining and sell for as low as 70,000 yen ($772). That line, first released in Japan, has become a best seller among women here.   - 2008 December 17     WALL ST. JOURNAL

Lehman Assets in Japan Go on Sale

Bidding started on Lehman Brothers Holdings Inc.'s real-estate assets in Japan in the past week as creditors in the U.S., Asia and Japan try to claw their money back from the bankrupt Wall Street firm, people familiar with the matter said on Friday.

When Lehman went into a tailspin last year, its units around the world were sold or filed for bankruptcy protection. Lehman Brothers Japan Inc. filed at the Tokyo District Court on Sept. 16.

Two of the Japanese firm's real-estate loan units, Lehman Brothers Commercial Mortgage KK and Sunrise Finance Co., sought protection on the same day. Their liabilities totaled 748.4 billion yen ($8.44 billion).

Japanese brokerage firm Nomura Holdings Inc. acquired Lehman's operations in Asia, Europe and the Middle East but didn't take any debt held by the failed U.S. bank.

The timing of the auction is contentious. With real-estate prices plunging in Japan, mortgage loans are hard to value. Few potential buyers can borrow capital to make big purchases since banks have tightened lending criteria.

The administrators outside of Japan, KPMG and Alvarez & Marsal, believe they would be able to raise more cash at a later date for the Asian and U.S. creditors they are helping recover capital, according to people familiar with the situation.

UBS AG, which is seeking repayment for Japanese creditors to the two units, however, is pushing for an earlier sale, these people said.

First-round bids for the assets of these two real-estate units were placed on Tuesday. Companies showing interest include funds at Lone Star, Cerberus Capital Management LP, Goldman Sachs Group Inc.'s Goldman Sachs Japan Co., Blackstone Group LP and a Nomura Holdings unit, the people said.   - 2009 January 26   WALL ST JOURNAL 

Property failures, price falls seen for Japan

More bankruptcies, a deluge of distressed assets and a price slide are in store for Japan's ailing property industry, as banks recoil from the cheap loans that had fuelled a boom.

That was the grim assessment by investors at a conference session in Hong Kong this week, whose title drawn up a few months ago -- "Japan: a safe haven from the credit crunch?" -- betrayed the speed of the market's deterioration.

More than 3,000 builders and 425 property firms have failed this year with a combined debt of $25 billion, according to Tokyo Shoko Research. Notable recent victims, include developer Urban Corp and apartment builder C's Create Co.

And more pain lies ahead.

"A big negative spiral is coming," said Fred Uruma, chief executive of Touchstone Capital Securities, which specialises in property finance.

Total lending for property would probably fall to $8 billion this year from roughly $50 billion last year, Urama said, putting small and mid-sized developers and contractors in peril.

Banks, nudged by regulators in late 2007 to cut exposure to the industry, are mostly lending only to big firms, and cutting loan levels to 55-60 percent of a property's value, from as much as 80-90 percent a couple of years ago.

Among the major casualties are asset managers, who grew up with the seven-year-old market in real estate investment trusts (REIT), securities that are supposed to be stable because they pay most of their rent to investors as dividends.

Firms such as Kennedix, K.K. DaVinci Advisors , Pacific Management  and Creed  typically built or bought office blocks from developers, filled them with tenants and sold them on to REITs, which they often managed.

But as debt dried up, the whole model fell apart.

"LOUSY" ASSETS

Fund manager Re-Plus Inc, which sponsored Re-Plus Residential Investment 8986.T, set the trend by filing for bankruptcy protection in September.

Since then, Japan has seen its first REIT failure -- apartment landlord New City Residence Investment Corp 8965.T.

More REITs, property firms and fund managers are likely to hit the wall, which will spark a sale of assets and a further fall in prices of second- and third-grade buildings, said Satoru Yamashita, vice president of investment at Mitsui Fudosan Investment Advisors.

Because of a fall in values, top-notch Tokyo offices have seen their rental yields rise to around 4 percent, from 2.5 percent a couple of years ago, while yields on lower-grade buildings have widened to 5.5-6.0 percent from 4 percent.

"Some people are saying they will go back to where they started a few years ago, around 8 percent," Yamashita said of yields on second grade offices.

"There is still a lack of really good office buildings in Tokyo," he added. "But the companies facing difficulties don't own many prime assets."

Although foreign investors are sniffing around for bargains, the shortage of debt financing means only those willing to put down a lot of equity are snaring deals.

They include German open-ended funds that eschew borrowing, such as grundbesitz global, which bought a Tokyo office block in June, and Union Investment Real Estate, which plans to spend up to 4 billion euros in Asia over five years.

With Tokyo's REIT index losing 67 percent since a peak in May last year, property trusts should be prime acquisition targets for funds looking to take them private.

But Seth Sulkin, chief executive of retail property investor Pacifica Malls, said many assets owned by REITs were "lousy".

"I looked at one retail REIT, and even if we got it free it wouldn't make sense," Sulkin said. "With debt at 60 percent of book value, realistically I couldn't sell the properties fast enough even at a 40 percent discount."

If the distress continues, the government could well lean on the country's biggest property firms, such as Mitsui Fudosan and Mitsubishi Estate, to bail out struggling property firms, or at least buy assets.

Orix Corp  came to the rescue of struggling developer Joint Corp, injecting 10 billion yen into the firm in early September, and is also expected to help condominium builder Daikyo Inc, in which it is a major shareholder.

"Japan is a socialist country," said Touchstone Capital's Uruma. "If the government sees too many bankruptcies, they will force mergers. Large firms like Mitsui (Fudosan) will get the bad end of the stick." ($1=97.89 Yen)   - 2008 November 6  REUTERS

Gloomy days: The capital value of grade A office buildings in Tokyo's commercial business districts fell 2% on average as of March from three months earlier, according to an estimate by Jones Lang LaSalle   2008 October 28  BLOOMBERG

To some Western analysts, it is beginning to look a lot like 1989. In recent days, Japan's once formidable megabanks and financial titans are returning to the world financial stage after an absence of almost two decades, buying pieces of Wall Street institutions, according to The New York Times.  

DEALS

The US$1.5 billion sale of Resona Maruha Building in Tokyo was the biggest transaction in the Asia-Pacific in Q2 2008, followed by the US$1.1 billion sale of Shinsei Bank Building (BR), also in Tokyo.    2008 August 19  BUSINESS TIMES

European property fund makes first buy in Japan
Aberdeen Property Investors' Degi unit has made its first investment in Japan. The open-ended property fund has signed the sales contract for La Porte Shinsaibashi, a fully let retail buiding in Osaka's Shinsaibashi quarter purchased for €90 million.     - September 4, 2008   Europe Real Estate 

RETAIL

For the retail business, the key to the Japanese boom, at least socialogically, is the parasaito shinguro, or "parasite singles" - an estimated 10 million (mostly women) between the ages of 25 and 34 who live with their parents and spend up to 10 percent of their annual salary on fashion items.   -   2008 Spring  FQ MAGAZINE   

ECONOMY         HEARD IN ASIA

Japanese Developers' Problems
Threaten to Create Vicious Cycle
 

Japan has seen a raft of property developers go to the wall this year as banks have refused to refinance their loans. Analysts say the bankruptcy filings are likely to set off a vicious cycle that will weigh on the sector's shares in the coming months.

The reason: Real-estate firms that have run into financial difficulty are selling off assets at fire-sale prices, which will put the value of properties under strain.

So far this year, 8,916 companies have filed for bankruptcy in Japan, a third of which were in construction or real estate, according to data compiler Tokyo Shoko Research Ltd. Big blowups include real-estate management firm Reicof and condominium developer Suruga. Just last week, Urban Corp., a Hiroshima-based condominium developer and sales agent, filed for bankruptcy.

Banks are likely to clamp down even harder on lending to property firms, and loans granted are likely to be on more onerous terms, potentially resulting in more bankruptcies. Recent earnings reports from Japanese banks have shown a sharp increase in bad debts amid an economic downturn.

"We fear a chain reaction of bankruptcies," said investment bank Goldman Sachs in a report to investors. Goldman has a "cautious" stance on the Japanese real-estate sector, which means the outlook is unfavorable. The benchmark Topix real-estate index has fallen by about half since June last year.

Problems started earlier this year when foreign investment banks, such as Morgan Stanley, Bear Stearns and Lehman Brothers, cut back on financing real-estate deals in hopes of reducing risk globally. As a result, Japan's fledgling commercial-mortgage-backed securities market has virtually ground to a halt.

The foreign banks financed some of the most aggressively priced deals by real-estate funds in Japan. In some cases, they lent up to 90% of the value of properties for sale in 2007.

Japanese banks are unlikely to pick up the slack. Their lending to the real-estate sector has already hit 14% of their loan book, which is higher than what it was during the Japanese real-estate bubble between 1986 and 1991, according to analysts at Credit Suisse. This is partly because companies in other sectors of the economy have been paying down debt and hoarding cash, and not borrowing so much from banks.

Real estate and construction, which employ about a tenth of the work force in Japan, have a big impact on the Japanese sense of economic well being. When the country's real-estate bubble burst in the early 1990s, it ushered in an economic slump lasting more than a decade.

Although the Japanese property market isn't imploding, a recent dip in real-estate indicators has sparked a rash of fretful domestic newspaper headlines. Credit Suisse expects office vacancy rates to rise to 5% in December from around 3% now. While that level is still low, the rise is likely to push real-estate shares lower. Credit Suisse rates Japan's real-estate sector "underperform," meaning it is likely to yield investors 10%-15% less than the benchmark over a year.

One area that is unmistakably in free fall is condominiums. The number of condos put on sale in Tokyo during July plunged 44.5% from a year earlier, and only half the condos put on the market were sold, according to the Real Estate Economic Institute Co., well below the 70% rate that condo makers need to turn a profit.

Analysts say that in the long run, investors may be able to unearth bargains in Japan's real-estate sector. Because Japanese real-estate prices didn't rise as much as in Europe and the U.S., analysts expect Japan to have a shorter correction. Japanese interest rates remain low, so the yield on properties is still relatively enticing.

They also believe that the three major developers, Mitsubishi Estate, Mitsui Fudosan and Sumitomo Realty & Development, which have strong relationships with lender banks, will weather the storm better than most. - 2008 August 21   WALL ST. JOURNAL

Japanese Downturn Appears
Likely to Be Shallow but Lengthy

Just how bad will Japan's economic downturn be? Economists say it likely won't be too sharp -- but might carry on for a while.

Japan posted its worst quarterly report on gross domestic product in seven years last week: The world's second-largest economy contracted at an annualized rate of 2.4%. A look at the causes shows no single, large problem hammering down, but a number of factors coinciding to push the economy into contraction. This, economists say, means Japan likely won't be battered as hard as it was during its most recent previous downturn, but it could take a long time to recover.

The current quarter and the October-December quarter will see just 0.1% expansion over the previous quarters, forecasts Kiichi Murashima, an economist at Nikko Citigroup. If Mr. Murashima's prediction turns out to be right, Japan won't meet the common criterion for a recession of two straight quarters of economic contraction. But it would put it on course for anemic growth in 2008. Mr. Murashima predicts expansion of just 0.8% this year, followed by 0.6% in 2009.

"The recovery won't come until the second half of 2009," he says. The stagnation "will likely be protracted."

A long, moderate slowdown would mean no quick, V-shaped recovery to boost stock prices. Tokyo's Nikkei Stock Average of 225 companies has fallen 15% so far this year, and analysts hold out little hope for improvement soon. The index climbed 0.5% Friday to 13019.41.

It also would mean Japan's super-low interest rates continue for even longer than expected. After abolishing an emergency target of zero for short-term rates in 2006, the Bank of Japan last raised its target in February 2007 -- to just 0.5%. Some economists now think it won't raise the rate until 2010, meaning limited increases in long-term borrowing rates and less support for the yen. The bank is expected to leave its rate target steady at a two-day policy-board meeting that ends Tuesday, but it might downgrade its assessment of the economy.

Politically, a long, shallow downturn could damage Prime Minister Yasuo Fukuda's prospects of winning the next general election, which must be held by September 2009. His cabinet has an approval rating in the 20%-to-30% range, according to some opinion polls, raising the likelihood of a victory by the opposition Democratic Party of Japan. The DPJ has never held power, and its recent policy statements suggest a return to public spending to aid weak regional economies.

To counter this DPJ message, Mr. Fukuda's Liberal Democratic Party might push for more public funds for the provinces. Taro Aso, the LDP's new secretary-general, has been quoted in the past two weeks as calling for greater public spending. He also said the government would likely miss a target of 2011 for achieving a primary budget balance (revenue minus spending, not including the cost of debt servicing).

Meanwhile, Mr. Fukuda appears to have abandoned the quest of former Prime Minister Junichiro Koizumi to promote structural changes to spark economic activity.

"There is no concept [in the current administration] of raising potential growth through deregulation," says Ryutaro Kono, an economist at BNP Paribas. He thinks Japan's education, medical and farm sectors could be enlivened through exposure to greater competition. But government officials and other "LDP supporters are concerned not to lose their vested interests through deregulation."

