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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 

• Japan goes on overseas shopping spree

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   

• JAPAN:  Real - Life Lab for cutting-edge Mobile Phones
• Mitsukoshi closing 6 stores
• Japan a good buy in contrary trend

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  

Tokyo residential property set for full-blown decline  br> 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.

• Land Prices

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 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

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

• Mistui Fudosan's Midtown- Jogging Route

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.