Correction in Japan land values continues

The most recent survey of Japan land prices for 4th quarter 2008 in the “Land Price LOOK Report“, issued Feb 24th by the Japan Ministry of Land, Infrastructure, Transport and Tourism (MLIT) shows how how far things have turned downward for the last half of 2008 after a flat start to correction during the first half.

Both 3rd and 4th quarter 2008 results were down generally across the country, with particularly bad news in Sendai, Nagoya, Osaka, and Naha, central area land prices all down 9%+ for the 4th quarter, following 3rd quarter news which was nearly as bad.

The results for Tokyo were also poor in the -3 to -9% range with bright spots in Marunouchi, Bancho, and Shibuya (0 to -3% range) and negative spots in Ikebukuro and Shinagawa (-9%+).   The popular area of west tokyo down to Yokohama including Kawasaki was generally much better than the north and east side of the city out toward Saitama and Chiba.   That being said, the whole Greater Tokyo area was down for 2 consecutive quarters.   The number of transactions are also down significantly as developers go bust and banks refuse to lend to new projects.   We expect this abrupt slowing of new supply starting in 2008 and continuing for the time being will have a very positive impact on central area condominium prices 2-3 yrs down the road.

Surprising spots where land prices remained robust although not moving upward were right in front of Niigata and Kagoshima Chuo main stations.  Assumedly the major redevelopment of these stations including preparation for the new bullet train access to Kagoshima have held the land prices.

The MLIT official land prices `kojikakaku` for 2008 will come out later this month giving another indication.    For now, the debt liquidity pressure remains but in most cases existing real estate loans to property in private funds and JREITS seem to be working out solutions with lenders to extend financing periods at reasonable terms.   We hope that government measures and new financing sources will ease the market pressure more starting in April.

New City REIT sells 3 assets at loss to cover short-term debt

The New City Residence REIT has concluded sale of 3 prime, well-performing residential assets (Yokohama, Azabu, and Togoshi Ginza) for JPY 8.79 billion resulting in a JPY 1.25 billion loss to the JREIT in order to cover JPY 12 billion in short-term debt due the end of September.  See English announcement here.

This is the first instance of a JREIT selling at a significant loss.  The external environment made it impossible to refinance these short-term loans so New City was forced to sell some prime assets at a very unfavorable timing to do so.  We would assert that, although the external environment has hit the listed equity value and the debt spread pricing has gone haywire, ultimately the banks in these REIT lending syndicates will find that they are shooting themselves in the foot for not allowing refinancing of stable assets held by what was built to be a fairly stable, well-regulated, long-term financial vehicle for indirect exposure to the underlying fundamentals of Japanese real estate – which, and poignantly in the case of these sold assets, is very strong.

We hope this will not begin a trend in the JREIT sector with a vicious circle of selling assets at a loss leading to lower investor confidence, lower stock prices, and more pressure on the debt side to sell at losses.