Japan's fundamentals aren't that bad: Unemployment and inflation are low, and banks have been relatively unscathed by losses related to subprime mortgages. Corporations on average increased their profits every year from 2002 to 2006.

But Japan has been hit by problems from overseas.

Because Japanese manufacturers import almost all their raw materials, the rise in world commodity prices has eroded profits. Annual wholesale inflation -- the rise in the prices companies have to pay for things like materials -- jumped to a 27-year high of 7.1% in July. But, in the face of low growth in consumer spending, the consumer-price index -- which indicates how much retailers can raise prices -- rose just 2% in June over the previous year.

The squeeze on corporate profits has crimped investment in plant and equipment -- traditionally a big driver of Japanese economic growth. It also has held down wages, discouraging consumer spending.

But even if commodity prices fall back and companies learn to cope with higher costs, Japan faces other troubles. Weakness in the U.S. and Europe as well as a possible post-Olympic slowdown in China could hurt exports. "External demand, which has been the driver of the Japanese economy, will likely stagnate further," in particular between October and March, wrote Morgan Stanley economist Takehiro Sato in a report last week. He forecasts Japan's economy will grow 1% this year -- and just 0.6% in 2009.   - 2008 August 18  WALL ST JOURNAL

Builder Urban Joins Failures
Of Japan's Real-Estate Sector

Japanese property developer Urban Corp. filed for court-led rehabilitation Wednesday when it collapsed with 255.83 billion yen ($2.34 billion) in liabilities, becoming the nation's biggest corporate failure so far this year.

The Hiroshima-based firm, which joins a growing number of casualties in Japan's faltering real-estate sector, said the Tokyo District Court ordered the protection of its assets immediately after the filing. Its shares will be delisted from the first section of the Tokyo Stock Exchange Sept. 14.

Japan's real-estate sector is buckling from a slowing market stemming from the U.S. subprime problem. Wary of doling out new loans, financial institutions are scaling back their lending to the sector, which is spurring a string of corporate failures.

Last month, condominium developer Zephyr Co. filed for court protection with debt of about 95 billion yen, while construction company Suruga Corp. went under in June with debts valued at 62 billion yen.

Urban, whose business includes condominium development and investment in nonperforming real estate, said that the worsening situation has made it impossible to raise funds via a capital alliance.

"We've given up the idea of self-resuscitation and have decided to rebuild through court-led rehabilitation," the company said.

The inability to pay off loans with due dates in and after mid-August also prompted the company to file for the court-led rehabilitation. Hiroshima Bank Ltd. is Urban's main lender with outstanding loans totaling 12.9 billion yen.

Shares of Urban have dropped about 80% since late June. In trading in Tokyo on Wednesday, the issue ended at 62 yen, down one yen, giving it a market capitalization of 14 billion yen.

Urban has already agreed to sell 30 billion yen of convertible bonds to an arm of French bank BNP Paribas SA. Officials from BNP Paribas weren't available for comment.

An Urban spokesman said the convertible-bond deal with BNP Paribas still stands.

Urban also said Wednesday that it reported a net loss of 45.42 billion yen in the fiscal first quarter compared with a year-earlier profit of 15.92 billion yen. Sales fell 43% to 49.91 billion yen during the April-June quarter.   - 2008 August 14   WALL ST JOURNAL  

RESIDENTIAL

Tokyo residential property set for full-blown decline  
Japan's slowing economy and the credit crisis has damped commercial, residential demand

Tokyo residential property prices may be poised for a major decline because of excess housing supply and flagging demand, said Minoru Mori, chairman of Japan's biggest privately held developer. 'We foresee full-blown drops in residential property prices,' Mori Building Co's chairman said in an Oct 25 interview in Shanghai.

Japan's slowing economy and the credit crisis that tightened lending has damped demand for commercial and residential property in Japan. The slump in Tokyo's condominium market may last longer than the drop after Japan's asset-price bubble burst in 1990, according to an estimate by the Real Estate Economic Research Institute.

Condo supply in Tokyo fell 24 per cent for the first six months of the year from the same period a year earlier. The number of new condos put up for sale in Tokyo, which stayed above 80,000 units since 1999, fell to 69,194 units in 2007 because sales declined and inventories rose. Commercial real estate is holding up better than residential property, said Mr Mori.

'Tokyo's commercial property market remains relatively healthy. The current price decline probably won't be more than 10 per cent,' Mr Mori said.

Tokyo-based Mori has scrambled to manage the impact of the global financial market turmoil. Lehman Brothers Holdings Inc, which last month filed for the largest bankruptcy in history, was a tenant of the developer's Roppongi Hills complex, occupying 275,000 square feet of office space.

Nomura Holdings Inc, which agreed to buy Lehman's European and Asian assets, has expressed an interest in taking over Lehman's lease at Roppongi Hills, Mr Mori said in the interview. Japan's biggest brokerage also 'hinted' at possibly increasing the floor space it leases at the complex, he said.

Other tenants at the complex such as Goldman Sachs Group Inc are under long- term agreements that incorporate increases in the rents they pay, Mr Mori said. 'On a contractual basis, we don't foresee any problems,' he said.

The capital value of grade A office buildings in Tokyo's commercial business districts fell 2 per cent on average as of March from three months earlier, according to an estimate by Jones Lang LaSalle.

As commercial prices declined, Mr Mori said now is the time to prepare for land acquisition for large-sized projects similar to Roppongi Hills. 'We have plans to introduce second, third, fourth and fifth Roppongi Hills,' said Mr Mori. 'This is a good time to plan for large-size projects.'

Mori is in talks with local residents to redevelop Toranomon-Roppongi. The developer plans to build a 46-storey commercial tower and a six-floor residential building on a 15,350 square metre site in 2009.

Other projects under planning include Loop Road No 2 from Toranomon to Shimbashi in central Tokyo and a waterfront development project in Yokohama, according to the company's website.

These projects will require infrastructure such as roads and large blocks of available land, both of which may take some time, he said.

Mori Building's Shanghai World Financial Center, China's tallest building, was opened to the public on Aug 30. Space in the building was leased 'faster than expected' to near 50 per cent of capacity currently from 40 per cent in August, Mr Mori said.

Japanese financial institutions such as Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group Inc have taken space, he said. Demand for space may slow with the opening of new office developments in Shanghai, such as Sun Hung Kai Properties Ltd's Shanghai IFC complex, located next to Mori's building.

'As new developments come on line, it might be difficult to enjoy the same occupancy rates as before, and net demand might decline somewhat,' Mr Mori said. -- 2008 October 28 BLOOMBERG

Japanese condo developer tightens belt

Japanese condominium developer Joint Corp plans almost no new investments this year as it focuses on reducing its assets to ride out an increasingly negative business environment including an exodus of foreign investment, a company executive said on Monday.

Shares of Joint and other Japanese real estate developers have been hit hard in recent sessions amid concerns about the health of the sector due to the global credit crunch and weak consumer spending.

Japan's property sector has also been hurt by tighter bank lending and soaring prices for steel and other construction materials.

To survive this business environment and improve its cash situation, Joint is mulling selling off some of its vacant land, said director and executive officer Hisahi Oribe.

'We don't want to be seen as having passive business plans, but our business is currently up against a really strong headwind,' Mr Oribe told Reuters in an interview.

'For a while, all we can do is simple things just to improve our business,' he said. The Tokyo-based midsized developer plans to sell land, buildings and other inventories to reduce its fixed assets to 150 billion yen (S$1.90 billion) for the year ending in March 2009 from 230 billion yen as at March this year.

Joint may post special losses this year for writing down such assets, but the amount will likely be small as it already wrote down 11 billion yen worth last business year, said Mr Oribe.

'About 80 per cent of our condominium-development projects have already been inked or paid,' said Mr Oribe.

He added that the company would not have to spend much on new projects during the course of this business year.

The recent sell-off of Japanese real estate-related stocks comes as the global credit crisis muddies the outlook for Japan's once-soaring property market.

Adding fuel to investors' worries over the sector's financial health, a series of Japanese contractors and real estate developers including Suruga Corp have fallen into bankruptcy.

The Tokyo Stock Exchange's Reit index has dropped about a quarter this year.

Japanese Reits' market value tumbled to 4 trillion yen in March this year from 6.8 trillion yen in May last year when it hit its peak.

Mr Oribe said, however, that although there was a slew of bad news in the sector, the recent sell-off of Joint shares was 'abnormal and emotional'.

'It is abnormal that even big real estate players have a PBR (price to book value ratio) of below one,' he said. 'Our business environment really is tough, but I think investors have been a bit too emotional,' he added.

Joint shares, which have a PBR of 0.29, fell as low as 440 yen during morning trade yesterday, their lowest intraday level since August 2003, but bounced back to finish up 5.4 per cent at 509 yen. -    2008 July 8   REUTERS

OFFICE

Property firms raise rents in central Tokyo
Average rent in five central wards up 12% last month from June 2007

Japan's leading estate firms including Mitsui Fudosan Co have begun proposing big rent rises in central Tokyo, where office vacancy rates have been hovering near 20-year lows.

hese rock-bottom vacancy rates have helped Mitsui Fudosan and rival Mitsubishi Estate Co weather tougher times for much of Japan's property market, which has been hit by tighter credit and stricter apartment building codes.

Mitsui Fudosan, Japan's largest real estate developer, said yesterday that it was in talks with tenants to raise office rents in central Tokyo by an average of 10-15 per cent.

The country's second-largest developer, Mitsubishi Estate, also said that it was in talks with tenants to raise office rents in the Marunouchi area of central Tokyo by 15-20 per cent.

Another major developer, unlisted Mori Trust Co, said that it was preparing to raise office rents in central Tokyo's Minato district by an average of 20 per cent.

The office vacancy rate in Tokyo's 23 wards stood at 2.1 per cent last month - the lowest since the bursting of Japan's asset-inflated bubble economy in 1990, according to Ikoma Data Service System, a research firm specialising in the market for office buildings.

Average rent in Tokyo's five central wards last month was 15,120 yen (S$199) per approximately 3.3 sq m. That marks a 12 per cent increase from 13,530 yen in June of last year, according to the most recently available data from Ikoma.

'Tokyo's office market is extremely tight,' said Ikoma researcher Mitsuhiro Asada.

'With signs of an economic recovery, many companies started hiring more people, and that's making them want to move to bigger offices,' he said.

He added that such conditions would likely last for a while, helping real estate firms' businesses.

Mitsubishi Estate said that it was seeking the rent increase given the tight office market situation in the Marunouchi area. It said that its vacancy rate in that district was just 0.19 per cent as at the end of March, the lowest since it started disclosing the data in 2003.   - 2008 May 25   REUTERS

Citi Japan sells head office to Morgan Stanley
The sale and lease-back deal will increase balance sheet efficiency and mitigate property risk, says Citi

Foreign banks keen to raise cash could increasingly turn to Japan, say analysts, thanks to its liquidity. While the commercial real estate markets in the UK and the US are frozen, Japan has become one of the few major markets where deals can take place, notes Yoji Otani, a real estate analyst at Credit Suisse in Tokyo.

That’s the logic which has pushed Citi Japan to offload its Citibank Centre head office (the land and the building) to Morgan Stanley. Details of the transaction were not disclosed by either party, but according to the Nikkei Business Daily, the acquisition price was $445 million. Neither side would comment - but the cash will be welcome as a contribution to Citi's balance sheet, hurt by subprime losses.

The building is in Shinagawa, a prime real estate area where the headquarters of Sony, Mitsubishi and Canon are also located. The building houses Citi Japan’s retail and corporate banking divisions. Aside from the head office, Citi has 25 branches and nine sub-branches in Japan. The US bank will lease the building back from Morgan Stanley.

According to the Japan Real Estate Institute, real estate prices in the six largest Japanese cities have emerged from a trough of 67 points on the index in 2004 to 96 in September 2007. The index was at 500 points in 1990, the peak of Japan’s economic bubble. Citibank Centre was built in 1992.

Based on the Nikkei data, the price paid represents a yield of 3.5%-4%, estimates Otani. “It’s not a very exciting yield, it’s very much average for the market,” he comments.

The Morgan Stanley fund (Morgan Stanley Real Estate Investment) that bought the building is not a high-risk, high-return fund, but tends to invest in low-yielding, stable investments, making the yield appropriate. “The deal was done at fair value,” says Otani.

The fact that the fund is based in Germany could be a reflection of the difficult state of the European real estate market, say observers. European funds could have large amounts of money on their books which they need to spend, even if the projects are far away in Asia.   - 2008 February 20    FINANCE ASIA

A securitisation expert who preferred to speak off the record, says that the market for commercial mortgage-backed securities (CMBS) is pretty robust in Japan, and that investors are not requiring the "irrational yields" being demanded in Western markets. A functioning securitisation market is an important precondition for a rising real estate market.

“The evidence is that investors have plenty of cash to spend next fiscal year, and Japanese government bond (JGB) yields keep trending down. So, once the markets stabilises, I would not be surprised if the CMBS market performed reasonably this year as investors look to maximise yields,” he says.

The Tokyo real estate market could see more such deals as cash-strapped foreign institutions, hammered by the subprime crisis, seek to strengthen their balance sheets. But Credit Suisse’s Otani believes that prices will have to fall and yields rise as the Japanese economy slows and the credit contraction starts to bite.

The broader macro situation is not conducive to optimism on the real estate market. In the third quarter, the economy grew at 0.9% in real terms. Exports have increasingly been driving the economy as domestic consumption weakens on slow wage growth. A weak performance from Japan ex-Tokyo in the small company sector is a huge concern for the government.

Citi’s woes represent an opportunity for Morgan Stanley, which has built a position in real estate over the past decade and has become one of the biggest hotel operators in Japan. Last year the bank bought a chain of 13 hotels from All Nippon Airlines for $2.4 billion, which it manages through its Panorama subsidiary. Panorama often works closely with existing hotel managers to increase the value of the hotels ahead of a sale. Morgan Stanley now has 10,000 rooms in Japan, putting it among the top 10 hotel operators nationwide. Over the past 10 years, Morgan Stanley has invested $20 billion in Japanese real estate.

Earlier this month, Morgan Stanley offloaded the Westin Tokyo to the Government of Singapore Investment Corporation for around $770 million. Other notable deals in the past six months include Goldman Sachs’s acquisition of the Tiffany flagship store for $305 million in August last year. Somewhat ironically, the Tiffany building in New York was once owned by Japanese investors, but they sold out after the bubble burst.

Three Tokyo Waterfront City projects awarded
Developments will create more office, residential space

Mitsui Fudosan Co, Japan's largest real estate developer, Daiwa House Industry Co and others won three waterfront projects worth US$1.81 billion to create more office and residential space in Tokyo.

Mitsui Fudosan, Daiwa House and Sankei Building Co will spend 79.2 billion yen (S$1 billion), including the cost of land, to develop an office building, the Tokyo Metropolitan Government said on its website. Tokyo Tatemono Co, a 111-year-old property firm, won the right to develop an office site at a cost of 107.6 billion yen.

The plans are part of Tokyo's Waterfront City project about six km from downtown on 442 ha of reclaimed land. The city expects to attract 70,000 residents and 42,000 workers to the area. Average waterfront prices are about a quarter of land prices in nearby Shimbashi, part of central Tokyo, according to government figures.

'With the office vacancy rate being very low, some tenants may seek space in that area,' said Masahiro Mochizuki, a real estate analyst at Credit Suisse in Tokyo. 'However, I am concerned about the profitability of these projects because the location is not that great.'

Japan's commercial land prices rose for the first time in 16 years during the 12 months through June, as real estate companies and investors sought sites to develop. Demand for office space in Tokyo pushed rents to a 13-year high.

Shares of Mitsui Fudosan rose 0.2 per cent, or five yen, to 2,515 on the Tokyo Stock Exchange. Tokyo Tatemono dropped 0.6 per cent to 1,122, and Daiwa House fell 0.9 per cent to 1,488.

The Mitsui Fudosan site is 32,904 square metres, while Tokyo Tatemono's is 29,640 sq m. The third site will be used to relocate Musashino Joshi Gakuin, a girl's junior and senior high school, onto a 13,014 sq m location.   - 2007 December 27    BLOOMBERG

Tokyo to replicate Canary Wharf
Japan wants more financial institutions to open Asia HQ in capital

Yuji Yamamoto, Minister for Japan's Financial Services Agency, said the country plans to replicate London's Canary Wharf in an effort to get more financial institutions to set up their Asia headquarters in central Tokyo.

Japan wants to take measures to attract more hedge funds, banks and other financial institutions to the nation's markets. Mr Yamamoto is seeking to ease rules that separate banks and brokerages while strengthening the authority of the Securities and Exchange Surveillance Commission.

'We've set strengthening of Japan's financial markets as a priority in the June paper, which will outline the basic economic reforms of Prime Minister Shinzo Abe's government,' Mr Yamamoto said at a conference in Tokyo yesterday. 'We are aiming at taking a similar type of zoning approach as that seen in Canary Wharf.'

Mr Yamamoto said the zone targeted is along the Sumida River, starting from the Nihonbashi district, taking in the Bank of Japan, and Kabuto-cho, where the Tokyo Stock Exchange is located. New high-rise buildings are to be built with 24-hours operations 'to enhance services for people who work across different time-zones and suffer jet-lag,' he said.

Japan needs to make financial regulation more transparent and create new markets to attract more hedge funds to win a greater share of global investment, an advisory panelto the agency said last month. Government committees are having 'positive and bold discussions' to promote reforms, Chief Cabinet Secretary Yasuhisa Shiozaki said last month.

The Council on Economic and Fiscal Policy, which draws up reform plans and outlines budgets, said last month the nation's financial markets for securities and commodities should be consolidated under the Tokyo Stock Exchange to create a single trading venue that can compete with global rivals for investors and products.

However, he said Tokyo has fallen too far behind other financial centres in its ability to attract foreign bankers and capital. Japan accounts for just 5 per cent of financial industry profits worldwide. Only 28 non-Japanese companies were listed on its stock exchanges in 2005, down from 96 in 1990.  High taxes and finicky regulators are often blamed for driving foreigners to smaller but more cosmopolitan centres such as Singapore and Hong Kong.

'Japan's internationalisation efforts have lagged,' Mr Yamamoto said in a speech to the American Chamber of Commerce in Japan. 'We have to find a way to reverse this trend. 

'That's my challenge.'

As another potential step, private-sector panel members have proposed merging Japan's commodities exchanges with the Tokyo Stock Exchange to create a single, all- encompassing bourse, though ministries that now regulate commodities trades oppose the move.

On taxes, Mr Yamamoto acknowledged that low-corporate-tax countries such as Singapore had an easier time luring foreign firms than Japan - a situation he compared with Ireland's edge over the UK since Ireland slashed taxes in the 1990s.

Beyond recognising the problem, however, he gave no hint that Japan planned to ease it  tax rates.

Even if Japan is successful in making its markets more open, largely monolingual Tokyo may still have a tough time drawing foreign bankers, according to Kirby Daley, a strategist at the brokerage Fimat who has lived and worked in both the Japanese capital and Hong Kong.

'For families coming from Europe or the US, the cultural and language barriers immediately and continually have put Tokyo at a disadvantage to Hong Kong and Singapore.' - Bloomberg, Reuters   22 May 2007

Tokyo aiming to be Asian financial hub

It is not so much a case of the business coming to Tokyo as a financial centre as of Japan going to where the business is.

Over the past few decades, Tokyo, Hong Kong and Singapore have vied from time to time to become the premier financial centre of the region. Singapore has established itself as a financial bridge between South and South-east Asia while Hong Kong has retreated to a China-dependent position and Shanghai has begun to assert its own claims. Tokyo meanwhile has seemed to slip out of contention, but something is stirring again now.

Japan's recently-appointed Financial Services Minister Yuji Yamamoto is hatching a scheme to turn Tokyo into the 'London' of East Asia, so far as financial services go, while Tokyo Stock Exchange (TSE) president Taizo Nishimuro has managed to link the TSE with both the London and New York stock exchanges in a three continent-spanning alliance.

Could this mean that Tokyo is finally about to become the monarch among Asian financial centres?

Perhaps, but what is more likely to happen is that Tokyo will once again demonstrate the truth of the saying that Japan is 'in Asia but not of Asia'. A part of the nation's colossal savings will be invested in China and India but increasingly Japanese capital seems likely to flow into Russia and Eastern Europe as well as to exotic spots like Brazil, and Tokyo could become home to IPOs and stock exchange listings originating outside Asia.

This is happening already, even before Mr Yamamoto's plans begin to get off the ground and before Mr Nishimuro's commendably pragmatic schemes for the TSE begin to bear fruit.

Very large sums of Japanese debt and equity capital are being invested in Russia and Eastern Europe, via syndicated loans, and into London or New York-led IPOs for state and privately owned entities from these countries, as well as through investment funds.

It is not so much a case of the business coming to Tokyo as a financial centre as of Japan going to where the business is. The conduits are Japanese megabanks such as SMBC, Mizuho and Mitsubishi UFJ or investment banks and securities houses such as Daiwa SMBC and Nomura.

These are high value transactions but because Japanese firms do not enjoy the same glamour as the Goldman Sachs, UBS' or HSBCs of this world they remain relatively low profile.

While Japan does not enjoy the same degree of sophistication in financial techniques as do New York and London, or Hong Kong and Singapore for that matter, it does have money -huge amounts of it. A great deal of this money is in the hands of individual investors and they are happy to place it with banks and securities firms and send it offshore in search of much higher yields than it can earn at home.

Japanese investors and authorities do not even require that foreign entities wanting to raise capital in Japan should list their securities on the TSE. These investors, obligingly, are happy to trade securities they receive in return for their capital on London or New York, despite the marginal inconvenience of different time zones, and to accept the fact of being 'in foreign parts' in return for what they perceive as the greater safety and transparency of dealing on the NYSE or the LSE compared to the TSE.

Not surprisingly, one party that is not happy is the TSE itself, having seen the number of foreign companies listed in Tokyo plunge from around 130 at the height of Japan's bubble economy to just 25 now, and having watched the exchange's total capitalisation slip from near parity with New York's to roughly one third of New York's US$13 trillion now.

The TSE's share of global stock market capitalisation has meanwhile slipped from one third of the total to only one tenth.

Wisely, Mr Nishimuro has abandoned the fiction that the TSE can recover former greatness simply by urging Asian companies from China, India, Asean and beyond to list their stocks on the Tokyo Exchange, or solely by entering into collaborative alliances with other stock exchanges in these various countries.

Recognising the technological and other shortcomings of the TSE still, he has instead cemented working relations with the NYSE and the LSE where systems and standards are state of the art. This promises that, in terms of technological and trading competence at least (no more embarrassing computer system crashes or trading system errors), Tokyo should be able to emerge within a couple of years as the primus inter pares among Asian stock markets - and with a thoroughly modernised, de-mutualised and publically listed stock exchange that is ahead of others in more respects than just having the world's second largest capitalisation.

But all this does not add up to making Tokyo a world class financial centre, or even the best in Asia.

So what does Mr Yamamoto have in mind? Little detail has been revealed as yet, probably because the minister has not been long enough in office. However, past schemes such as launching an offshore banking centre in Tokyo, or even Japan's much lauded financial sector Big Bang in the 1990s have failed to overcome fundamental obstacles to Tokyo's ascendancy.

Mr Yamamoto has spoken of creating a London-style 'Canary Wharf-style' quarter in Tokyo where the financial community drawn from all parts of the world can work, live and socialise together.

Laudable, no doubt, but a financial centre cannot be socially engineered. A much higher degree of English competency and a basic change in acceptance of foreigners (gaijin) and foreign practices in Japan are needed as building blocks in order for Tokyo to become a cosmopolitan financial centre. Singapore and Hong Kong need not tremble yet. - by Anthony Rowley  SINGAPORE BUSINESS TIMES Tokyo Correspondent   2007 March 1

Japanese real estate prices rise after 14 years
Japanese land prices rose for the first time in 14 years in 2005, signalling an end to the persistent asset deflation that dragged the nation's economy into recession in the early nineties.

Data released yesterday by the National Tax Agency also showed that price gains were spread across Tokyo and four other cities - Chiba, Aichi, Kyoto and Osaka - underlining the strength of the recovery and alleviating concerns that it would be limited to a few patches in the capital. In 2004, Tokyo had been the only prefecture in which land prices rose.  -  - By Mariko Sanchanta in Tokyo    FINANCIAL TIMES  August 2 2006

Banks fuel property boom

Tokyo's real estate market hums as Japanese banks, eager to expand their loan portfolios, pour ever more cash into property. This is no flashback to the country's doomed 1980s asset bubble: It's happening now.

New lending by Japanese banks to real estate developers rose 15 percent to 8.18 trillion yen (HK$570.96 billion) in the business year to March 31, Bank of Japan data show, even as the volume of new loans for capital investment of all kinds fell by nearly 3 percent.

``It's like a mini-bubble, it's true,'' an executive at a major Japanese real estate firm said, describing the exuberance with which Japanese banks have returned to property finance, lured by bottoming land prices and new demand from commercial and residential builders.

But there are crucial differences between banks' real estate lending today and the speculative frenzy of nearly two decades ago, which left Japan's economy paralyzed and banks saddled with billions of dollars in soured loans.

``Banks have changed the way they lend, the way they manage risk,'' said Jason Rogers, chief credit analyst at Barclays Capital in Tokyo.

A key innovation is the expansion of non-recourse lending, which limits collateral to a single building or project, protecting the borrower's other assets and limiting the size of loans.

Repayment plans rely on rents and other cash flow, rather than expected land-price rises. Banks are also more careful to share risks with developers, typically funding 60-65 percent of a project with loans and leaving builders to pay for the rest through equity.

The rise in property finance reflects banks' return to health, analysts say. Bad loans at Japan's leading banks fell to less than 4 percent of total lending last financial year, in line with their global peers, from more than 8 percent in 2002. Epitomizing the turnaround is Mitsui Trust Holdings, Japan's seventh-biggest bank and one of the biggest property lenders with close to one trillion yen in outstanding real estate loans.

The bank, one of the hardest hit by the bad-debt crisis, posted an 85 percent rise in annual net profit for 2004/05 and forecast further gains. Growth in real estate lending has fed a string of new office towers reshaping Tokyo's skyline.

In a sign of renewed demand for property, commercial land values in Tokyo's five most developed wards rose in 2004 for the first time in 14 years. At the same time, mortgage rates have fallen, dropping below 2 percent in some cases for a 10-year loan, enhancing the appeal to residential buyers.

Still, while new non-recourse real estate loans topped four trillion yen last year, that amounted to just 1.5 percent of Japan's domestic lending, said Yoshinobu Yamada, a bank analyst at Merrill Lynch.

``Experiences during the bubble era have given many people the impression that real estate lending equals high risk,'' he said. But banks' more diverse loan portfolios and other advances in risk management mean there is little chance of a return to bubble-style recklessness, he said.

Instead, he and others familiar with the industry say the biggest risk for banks is that a rising supply of loans could squeeze margins and erode profitability.

Foreign banks that led the return to property finance in Japan in the late 1990s enjoyed sizeable lending premiums, but these have fallen sharply as Japanese banks have joined the fray.

Premiums on real estate loans compared with benchmark interbank lending rates have fallen by a third to half since 2000, a property executive said, and in some cases banks are lending at rates below what the actual lending risk demands. ``With the entry of the Japanese banks, the spreads really started to get squeezed,'' the executive said. ``They're being squeezed every day.''  REUTERS    15 July 2005

Tokyo properties show recovery
Prices are rising, and construction demand is on the upside nationwide

Tokyo average residential land prices rose in Tokyo's five main wards last year for the first time since 1987, indicating Japan's slump in property values may be ending. Commercial real estate prices in those five areas also gained for the first time in 14 years.

Looking up: Residential and commercial land prices are beginning to recover throughout Metropolitan Tokyo, except in Shinjuku. Characterised as 'accelerating' by market observers, the recovery is expected to bolster growth.

The average price of residential land in Chiyoda, Chuo, Minato, Shinjuku and Shibuya wards rose 1.4 per cent in 2004, the Ministry of Land, Infrastructure and Transport said yesterday in a statement.

Commercial land values also rose, gaining 0.5 per cent in the same region on average.

Signs of an end to land price deflation may help bolster growth in Japan as property owners gain more confidence about the future and increase consumption, economists said.

The world's second-largest economy has had four recessions since land and other asset prices began tumbling at the end of the 1980s.

'Stable-to-rising land prices are going to encourage activity in the real-estate, construction, and housing sectors,' Richard Jerram, chief economist at Macquarie Securities Ltd in Tokyo, said before the report.

'It's a clear positive for the economy,' he added.

Nationwide, land prices declined for a 14th straight year, slipping 5 per cent, the smallest drop since 2000, the report showed. Property values fell 6.2 per cent in 2003.

Japan's land prices haven't risen since peaking in 1990. The slump since then has erased about two-thirds of the value of commercial property purchased in that year and about half of that for residential real estate.

Annual nationwide construction orders rose for the first time in four years in 2004, increasing 4.2 per cent to 13.1 trillion yen (S$201 billion), the land ministry said on Jan 31. Housing starts rose 2.5 per cent last year, a second consecutive yearly gain.

'Increases in land prices accelerated in some of Japan's metropolitan areas and the decline in the rest of Japan has narrowed,' Hiromichi Iwasa, chief executive of Mitsui Fudosan said.

'These factors reflect a strengthening Japanese economy,' he added.

Japan emerged from recession at the end of last year, expanding at a 0.5 per cent annual pace in the three months ended Dec 31 after shrinking in the two previous quarters.

'We have started to see the trend of falling land prices in the Tokyo, Osaka and Nagoya areas coming to an end as the business environment improves,' the ministry said in the report.

Space in Marunouchi Building, a high-rise office and shopping complex owned by Mitsubishi Estate Co, Japan's second-largest developer, remains the most expensive in central Tokyo, at 22 million yen per square metre, up 4.8 per cent from 2003.

Residential and commercial land prices rose in all the five main Tokyo wards last year except Shinjuku, where they fell 0.3 per cent and 1.1 per cent, respectively.

A recovery in property prices would probably help Mizuho Financial Group, Sumitomo Mitsui Financial Group and other lenders that have accepted real estate as collateral for loans.

Land prices rose an average of 8.7 per cent a year in the decade through 1990, then collapsed, leaving banks with loans that weren't being repaid.

Japan's banks cut bad loans by about 11 per cent to 23.7 trillion yen in the six months to Sept 30, 2004, according to the Financial Services Agency.

'Falling land prices, financial system distress and corporate sector restructuring are all tied together,' Mr Jerram of Macquarie Securities said.

'Rising land prices go hand-in-hand with a healthy financial system.'

Prices in the Tokyo region - that includes neighbouring Saitama and Chiba prefectures, the cities of Yokohama, Kawasaki and other municipalities - fell 3.2 per cent, the least since the declines started in the area in 1991, according to yesterday's report.

Japan's residential land prices fell 4.6 per cent, the slowest decline since 2000, while nationwide commercial land prices dropped 5.6 per cent, the smallest decline since 1991, the ministry said.

'The degree of weakness is getting less,' said Peter Morgan, chief economist at HSBC Securities Japan Ltd. - Bloomberg   24 March 2005

Is Japan Back?
Business Week cover story

One of the big surprises of the global economy is Japan's remarkable turnaround. It has grown faster than the U.S. over the past six months, and its 3.2% expansion for the fiscal year ended in March is the best showing the country has managed since 1996. The stock market is up 45% over the past 13 months, and the economy is generating jobs again, pushing unemployment to a three-year low of 4.7%. Exports -- always a strong driver of Japan's economy -- are soaring, particularly to China. "Japan has not been this strong in the past decade," says General Electric Co. Chairman Jeffrey R. Immelt. 

The surprise is that more and more of the recovery is being powered by demand at home, both from business investment and consumer spending. On May 28, Japan reported that household spending shot up 7.2% in April from the year-earlier period as shoppers flocked to department stores and discounters, stocking up on everything from suits to stereos. You have to go back to the heady days of 1982 to see that kind of consumer splurge in Japan.

This Japanese surge wasn't supposed to happen. After all, over the past decade a historic plunge in stock and land prices, three recessions, and stagnant growth have wiped out as much wealth as World War II did. Much of that was the wealth of a bubble economy -- unrealistic valuations doomed to fall. The problem is that the authorities opted for a slow workout to avoid bankruptcies and massive unemployment. That approach preserved social stability but cost trillions -- money that could have been spent resurrecting the country more quickly -- and helped push Japan into troublesome deflation. Even today the nation continues to experience major structural problems: a still-fragile banking system, a central-government debt burden equal to 160% of gross domestic product, and a sovereign credit rating more suited to a banana republic than to the world's second-biggest economy. Nonetheless, Japan clearly is moving forward. Here's why:

Japan was written off as hopeless as recently as 18 months ago, but the numbers are finally looking good. What's going on?
To understand the answer, you have to remember Japan in its heyday: Ever-higher exports to the U.S. built up the strength of the keiretsu, those vast networks of corporations that supported all members, no matter how weak. Meanwhile, high prices at home propped up domestic industries and robbed the Japanese consumer of buying power. The system worked -- until the keiretsu banks fueled a huge property bubble and gigantic overcapacity in the manufacturing sector. The banks refused to cut off deadbeat borrowers, and recession set in. Not even continued U.S. demand for Japanese products could end the downturn that started in 1993 and staggered on for nearly a decade.

Today, though, Japan is a beneficiary of global trends that did not exist when it slid into trouble. First, there's the rise of intra-Asian trade. A half-decade ago few understood how much Japan would gain from China's boom. Chinese manufacturers and consumers have been eager buyers of the machine tools, chipmaking equipment, cars, and consumer products that Japan excels at making. Last year two-way trade with China shot up 30.4%, to $132.4 billion, for the first time eclipsing import and export volumes with the U.S. And it's not just China: Southeast Asia has also bounced back from the Asian financial crisis of 1997-98. Last year, Japanese exports to Southeast Asia rose 10%, to $60 billion.

Japan is also raking in money from the growing global demand for must-have gadgets such as digital cameras, flat-screen televisions, and DVD recorders -- products where it still has an edge. Fujitsu Hitachi Plasma Display Ltd. and Matsushita Electric Industrial Co. together control 42% of the global market for plasma-display screens and are spending nearly $1 billion each to build new factories in Japan. Meanwhile, Sony, Canon, and Olympus have a lock on half the global market for digital cameras. The digital-appliance boom has in turn created business for Japanese machine-tool companies that make specialized machinery needed to crank out microchips used in these products. Machine-tool orders surged 25% in 2003, to $8.3 billion, government data show. Sure, Japan faces competition from Korea, Taiwan, and China, but it leads in key technologies such as tiny hard drives and specialized chips used in digital gizmos.

Tech isn't Japan's sole salvation. Something else happened, too, with little help from the government of Prime Minister Junichiro Koizumi or any other politician: The mighty keiretsu started to lose their iron grip on the economy. Constant deflation, heavy debt loads, and stagnant demand at home chipped away at corporate profits, forcing the weakest into bankruptcy. The tight relationships among banks and borrowers, manufacturers and suppliers started to fray. To survive, the strongest companies went offshore to produce their goods and ship them back to Japan at ever-lower prices.

At the same time, Japan's consumer psychology started to change, and deflation, ruinous as it was, proved to have a hidden payoff. Shoppers demanded lower prices and got them -- from entirely new retail categories such as "100 yen" shops, discount grocers, and warehouse-style department stores offering more and cheaper imported goods. So Japan's hard-pressed consumers finally could stretch their spending power, even on scantier wages. With employment picking up and strong economic growth, many now have the best of both worlds: steady incomes and still-decent prices.

Global investors are starting to amplify these trends. Until the mid-1990s about half of equities in Japan were held by banks, a legacy of the keiretsu cross-shareholding networks. That figure is now about 25%, according to fund manager Sparx Asset Management. The banks sold off their shares in 2001 and 2002 to meet new capital requirements imposed by regulators. Those sales sent the Nikkei 225 stock index to 20-year lows 13 months ago. But the sell-off sparked interest in Japanese stocks among foreign investors, who poured $77 billion into Japanese equities last year and now control 30% of the shares traded on the Tokyo bourse.

Those foreign shareholders are demanding better corporate governance, profitability, and transparency. In December, for instance, private equity fund Steel Partners Japan Strategies LP launched a hostile takeover of Yushiro Chemical Industry Co. Why? Steel Partners, which owned 8.9% of the cash-rich machine-oil maker, was tired of the company's low stock price and paltry dividend. Yushiro fended off the attack, but not before a panicked management agreed to raise its dividend fourteen-fold. Meanwhile, dealmaker Wilbur L. Ross Jr. has established a $200 million fund with the California Public Employees' Retirement System pension fund that will buy japanese shares and agitate for better governance. American private equity players are at work, too. Carlyle Group and Lone Star are on the prowl for turnaround opportunities after seeing the success Ripplewood Holdings had with its investments in Japan Telecom and the near-bankrupt long term credit bank, now called Shinsei.

Isn't too much of Japan's recovery linked to the volatile, overheated China trade?
That's a legitimate worry. "Japan's reflation is just the mirror image of China's investment cycle overshooting," says Hong Kong-based Morgan Stanley economist Andy Xie. Regarded as a China bear, Xie thinks the good times will be short-lived. The bubble in China has sparked a capital-expenditure turnaround in Japan, he says, and that has fed into the rebound in consumer spending. Once China collapses, Xie says, Japan's economy will suffer heavy collateral damage.

The argument, though, may be overblown. Few think the long-term outlook for China is anything but rosy, and there are some signs that the country is headed for a soft landing. Unless the U.S. were to crash at the same time, it's hard to imagine Japan falling back into recession. Moreover, such reasoning ignores the fact that, while Japanese companies have rushed to build up Chinese plant capacity to sell goods to consumers there, they're also using China as a cheap production base to sell products back home and around the world. Imports from China shot up 21.9%, to $75 billion, in 2003. About 15% of that, says the Japan External Trade Organization, was "reverse imports" -- subsidiaries of Japanese companies sending Chinese-made PCs, printers, and DVD players back home. China may see boom-and-bust periods that crimp Japanese export growth, but Corporate Japan still benefits from having a vast production base on the mainland.

It's also hard to argue that China has much to do with the rapacious domestic demand for digital appliances. The boom started inside Japan about two years ago; today roughly half of all Japanese households have digital cameras, and one-third own DVD players. If you have ever visited a space-starved Japanese home, you can quickly grasp why sleek flat-screen TVs are all the rage. In March, Japanese consumers bought 216,000 of them, up 72% year-on-year. Now that these products have been successfully marketed at home, companies are boosting capacity to sell more overseas. Matsushita just announced plans for a new factory to crank out 3 million plasma-display panels a year. When it comes to digital TVs, says Fumio Ohtsubo, a senior managing director with Matsushita, "we can't be beaten."

Has Japan Inc. really restructured enough to regain its global stature?
It depends on which part of Japan Inc. you're talking about. There has been a true revival in the competitiveness of the biggest multinationals, particularly in electronics, steel, and autos. Nissan Motor Co., for instance, had a near-death experience but was revived by foreign capital and world-class managers such as CEO Carlos Ghosn. Today, Nissan is enjoying record profits. Ghosn sees enormous potential in Japan given its educated and diligent workforce, engineering smarts, and manufacturing prowess. "Every problem has a solution," he says. "The key is getting people thrilled about what's going on in the company."

Other Japanese outfits have relied on homegrown managerial talent to pull out of the rut. At Matsushita, CEO Kunio Nakamura has closed or streamlined dozens of plants, cut the workforce by 20% since 2000, and last year poured some $5.5 billion into research and development on products such as camera phones and flat-screen TVs. Even Old-Economy mainstays are getting into the act. Toray Industries Inc., a manufacturer of synthetic fibers, now produces materials needed for making LCD panels. And steelmaker JFE Holdings Inc. has stormed back to profitability with decisive downsizing and a shift to higher-margin products such as sheet metal for carmakers. All in all, the average return on equity of Japan's 400 top nonfinancial companies has jumped fourfold, to 7%, since 1998. Goldman, Sachs & Co. thinks it could hit 10% by 2006. Another new trend is part-time employment, which adds to companies' operating flexibility. Last year the number of temps soared 21.8%, to 2.13 million workers -- 2 1/2 times as many as five years ago, or 3.5% of the workforce.

That said, there are still plenty of backward-looking companies. While labor productivity increased about 2% overall in 2003, the biggest gains came from giants such as Toyota and Canon. Companies in services, retail, construction, and food processing -- which represent some 60% of total employment -- lag far behind, says Nikko Citigroup Ltd. economist Jeffrey Young. "In some cases, productivity is falling outright," he points out. That lack of productivity translates to scarce profits. In the past fiscal year the five most profitable enterprises represented some 25% of the pretax earnings of Japan's 300 biggest companies, Young says. So while Japan has made progress, its restructuring drive still needs to go deeper.

The banking sector seems to be bouncing back. Will that make much of a difference?
This is one area where Koizumi deserves credit for getting the job done. His appointment of Heizo Takenaka as Japan's economics czar and top bank regulator was smart. Takenaka and his staff at the Financial Services Agency have forced Japanese bankers to reclassify marginal loans as the duds that they really are and made them drop accounting gimmicks that hide problems. For instance, in March, FSA auditors discovered that banking group UFJ Holdings Inc. had underreported loans by some $9.1 billion and needed to shore up reserves by $8.4 billion. UFJ reported a $3.6 billion loss last year -- a shock, but a refreshing change after years of book-doctoring with tacit government permission.

The other side of the bank problem is that many companies that were going to go under have already gone bankrupt, while borderline cases have returned to health as the economy improved. Last year, the number of corporate bankruptcies fell by 16.6%. The banks have written off much of the debt owed by those companies or sold it to a government loan-workout corporation. So the level of nonperforming loans at major Japanese banks has dropped by about half over the past two years, to $124 billion, or about 5% of their loan books. This development could prove a tremendous boost for the economy. With the banking sector in a funk, total outstanding loans have been declining for the past six years, hobbling the ability of enterprises to raise capital for expansion. True, the rebound in the Nikkei has reopened a key source of financing, and the best-run companies have no problem raising money in global markets. Still, Japan needs a vibrant banking sector to fund new ideas.

What are the challenges for Japan now?
Japan still suffers from deflation, which took root in 1998. Consumer prices have been dropping at about 1% annually, and land prices have fallen since 1992. Most economists, though, think prices are hitting bottom and will start rising modestly late next year.

The government also faces a Godzilla-sized debt problem. Its national pension scheme is such a mess that most workers -- and even some politicians -- don't even bother to pay into it. These troubles are fixable provided Japan keeps growing and Koizumi can push through higher pension premiums and rein in government spending. But it will take years, if not decades.

Then there's the question of when the Bank of Japan will boost its benchmark interest rate from the near-zero level it has maintained since 1999. BOJ Governor Toshihiko Fukui probably won't move until consumer prices start to rise next year, and even then will only raise rates modestly. That shouldn't hurt. But if inflation sets in, he may have to be more aggressive. Then the government's debt costs would rise, which in turn could make it harder to reduce the deficit and cut spending.

For now, though, ordinary Japanese finally have a reason for cautious optimism. Kimiko Hasegawa, 50, recently spent an afternoon looking through designer dresses at the upscale Mitsukoshi department store in the Ginza, for the first time in ages. "For the past two years, I only shopped at discounters," she says. If Japan can keep growing and get its competitive groove back, more and more Japanese might feel confident enough about their economic. - By Brian Bremner, with Hiroko Tashiro, in Tokyo   BUSINESS WEEK INTERNATIONAL COVER STORY       14 June 2004

RETAIL

Goldman bags Tiffany's Tokyo flagship property

Goldman Sachs is buying Tiffany & Co's flagship property in Tokyo for 37 billion yen (S$484 million), a person familiar with the deal said yesterday, in a move that underlines the appeal of prime real estate here to investors.

The person, who requested anonymity because he is not authorised to speak on the matter, confirmed a report in Japanese business daily The Nikkei Sunday that said the deal is being finalised following a bidding for the property in Tokyo's glitzy Ginza shopping district.

The New York-based jewellery retailer Tiffany will lease the property to keep its store open there.

Goldman Sachs Group Inc spokesman Yoshihide Nakagawa and Tiffany spokeswoman Kyoko Okada declined comment on the report.

Japanese real estate has been recovering and gradually drawn investors amid an economic recovery.

Earlier this year, Morgan Stanley said it was buying 13 hotels from Japanese carrier All Nippon Airways Co for 281 billion yen, in a deal roughly doubling the American investment bank's portfolio of hotels in Japan.

Japanese are among the world's biggest fans of Tiffany products, although their popularity has waned somewhat in recent years amid intensifying competition from other brands.

Tiffany's recorded better sales and profits for the first fiscal quarter, but reported that retail sales fell 2 per cent in Japan. -- AP    2007 August 28

Luxury retailers bid up property values in quest for prestige

For Maiko Toda, the new Tokyo store that Prada Holding opened last month is the height of chic, the best place to buy accessories for her Louis Vuitton handbag.

"The store looks really cool," said Toda, as she and a friend admired the 30,000-square-foot (2,800-square-meter) shop, spread over six floors of a building with perspective-altering convex and concave windows that Milan-based Prada built in Tokyo's boutique-filled Aoyama district.

But for property investors like Peter Gensheimer, the building symbolizes something else - a battle between luxury-goods retailers that developers say is raising land prices in prime shopping areas of a city where most property is still mired in a decade-long slump.

Prada and other top-end brands are buying sites for distinctive buildings aimed at luring shoppers like Toda, who says she spends about $2,000 a month on clothes and accessories.

"High-end fashion retailers have been buying buildings and land for their flagship stores recently and have been paying top dollar for the privilege," said Gensheimer, a principal at Enright Real Estate, which invests in retail property. "It's caused a bit of a mini bubble."

Land prices rose nearly 10 percent last year in the Ginza shopping district and on Aoyama's tree-lined Omotesando avenue, known as Tokyo's Champs-Elysées, according to Toyokazu Imazeki, an analyst at Jones Lang LaSalle in Tokyo, citing government data.

By contrast, most commercial land in Tokyo is still getting cheaper - overall prices fell 2.5 percent in the six months to March 31 - after falling by four-fifths from a 1987 peak.

Prada's store was designed by the Swiss-based architects Jacques Herzog and Pierre de Meuron, winners of the 2001 Pritzker prize, who designed the Tate Modern Museum in London. Prada, which last year tripled its net income in Japan to ¥385 million ($3.3 million), will not say what it paid for its plot.

Although near-record unemployment and falling wages have reduced consumer spending, luxury goods are in demand among young Japanese women.

"We consider Japan an undersaturated market," said Chris Amplo, director of retail operations in Japan for Coach, the biggest U.S. seller of luxury leather goods. "Per capita spending of women in Japan is twice that in the United States."

Coach, too, has joined the trend toward establishing so-called flagship stores, typically stand-alone outlets in a building carrying the brand name. It opened its biggest Japanese store in April in Tokyo's Shibuya district.

Coach, based in New York, has 93 outlets in Japan and plans a third "flagship" store within 12 months, Chief Executive Lew Frankfort said after opening the new shop.

LVMH Moet Hennessy Louis Vuitton, the world's biggest luxury-goods retailer, plans to open a 13,300-square-foot store, its 47th in Japan, in Tokyo's new Roppongi Hills complex in September.

Tiffany, the U.S. luxury jeweler, last month paid ¥16.5 billion for the Ginza building that houses its main Tokyo outlet. That will give it more control over its premises, said Tamami Matsuoka, a UFJ Tsubasa Securities analyst.

"They aren't on the first floor of that building and to Japanese consumers that means it isn't a luxury brand," said Matsuoka. "Image is important."

For property owners in the right place, the rush to open more and bigger boutiques helps counter falling land prices, said Imazeki of Jones Lang LaSalle. Owners can redevelop their properties to attract higher rents from luxury retailers that don't own space, or can sell at a premium to other developers or retailers intent on building stores.

"Downtown Tokyo is in the middle of a construction boom that has stemmed a slide in prices in the capital, and in retail districts prices are even rising," Imazeki said.

The more brand-name shops that open in Tokyo, the better, say Toda and her friend Mami Horie. "It's really convenient to have so many options for buying products with high quality and status," said Horie, sporting a Hermès handbag as she accompanied Toda.    - By Desmond Hutton    Bloomberg News    9 July 2003

OFFICE

Tokyo vacancies rise as new buildings lure tenants

Tokyo office vacancies rose last month as some tenants gave notice of moves to newer buildings, increasing the space available for rent in older structures, a privately held property research company said.

The vacancy rate for office space rose to 7.42 per cent last month from 7.22 per cent in June in Tokyo's five main business districts of Chiyoda, Chuo, Minato, Shinjuku and Shibuya, Miki Shoji said.

Economic growth was helping companies expand their business, prompting moves into larger offices. Japan's economy, the world's second-biggest, has expanded for five straight quarters, although growth slowed to a 1.7 per cent annual pace in the three months to June 30, from 6.6 per cent in the first quarter of this year.

Miki Shoji said average monthly rent at newly opened buildings rose to 24,833 yen (HK$1,754) per tsubo (equivalent to 35.5 square feet) from 24,391 yen in June. Average rent at previously existing buildings dipped to 17,429 yen per tsubo, from 17,451 yen.          -  2004 August 18    BLOOMBERG   

Japan Land Prices Rise for First Time in 16 Years

Land prices in Japan rose for the first time in 16 years as international and domestic investors competed to acquire properties in the three biggest cities.

Gains in Tokyo, Osaka and Nagoya compensated for drops elsewhere in the country. Average commercial land prices in the three cities rose 8.9 percent in 2006 while residential land prices grew 2.8 percent, the Ministry of Land, Infrastructure and Transport said in a report released today.

The gains indicate Japan is ``getting out from the deflationary era,'' said Yuichi Chiguchi, who helps oversee $8.6 billion in assets at DLIBJ Asset Management Co. in Tokyo. ``These figures will definitely have a positive effect for the equity market.''

Morgan Stanley and Goldman Sachs Group Inc. are among investors that have poured money into Japanese real estate, attracted by low interest rates, economic growth and new securitization deals. The investment rush has sparked concern of a new bubble, after a collapse in land prices in the early 1990s led to a decade of declines.

The Bank of Japan said in its Financial System Report last week that it was ``necessary to carefully watch future developments in the real estate markets and their effect on the financial system.'' Japan's interest rates are still the lowest among developed economies after the bank raised the benchmark borrowing cost to 0.5 percent last month.

Signs of Peaking

``The possibility of the Bank of Japan raising interest rates faster than the market expects has emerged with this data,'' said Yoji Otani, an analyst at Credit Suisse Securities Japan Ltd. in Tokyo. ``The current phenomenon in land prices is becoming a problem. The BOJ has good evidence of that now.''

Commercial land in and around Tokyo, Osaka and Nagoya rose for a second straight year, after gaining 1 percent in 2005. Residential land prices in the cities increased for the first time in 16 years, up 2.8 percent.

Commercial land values nationwide are still half of what they were at the height of Japan's bubble economy in 1991, while residential land prices stand at half the peak. Commercial land prices in Tokyo's central wards are at the same level they were in 1980.

The ministry's land report, based on appraisals of 30,000 locations across the country, is used as a benchmark for determining land values in the private and public sector.

Tokyo Demand

Demand for office space in city centers and for condominiums in expensive districts has pushed up prices, according to the ministry report. Japan's economy continued its longest extended period of postwar growth, expanding by an annualized 5.5 percent in the three months ended Dec. 31.

The steepest gains were recorded in areas near Omotesando Hills, a retail and residential development in central Tokyo which opened on Feb. 11 last year. Commercial and residential land prices both rose as much as 46 percent near the project. High-end retailers such as Louis Vuitton, Christian Dior, Armani and Polo Ralph Lauren have opened stores in the area. One 206- square meter apartment in the area is listed for sale at 318 million yen ($2.7 million).

High demand for office space in developments near Osaka and Nagoya railway stations resulted in advances of more than 40 percent in those cities, according to the ministry.

Tallest Building

Prices fell at 55 percent of all surveyed locations, and values outside of Japan's three major metropolitan areas declined for a 15th consecutive year, dropping 2.8 percent. Exceptions included the northern island of Hokkaido and its biggest city Sapporo, and Fukuoka city in the southern island of Kyushu.

Increasing land prices are a reflection of the economy and don't indicate an asset bubble, Vice Finance Minister Hideto Fujii said after the figures were released at 4:50 p.m. in Tokyo.

Japan's two largest developers will open developments in central Tokyo in the next month. Mitsui Fudosan Co.'s Tokyo Midtown project, due for release on March 30, includes the city's tallest building. Mitsubishi Estate Co. is scheduled to open a new 42-story skyscraper in front of Tokyo Station in April.

Mitsubishi Estate shares rose 50 percent in the past year and Mitsui Fudosan stock has gained 31 percent, compared with a 2.7 percent increase in the Topix index. The Topix Real Estate Index has climbed 30 percent.

`Dangerous Situation'

Tokyo office vacancies fell to 2.87 percent in January, the lowest monthly level in at least six years, according to Miki Shoji Co., a privately held office brokerage company. Mori Building, Japan's largest privately held real-estate developer, said last month it expects office supply in Tokyo to fall over the next five years, putting upward pressure on office rents.

Morgan Stanley said it bought a two-thirds stake in a 19- floor office building in Tokyo's Akasaka district for $523 million in September. Goldman Sachs Realty Japan Ltd., a wholly owned subsidiary of the U.S. securities firm, manages 700 billion yen ($5.9 billion) in assets in Japan, according to the company's Web site.

Japanese real estate investment trusts have also benefited from rising land prices, with the Tokyo Stock Exchange REIT Index climbing 40 percent in the past six months.

The market capitalization of Japanese REITs has risen 23 times to about 6 trillion yen since September 2001 when Japan's first two REITs listed. Net purchases by overseas investors of the trusts more than quadrupled to 262.3 billion yen last year, making them the largest investors.

``Even prices for properties with low appeal are rising due to intensifying bidding,'' said Tomohiro Makino, executive director of Nippon Commercial Investment Corp., Japan's 10th largest REIT. ``That is a very dangerous situation. You'll fail if you make the wrong move.''   - 2007 March 27  BLOOMBERG

CONDOMINIUMS

Tokyo condo offerings to drop 10%

Condominiums to be put on the market in the greater Tokyo area are expected to total 54,000 units in 2008, down 10.5 per cent from the 2007 estimate, according to a forecast released Thursday by the Real Estate Economic Institute.

This would mark the first time below 60,000 units since 1993, when the number of units on the market totaled 44,270. The institute attributed the likely decline in condo supplies to a slowdown in demand due to rising condo sales prices. The supply price of condos in the greater Tokyo area
climbed 11.5 per cent per sq. meter in the January-November period of 2007. With construction costs set to rise in 2008, condo prices are expected to rise even further.

"There is a strong possibility that buyers will hold off on making purchases," said an institute official said.   -   2007 December 21   ASIA PULSE

Tokyo's Condominium Revolution

The day when  Tokyo residents owned homes on the outskirts of the city and put up with a two-hour commute every day because of sky-high property prices are long gone.

Land prices have been falling for 10 straight years, and an increasing number of valuable sites is being made available for residential use. For the average salaryman or woman, living near the office is no longer an impossible dream. Although the economic outlook is still gloomy, real-estate developers are rushing to build high-rise, luxury condominiums in prestigious districts of the capital. "These properties are selling well everywhere," says Yusuke Abe, an official at Mitsubishi Estate, Japan's second-biggest real-estate company.

The condominium boom began in the early 1990s, when the bubble economy collapsed and land prices began to plunge. More recently, a tax break on mortgages and low interest rates on basic loans of 2.6% boosted condo sales to 182,000 units in 2000, their highest point since 1994. A supply glut is dampening prospects for the overall market, but demand remains strong for high-rise condos, most of which are in central Tokyo.

High-rise condo buildings with 20 storeys or more have existed since 1976. But supply suddenly skyrocketed last year as developers began to build on land they had acquired from companies and financial institutions during their restructuring. The number of new tower condos units in central Tokyo reached 3,944 in 2000, a rise of 150% from 1999. The Tokyo-based Real Estate Economic Institute estimates construction of these buildings will continue to surge for the next few years.

PROXIMITY TO WORK

"People are coming back to Tokyo because they can afford to buy property in areas where it was impossible to live until a few years ago," says Akio Fukuda, head of the planning and research division at Real Estate Economic Institute.

Most of these condos are located just a few minutes from train stations in upmarket business and fashion areas such as Aoyama and Shinjuku. Also, Fukuda says, "people may want to feel the prestige" of living in nice condos. Hijiri Inose, 37, bought a tower condo last year. "It's convenient to go to work. And the facilities provided for common use, like the lounge on the top floor, look very nice," he says.

As well as a good location and nice views, tower condos have other attractions that you don't get elsewhere, like broadband networks, party rooms, fitness rooms and large gardens. Mitsui Fudosan, Japan's leading real estate developer, will put on sale its landmark 120-metre-tall Aoyama Park Tower in June. It says the building will feature a combination of cutting-edge earthquake-resistant structure and spacious rooms.

The residential units at Aoyama Park Tower, which houses 314 condos, are likely to be priced upwards of ¥80 million ($650,000) for 75 square metres. This is fairly pricey by today's standards, but would have been virtually unthinkable in Tokyo 10 years ago. The average price of condos was ¥660,000 per square metre in 2000, compared with an exorbitant ¥1.553 million per square metre in 1991.

Meanwhile, demand is still rising. Developers say almost all new tower condos have sold out on the first day. For example, Mitsubishi Estate last year sold all its 300 tower condos immediately after releasing them. The majority of buyers were middle-aged and elderly couples who wanted a more convenient way of life than was available in the suburbs. This year, Mitsubishi plans to quadruple from last year the supply of new tower condos to 1,200 units.

While other developers share Mitsubishi's optimism, some analysts say that the initial craze has now probably reached its height. Junichi Shiomoto, a senior analyst at Nomura Securities in Tokyo, says prices of tower condos are now starting to rise. "Supply hasn't peaked yet, but the time is long past when just any old high-rise condo will sell well," he says. When the initial euphoria passes, buyers will be far more cautious when making a choice.   - by By Ichiko Fuyuno     Far Eastern Economic Review

REIT

Japanese Reits likely to be takeover targets
Those trading at less than their net asset value are likely to be bought out

Japanese real estate trusts and asset managers may be ripe for takeovers after share prices plunged and stricter compliance guidelines raised costs, said property managers including a local real estate executive at Morgan Stanley.

It's a jungle out there: Regulations to boost investor protection have raised compliance costs, making it difficult for smaller real estate managers to survive

Regulations to boost investor protection went into effect on Sept 30, raising compliance costs which may make it difficult for smaller real estate managers to survive.

Real estate investment trusts (Reits) trading at less than their net asset value are likely to be takeover targets.

'Consolidation is imminent,' said Marcus Merner, managing director for real estate at Morgan Stanley Japan Securities Co, at a conference on Wednesday. 'All the arrows are pointed in the right direction for that to happen.'

The Tokyo Stock Exchange Reit Index has fallen even as land prices advanced.

The index has dropped about one-third in the past six months, eroding gains earlier in the year, after rising defaults of sub-prime mortgage loans in the US prompted some investors to sell stock to make up for losses elsewhere.

Japan may see buyouts of property holders similar to some of those in the US, said Alan Miyasaki, managing director of the Blackstone Group Japan KK.

Blackstone Group LP bought Equity Office Properties Trust (EOP), the biggest US office landlord, for US$23 billion in March, and may have made as much as US$2 billion in profit by selling off properties in EOP's portfolio, according to Bloomberg calculations. 'Growth fundamentals in the market place are appropriate to have similar M&A here in Japan,' Mr Miyasaki said.

Thirty out of 40 Reits listed on the Tokyo Stock Exchange (TSE) trade below their net fixed asset value, according to Bloomberg calculations.

The share declines may have prompted LaSalle Investment Management Inc, a unit of the world's second-largest commercial real estate broker, to take control of eAsset Investment Corp, the first ever takeover in Japan's 4.9 trillion yen (S$64.6 billion) Reit market.

LaSalle, a subsidiary of Jones Lang LaSalle Inc, bought the asset manager of eAsset on Nov 19 and plans to expand the trust.

Earlier this month, Goldman Sachs Group Inc and Aetos Capital LLC bought property manager Simplex Investment Advisors Inc for 154.1 billion yen.

Goldman plans to invest about 200 billion yen this year in Japanese property, betting that real estate is short of its peak after a two-year rally.

Tighter regulations under the Financial Instruments and Exchange Law have increased administration costs for compliance standards, and the burden could turn smaller funds into takeover targets, said Yasuhiko Amino, operating officer and chief marketing officer of Japan at GE Real Estate Corp.

'The number of opportunities will increase,' Mr Amino said.

As land prices recover, property values on some companies' books are increasing at a faster pace than their market worth.

Property assets generated more profit last year for Sapporo Holdings Ltd, Japan's third-largest beermaker, than its alcohol business did.

Sapporo formed a property alliance with Morgan Stanley on Oct 30 as it seeks to fend off a hostile bid from Warren Lichtenstein's Steel Partners Japan Strategic Fund, which wants the brewer to sell off its real estate.

Mitsubishi Estate Co and Sumitomo Realty & Development Co, Japan's second and third-biggest developer by revenue, are among builders that have set up takeover defences this year.   - 2007 November 23   BLOOMBERG 

JLL to take control of Japanese Reit eAsset 
The Tokyo Stock Exchange Reit index has declined 11% this year

Jones Lang LaSalle Inc (JLL), the world's second-largest commercial real estate broker, will gain control of eAsset in the first takeover in Japan's 4.9 trillion yen (S$63 billion) Reit market.

LaSalle Investment Management Inc will buy Asset Realty Managers Co, the asset manager of eAsset, for an undisclosed sum, giving it control of the Reit.

The Jones Lang unit will expand eAsset as part of its plans to invest 300-500 billion yen a year over the next few years, said Jack Chandler, chief executive officer of LaSalle Asia-Pacific.

Japanese Reits have declined this year at a time when land prices and rents are rallying.

LaSalle's decision to take over eAsset may spur international property managers to follow suit, lured by higher returns than those available in North America and Europe after rising defaults on US sub- prime mortgages sapped investor confidence.

'You've seen dramatic reduction in transaction activity in the UK and the US as capital values have declined,' said Mr Chandler.

'It is extraordinary how different the investment climate is here than in other regions.'

The Tokyo Stock Exchange (TSE) Reit Index is heading for its first decline since 2004 after rising defaults on US sub-prime mortgages prompted some foreign investors to sell stock.

The TSE Reit index has declined 11 per cent this year, after gaining by at least 8.2 per cent in each of the past three years.

'J-Reits are having trouble finding properties because there are few available for sale,' said Yoji Otani, a real estate analyst at Credit Suisse Group who expects further acquisitions of Japanese Reits' asset managers.

'Sponsorship and asset managers are very important for J-Reits because they are the main source of real estate. Asset managers for some small Reits need to be replaced for Reit prices to gain.'

LaSalle Investment and other investors agreed on Nov 8 to pay 22.8 billion yen for a stake in eAsset, which will sell 57,000 new shares in the transaction. It had 64,000 shares outstanding as of October. eAsset will gain two shopping centres in Tokyo and Kobe, worth a combined 57.6 billion yen, from LaSalle as part of the transaction.

'Tokyo is by far the largest office market in the world, a lot of that stock here is obsolete,' Mr Chandler said on Nov 9 here.

'Even with low growth, just obsolescence and replacement and some of the emerging areas in Tokyo will create a tremendous amount of opportunity.'

Japanese Reits are controlled through their asset managers. The trusts themselves lose corporate tax breaks if their three largest shareholders own more than 50 per cent of the Reit between them.

Asian Investment LaSalle, which plans to triple its investment in Asia to US$20 billion in three to four years, is seeking growth in a region that has seen the least effect from the sub-prime problem.   - 2007 November 13   BLOOMBERG

MULTI-FAMILY

ART buys rental apartments in Tokyo

Ascott  Residence Trust (ART) is acquiring more than 500 rental apartments in 18 blocks in Tokyo for 12.2 billion yen (S$158.6 million).

More choice for customers: ART now offers both serviced residence and rental housing options to cater to a wider range of budgets and customer needs. Its existing properties in Japan include Somerset Roppongi (above), located in Tokyo's Minato ward

The properties, the subject of a conditional sales and purchase agreement, are being acquired from a private equity firm. There are a total of 509 units in eight wards in Tokyo - Shinjuku, Bunkyo, Meguro, Setagaya, Nakano, Suginami, Nerima and Taito Ku. They are all freehold and have an average age of 18 months. Total net lettable area is estimated at 13,318 square metres.

The newly purchased properties include purpose-built studio and one-bedroom apartment units which are popular with an increasing number of singles customers. Each of the 18 sites is within walking distance of the Tokyo subway, other public transportation, restaurants and supermarkets.

The apartments are currently managed under a mixture of four Japanese rental housing brands - Zesty, Joy City, Gala and Asyl Court.

All of them have broadband Internet, security access phones, air-conditioners, fully-fitted kitchens, built-in wardrobes and water heaters. ART said in a statement yesterday that the properties were acquired at an estimated annualised property yield of 4.1 per cent in the forecast year 2008.

The transaction will be funded by borrowings, which will bring ART's gearing to 36.8 per cent, well within the 60 per cent gearing limit allowed under the Monetary Authority of Singapore's property fund guidelines.

Upon legal completion, all 18 rental housing properties will be managed by Ascott International Management Japan (AIM Japan), a 60:40 joint venture between The Ascott Group and Mitsubishi Estate Co, a major real estate developer in Japan.

Chong Kee Hiong, ARTML's chief executive officer, said: 'The longer tenancy leases of the rental housing model and high average occupancy of 90 per cent across the 18 properties ART is acquiring provide good income stability and potential for organic growth in ART's Japan and overall portfolio.

'In addition, ART will be able to enlarge the customer base for its Tokyo portfolio as it now offers both serviced residence and rental housing options to cater to a wider range of budgets and customer needs.'

With the latest purchase, ART's diversified portfolio now comprises 22 per cent rental housing units and 78 per cent serviced residence units. Its length-of-stay profile will improve from an average of seven months to eight.

ART's existing properties in Japan are Somerset Azabu East and Somerset Roppongi, located in Tokyo's Minato ward.

Upon completion of the acquisition, ART's total portfolio value will stand at S$1.34 billion, comprising 3,463 units in 36 properties in 10 cities across seven countries.  - 2007 November 13    SINGAPORE BUSINESS TIMES

OFFICE

Tokyo office rents set to rise next year
2005 supply of office space close to lowest in five years

Yahoo Japan Corp and other companies with plans to expand in Tokyo, the world's most expensive city after London, may have to budget more for rent next year as economic recovery increases demand for office space.

Tokyo office vacancies in November dropped to their lowest since January 2002 and average rents rose 1.4 per cent from the same month last year, said Miki Shoji Co, a closely held real estate brokerage.

'For companies seeking new space, rents are up about 10 per cent from where they were in 2004,' said James Fink, general manager at the leasing division of realtor Colliers Halifax in Tokyo, which has been in Japan since 1952.

'We should be pretty consistent through 2006, meaning quality space that comes available is going to be raising its achievable rent by about 10 per cent.'

That outlook hasn't escaped the notice of investors, who have made the Topix Real Estate Index, which includes 46 companies, the best performer in the current quarter among the 33 industries on the Tokyo Stock Price Index.

The real estate index, which has surged 96 per cent this year, is poised for its biggest gain in at least 22 years, or since 1983, when the exchange started compiling the historical data and Japan was in the middle of its bubble economy.

'Vacancy rates in Tokyo are now down to pretty low levels,' said Robert McKillop, head of Japanese equities at Standard Life Investments Ltd in Edinburgh, Scotland.

'We are seeing or hearing more and more anecdotes of rent hikes going through to new tenants. If the Bank of Japan delays raising rates, we could see a lot of interest in real estate assets or real estate stocks.'

Bank of Japan governor Toshihiko Fukui and other policy makers have indicated interest rates will remain near zero until it's clear Japan has escaped from deflation.

'Market conditions are quite good for real estate companies,' said Yoji Otani, a property and construction analyst at Credit Suisse First Boston in Tokyo. 'They can easily borrow money with low interest rates.'

'Companies need debt financing in order to buy properties,' Mr Otani said. 'As long as Japanese banks continue to increase lending, property prices will rise.'

Lending for investment funds by Japanese banks to the real estate industry gained 17 per cent for the nine months ended Sept 30 this year from same period a year earlier, a Bank of Japan report said.

Yahoo Japan, which operates the country's most-visited Web portal, increased its staff by 80 per cent to 2,214 as of September from a year earlier. The company took space at Tokyo Shiodome Building, owned by Sumitomo Realty & Development Co, in July, said Yahoo Japan spokeswoman Emi Takase.

Yahoo Japan's lease and utility expenses almost doubled in the three months ended Sept 30 to 1 billion yen (S$14.2 million) from 533 million yen as it expanded office space and added new staff, according to the company's earnings statement.

Yahoo Japan will take about 10 floors of Midtown Tower, which will be completed in early 2007 by Mitsui Fudosan, Japan's largest real estate company.

'You will see large companies like JPMorgan Chase & Co, Nikko Citigroup Ltd and State Street Corp relocating over the next two years or so,' said Mr Fink.

JPMorgan and State Street officials said they weren't immediately able to comment on relocation plans.

'We will increase the number of employees by 10 per cent next year,' said Neha Kumar, a spokeswoman at Nikko Citigroup, which has 1,500 staff in Japan. 'We have secured appropriate office space, which will have a capacity for 1,700 employees, for the future business expansion.'

The 2005 supply of office space was near the lowest in five years and market rents hit 20-year lows in 2004, according to Colliers Halifax's data.

'The pharmaceutical industry has been really active both in growing and consolidating locations into larger buildings. We see that trend continuing,' Mr Fink said. 'Tenants are adding head count because their business is growing.'

Rent per square foot of office space costs US$131.10 in inner central Tokyo, second only to London, according to a report published in August by CB Richard Ellis. The comparable cost in London is 36 per cent higher at US$178.67 a square foot.

Shares of Japan's real estate companies also gained in the past week after American International Group Inc, the world's largest insurer, said on Dec 20 it may buy an office tower and a commercial building site near Tokyo's main station.

An official at AIG in Tokyo, who declined to give his name for publication, said the companies were in discussions.

Mitsubishi Estate, which owns more than 30 buildings in the area, gained 8 per cent since the announcement, while NTT Urban Development Corp, which owns two properties, has surged about 20 per cent.

Shares of Pacific Management Corp, a property investment company, and Toho Real Estate Co, which mainly leases, sells and buys office buildings, more than doubled this quarter.

Some smaller medium-size developers are going to demonstrate they can provide properties for securitisation, said Curtis Freeze, who helps manage US$1.6 billion in assets.

'Next year is going to be a stock pickers' market,' said Mr Freeze. 'Some of the smaller companies will outperform.'    2005 December 29             Bloomberg    

Lone Star buys three towers in Tokyo for $1bn

Lone Star, the US private equity company, has acquired three office towers in central Tokyo for Y117bn ($1bn) in the latest sign that foreign investors believe selected parts of Japan’s moribund property market are poised for a rebound.

The properties were sold by Kokusai Motors, a taxi company that over-expanded into property management and development during the bubble economy in the 1980s and 1990s and is now trying to reduce its debt to UFJ, Japan’s troubled fourth largest bank.

Commercial land prices in six major urban centres in Japan have dropped from a high of 496 points in 1990/1991 to 72 points last year, according to an index published in the Japan Real Estate Securitisation Handbook.

This decline - combined with the economic recovery underway in Japan - has prompted overseas investment banks such as Goldman Sachs, Lehman Brothers and Morgan Stanley as well as a range of private equity funds to move into the market.

The number of properties available for purchase is being driven by two main factors: first, banks are demanding that troubled borrowers offload non-core property assets to reduce their debts; and second, the pending introduction of asset impairment accounting next year.

Under the new accounting rules, companies must book property assets on their balance sheets at market value, meaning they will be exposed to the reduction in property prices since most of them acquired properties in the bubble years.

Analysts say the companies are reasoning that as they will have to book the value of the property at a realistic market price they may as well sell it - apparently ignoring the signs that the market may be poised for a recovery, benefiting more astute overseas investors.

While there are signs that parts of Japan’s property market may be reviving, the pockets of recovery are isolated and the nationwide trend for all property asset classes remains downwards.

Premium commercial property prices in central Tokyo are recovering and there are signs this trend could be matched in other urban centres such as Osaka and Nagoya, but as the Real Estate Securitisation Handbook points out, there is a “polarisation of land prices and a disparity between Tokyo and the rest of the country”.

Lone Star recently raised $5bn to invest in Asia, around half of which has been allocated to Japan. It has already acquired Tokyo Star Bank, a small lender, a number of golf courses, and a range of properties.   - By David Ibison in Tokyo   FINANCIAL TIMES    17 Aug 2004

TOKYO -- A takeover battle shaking up Japan's banking industry has grown more intense as the target of that battle, troubled UFJ Holdings Inc., said it is examining an offer from the nation's No. 3 bank, Sumitomo Mitsui Financial Group Inc. 

UFJ's statement reverses its earlier stance of considering only competing suitor Mitsubishi Tokyo Financial Group Inc., Japan's second-largest banking group, and is the first indication that Sumitomo Mitsui may be approaching equal footing with its larger rival. 

The unabashed rivalry between the two mega-lenders is unprecedented in the chummy world of Japanese banking. That it could happen at all is a convincing sign that years of change and government reforms are finally clearing the way for real, bare-knuckled competition. 

UFJ had steadfastly refused to listen to proposals from Sumitomo Mitsui, citing a memorandum of understanding signed last month with Mitsubishi Tokyo that gave Mitsubishi Tokyo exclusive negotiating rights. But that memorandum is valid only until Aug. 31, and loss-making UFJ faces an even more urgent deadline: the Sept. 30 end of the fiscal first half. By that time, UFJ may need to have a strong suitor in place to avoid a potentially dangerous shortfall in capital. UFJ, Japan's No. 4 lender with ¥82 trillion in assets, or about $745 billion, says it still plans to go forward with the Mitsubishi Tokyo tie-up. But on Monday, the bank also said it is considering an offer that it received Sunday in a letter from Sumitomo Mitsui. 

In that offer, Sumitomo Mitsui proposed "a merger of equals," in which UFJ executives would be able to hold top jobs in a newly created bank, a Sumitomo Mitsui spokesman said. That part of the offer was apparently aimed at concerns within UFJ that the bank would be the weaker party in any tie-up. In the letter, Sumitomo Mitsui also offered to prepare more than ¥500 billion in fresh capital to help UFJ dispose of bad loans, the Sumitomo Mitsui spokesman said. UFJ has fallen behind other banks in disposing of its soured debt, which it said totaled ¥4.62 trillion in the quarter ended June 30. Rising pressure from government regulators to speed up its bad-loans cleanup has helped drive UFJ into seeking a richer suitor, bankers and analysts say. 

Sumitomo Mitsui is apparently keen to get an offer in place ahead of a court decision expected in coming days that could swing the outcome of the takeover battle with Mitsubishi Tokyo. People close to the deal have said Sumitomo Mitsui could make a formal bid for UFJ as early as this week. 

The Tokyo High Court is expected to rule on an earlier court decision that blocked UFJ from negotiating with Mitsubishi Tokyo about UFJ's trust bank unit. The earlier ruling was made at the request of Sumitomo Trust & Banking Co., a sister company of Sumitomo Mitsui that had agreed in May to buy the trust unit from UFJ. UFJ scrapped that deal to make way for a Mitsubishi Tokyo tie-up. 

If the higher court upholds the earlier ruling, UFJ will be permitted to negotiate on the sale of its trust-bank business only with Sumitomo Trust, which has joined Sumitomo Mitsui in its bid for UFJ. That will make it tougher to strike a deal with Mitsubishi Tokyo before the end of September, possibly driving UFJ to consider the Sumitomo Mitsui offer instead.   - by Martin Fackler     WALL STREET JOURNAL     9 Apr 2004

German Fund Manager adds Tokyo Building

29 July 2004  -  TOKYO- The German fund management company Deka Immobilien has acquired the fully-leased Don Quijote retail building here for about 75 million euros ($90.3 million) on behalf of the mutual property fund Deka-ImmobilienGlobal. The purchase marks the fund’s first investment in Asia.

The building has approximately 8,300 sm (89,340 sf) of retail space on nine floors that is fully leased on a long-term basis to the locally based and publicly traded Don Quijote discount department house chain. The asset is located in Chiyoda-ku, one of the Japanese capital’s five principal districts which surround the Imperial Palace. In its immediate vicinity, a large-scale office, retail and residential development will be completed by the end of 2006, presumably increasing the area’s long-term attractiveness for tenants and investors. While the building is the first Asia asset in the Deka-ImmobilienGlobal fund, it is the fourth Tokyo building acquired by Deka Immobilien. In 2002 it became the first German open-ended property fund operator to acquire properties in Tokyo, the world’s largest contiguous property market, and in June 2004 it bought the TK Shinbashi Building for 37 million euros ($44.5 million). Its Japanese portfolio is now valued at 200 million euros ($240.8 million). Deka Immobilien Investment GmbH, which belongs to the Sparkasse Financial Group, is Germany’s largest operator of open-ended property funds. Its funds, which have total assets of 19 billion euros, hold investments in 17 countries on four continents; over half of the properties are outside Germany. According to the company’s website, Deka-ImmobilienGlobal was launched in October 2002 and was the very first German fund with a primarily international investment strategy. One-third of the investments are made in each of three regions: Europe, the US, and Asia/Pacific. BUSINESS WEEK graphic

Japan - Land of the Recovering Sun?

Japan's  economy has bottomed out and can only go up, so this could be the time to invest in the Land of the 'Recovering' Sun.

That's what Development Bank of Japan representative Yoshikaz Niwa told a Singapore audience yesterday at Japan's annual Jetro conference.

Mr Niwa believes the advantage of doing business in Japan now is that while production is starting to recover and profits are rising rapidly, real estate prices remain low by Japanese standards. Assets now cost what they did 23 years ago, he said.

He also pointed to the upbeat outlook of major Japanese companies. In April, 25 per cent of companies surveyed had a negative outlook on business. Six months later, not one felt that business was worse.

Besides rising GDP, Japan has seen a rapid increase in corporate profits in the past six months, higher foreign direct investment and some interesting mergers and acquisitions.

Singapore's Raffles Hotel group, for instance, has acquired its maiden hotel in Japan - the Swissotel Osaka Nankai. The move was highlighted as a 'win-win' deal that has opened a new client base and brought together two countries renowned for high standards in the hospitality industry.

People behind other Singapore success stories in Japan also advised the Jetro audience yesterday.

Muvee Technologies and Comex said finding a niche area and having an innovative product help in the buzzing market. But according to Comex, 'be prepared for the long haul'.

And Muvee says clinching a major account also helps to move things, as the Japanese market is watchful and competitive.

Muvee benefitted from its unique home video editing idea. The Japanese liked its software so much that they wanted to apply it to a new segment, television.

Several key speakers said Japan has experienced slow but steady deregulation in the past few years, paving the way for smoother entry by foreign parties. Also making the market attractive is its demand for quality and high incomes.

As one of the keynote speakers pointed out, the Japanese economy may still be still be in hospital but it is no longer in intensive care - and perhaps it is about to be discharged.   - Singapore Business Times   28 Nov 2003

US Institution closes in on big Tokyo land deal
In what may be one of the biggest purchases of Japanese real estate by a foreign investor to date, Lone Star Funds, a U.S. investment group, is negotiating the purchase of a second set of buildings from Sumitomo Mitsui Financial Group for ¥35.7 billion, or $326 million, people involved in the transaction said Wednesday.

The Dallas-based investment fund is hoping to buy about 20 buildings, mostly apartment complexes, from Kichijoji Echo Building, a Tokyo-based developer that is financed by the Japanese lender, said the people, who asked not to be identified.  

The sales are part of Sumitomo Mitsui's bid to cut its bad loans in half by March 2005. Lone Star, Goldman Sachs Group and other overseas investors are increasing their purchases of Japanese real estate in the hope that accelerating economic growth may arrest a 13-year slide in property prices. Japan's economy grew at its fastest pace in two and a half years in the three months to June 30. 

 "The pressure is building on Japanese banks to get their money back to reduce bad loans, and advising borrowers to sell assets is a more acceptable way of doing things," said Pascal Masse, a fund manager at Aberdeen Asset Management in Singapore. "Taking these companies through the bankruptcy process may take years." 

Randy Work, president of Lone Star Japan Acquisitions declined to comment as did a spokesman for Sumitomo Mitsui. 

Earlier this month, Lone Star bought 19 properties sold by another developer financed by Sumitomo Mitsui for $342 million, bankers familiar with the plan said at the time. 

Sumitomo Mitsui's banking unit had ¥5.26 trillion of nonperforming loans at the end of March, the most as a percentage of total loans among Japan's four biggest lenders. The bank reduced the total to ¥4 trillion by Sept. 30 and wants to cut this to less than ¥3 trillion by March. 

Sumitomo Mitsui this month announced a venture with Goldman and Daiwa Securities SMBC Principal Investments to buy as much as ¥1 trillion of bad loans from its commercial banking unit. Goldman invested $1.35 billion in the Japanese bank in January as part of an alliance agreement. . Lone Star outbid Goldman for the right to buy the properties, bankers involved said earlier this month. 

"Lone Star probably sees this as a good way of getting a lot at a good price since there's little competition for these big deals," said Edwin Merner, president of Atlantis Investment Research in Tokyo. The two sales are "probably the biggest" acquisition of Japanese real estate by a foreign investor, he said. 

Lone Star is studying the finances of the buildings and may complete a purchase in December, the people said. Morgan Stanley may provide financing to Lone Star for the acquisition, they said. Sumiko Iwadate, a Morgan Stanley spokeswoman, declined to comment. 

Lone Star is among the three biggest overseas investors in Japanese bad loans. In November, it acquired failed mortgage lender, First Credit. It is also vying with Goldman to be the biggest overseas buyer of failed Japanese golf courses.   - By Jag Dhaliwall and Mariko Yasu     Bloomberg News    22 Oct 2003

Japan real estate mogul makes a $2.2 billion bet

In the autumn of 2001, Minoru Mori, Japan's largest private real estate developer, heard that Goldman Sachs Group, the anchor tenant in his new, $2.2 billion complex in downtown Tokyo, was thinking of pulling out.

Mori, 69, chief executive of Mori Building, decided he had to salvage the deal himself. He flew to New York in January 2002 for the World Economic Forum, an annual meeting of the world's political and business leaders, and made sure he spoke with the Goldman chief executive, Henry Paulson. After their conversation, which neither will discuss, the securities firm kept its commitment to Mori's Roppongi Hills center.

Mori's personal intervention underscored the new project's importance to him and his privately held company, which controls $7.4 billion of Tokyo real estate.

The sprawling complex of opaque glass, concrete and neon covers 29 acres, or 12 hectares, in Roppongi, one of Tokyo's most-famous nightlife districts, and takes up more space than Rockefeller Center in New York.

It comprises a hotel, a 54-story office tower, four apartment buildings, a nine-screen Virgin Cinemas multiplex, an outdoor theater, 200 shops and restaurants, a museum, a private club and a Japanese garden complete with fishpond.

Mori says the project is a crucial piece of his grand ambition to remake Tokyo. "I want to change the character of the city," he says. "I want to change the lifestyle of the people."

The project represents the biggest risk of Mori's 40-year career. He is bringing 4 million square feet of office space, or 371,612 square meters, and 800 condominiums to market when Japan is still struggling to recover from a decade-long economic slump.

There is also a glut of new offices for rent in Tokyo. A flurry of new construction will bring some 27 million square feet to the market this year.

The average office vacancy rate was 8.44 percent in Tokyo's five central business districts at the end of September, up 2 percentage points from a year earlier, according to the real estate group, Miki Shoji. The average rent for office space in new Tokyo buildings fell 5.6 percent from December 2002 to September, according to data from Miki Shoji.

"From an economic point of view, Roppongi Hills represents a huge supply, and that's why the office market has collapsed," says Yoji Otani, an analyst at Credit Suisse First Boston Securities (Japan). "If they were a listed company, they probably wouldn't be able to make the investment."

Some architecture critics are taking shots at Mori's massive complex. Adam Greenfield, who runs a Web site that features critiques of design and architecture, spent two years in Japan watching the construction of Roppongi Hills.

He says the project is disconnected from its surroundings and not especially Japanese. "It could be anywhere," says Greenfield, who recently moved to New York.

On top of everything else, Mori's dream of remaking the face of Tokyo has strained his resources. Mori Building carried total bank debt of ¥845 billion, or $7.7 billion, as of Oct. 10, up 5 percent from a year earlier.

The company reported in June that net income fell 48 percent to ¥3.1 billion in the year ended on March 31, partly because Mori took a loss on the value of property it owned.

A spokesman for Mori Building declined to give the amount of the special loss. He said the company expects income will rise 62 percent to ¥5 billion in the next fiscal year.

Even if Roppongi Hills is a success, the company's financial picture will not change soon: Mori says Roppongi Hills will not be a significant contributor to profits until 2005.

"There are two ways of thinking: Be positive or be risk averse," says his brother, Akira, 67. "He has a tendency to be more adventurous."

When their father died in 1994, the brothers split their inheritance into separate companies. Akira heads Mori Trust, which has invested in a project that will compete with Roppongi Hills for tenants: the Shiodome City Center, a new commercial district near Tokyo Bay.

Mori has now offered to share his sense of adventure with investors and reduce his debt at the same time. In March, he announced he would place seven of the 66 commercial properties in Tokyo that he owns, not including Roppongi Hills, into a private real estate investment fund - a pool of real estate that pays out profits to shareholders - worth about $671 million.

Mori promised a return of 8 percent: better than the best-performing, publicly traded real estate investment trust, Premier Investment, which paid a 5.4 percent dividend last year. Investors are showing interest.

"The environment for real estate trusts is getting better, with the rally in stocks slowing down and interest rates moving steadily," says Masahide Takauchi, a fund manager at Joyo Bank

Joe LeStage, president of Capital Investments Realty, predicted Mori's power and access to money would draw investors.

Sitting in his new Roppongi Hills office tower in a conference room decorated with drawings by the Swiss architect Le Corbusier, Mori discounted the dangers of bringing a huge project to market at an uncertain time.

He says he expected 90 percent of the offices and 100 percent of the residences to be leased by the end of the year. "I never thought it was a gamble," he says. "There's a need for first-quality office space in Tokyo."

To fill Roppongi Hills, Mori can pull strings and shift tenants from his other buildings, said LeStage. "There is a big shuffle around going on," he says, adding that he has been busy negotiating such moves for some of his clients.

Goldman, Lehman Brothers Holding, the Asahi Television network and the rock radio station, J-Wave, are a few tenants moving to Roppongi Hills from other Mori buildings.

"It's a great opportunity to move out of a 15-year-old building into a new building at essentially the same price," says LeStage.

Mori, wearing a light-gray suit the same color as his full head of hair, downplays his clout. He took the step of seeking out Paulson in 2001, he said, because he was worried that Goldman would lease from a competitor.

"I wouldn't call myself a strong businessman, because I had to swallow their conditions," Mori says of the Goldman deal. Goldman occupied six floors rather than the 10 originally announced, he said.    - 2003 October 27      Joel Dreyfuss and Desmond Hutton      Bloomberg News    

GREEN

Skyscrapers in central Tokyo are increasingly being developed with energy-saving features such as cogeneration systems and insulated windows.

Such buildings are as focused on countering global warming as factories because the central Japanese government and the Tokyo metropolitan government plan to require large buildings to incorporate more energy-saving measures.

The Mori Tower, a 54-story building that Mori Building Co plans to open in Tokyo's Minato Ward in April, is expected to consume 21 percent less energy than conventional buildings of its size. Control systems using sensors and other devices will raise the efficiency of air-conditioning and lighting units there, and a computer system will collect data and manage how much energy the entire building is consuming.

The 31-story Shinagawa Mitsubishi Building, located in a commercial district near the Japan Railways Shinagawa Station and slated to be completed at the end of March, will be equipped with high-performance air-conditioning units and automated light-adjustment systems. These and other features are expected to slash the building's energy consumption by 32.7 percent.

A 48-story building housing the head office of major advertising agency Dentsu Inc, which opened in December, comes with 35 types of energy-saving features. Features such as insulating double-layered windows are seen lowering energy consumption by about 30 percent.

The 37-story Maru Building, which Mitsubishi Estate Co opened in Marunouchi in September, consumes 30 percent less energy thanks to 10 types of energy-efficient features, including a cogeneration system in which the firm invested about 500 million yen (US$4.2 million).

The Kyoto Protocol, which is to take effect this year, calls for Japan to reduce greenhouse-gas emissions by 6 percent. To achieve this goal, the nation will have to mandate energy-saving features for office buildings as well as factories. The Japanese government will require large office buildings to have as many energy-saving features as factories when the revised Energy Law is implemented in April.

The Tokyo metropolitan government is also considering requiring buildings to make efforts to reduce greenhouse-gas emissions.  
  - Asia Pulse/Nikkei    10 January 2003

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