Skip navigation

Front page of the Nikkei today boldly announced the FIRST JREIT MERGER (online version highly abridged) to be Itochu sponsored Advance Residential (8978) merging with Pacific Holdings sponsored Nippon Residential (8962) by 3rd party allocation of new shares to Itochu Corp to create the 4th largest JREIT and by far largest residential with about JPY 390B in assets, and Itochu Corp also buying out the REIT management company Pacific Management .  Bloomberg here Reuters here

Both REITs issued notices that the media had jumped the gun, nothing has been formalized and there would be official release made when information on any decision is to be made public (Nippon Resi notice here), (Advance Resi notice here).  Itochu Corp made no announcement nor notice regarding the matter.

Clearly the market is excited about concrete progression into JREIT M&A territory as it has been a LONG time coming.   Nippon Residential has stated earlier it is on schedule for making a decision by the end of this month so we should have a decision next week, albeit it will likely take a few more months for the transaction to be executed.

The other bidders mentioned in the Nikkei article and good to watch in the coming REIT industry M&A drama are: Mitsubishi Estate (8802), Nomura Real Estate (subsidiary of Nomura RE Holdings 3213) and Mitsui & Co (8031)

Figures for May tourism inbound to Japan were released on Friday on JNTO`s website – find it here.

Altogether disappointing at 34% down year on year, explained as mainly due to swine flu hitting Japan, continued slump in consumption and strong yen.   From the beginning of the calendar year through April, while huge drops in Korean visitors impacted the numbers severely, there was continued glimmering growth in visitors from certain Asian nations, in particular China, Hong Kong, Taiwan, Singapore, and Thailand – granted some of it due to seasonal effects but the April figures suggested the situation had moved into a stabilizing trend.  However, the May figures resulted from an across-the-board drop in yoy arrivals from all countries including the Asia bloc – with the one exception being continued growth from French visitors albeit a mere 1% for May.

We`ll assume the swine flu was the large majority factor for May and hope for the better as summer deals abound and the Visit Japan programme begins to produce results.   The announcement a few days ago of loosening visa restrictions for Chinese tour groups: extending the number cities from which tour groups are allowed to Japan (now only Shanghai, Beijing, and Guangdong) is a welcome move hopefully in the direction of further deregulation.  There is a lot of discussion on the pros and cons, but the government policy is gradually coming to an understanding that tourism has huge untapped potential.   Along with tourism visa deregulation, we hope the budget airline competition will be allowed to move in to the territory as quickly as possible… also likely to happen but these things take some time in Japan.


Bookmark and Share

Seems more and more of the big players including Mitsubishi Estate are looking to extend their reach into the JREIT zone to profit from the value of their (perceived) credit worthiness and bank-loved brands.

There are a few specific deals that must happen because the JREIT advisor`s owner (= `sponsor`) has gone bust:

8973 Joint REIT (48 resi bldgs / 3294 units acquired for JPY 71 Billion and 9 commercial bldgs acquired for JPY153B, Joint Corporation sponsor) just started looking for a new sponsor with Nikko Citi engaged as financial advisor yesterday – call Takakura-san to enter the bid

8962 Nippon Residential (portfolio of 137 resi bldgs / 9273 units JPY302 Billion sponsored by Pacific Holdings) should announce a new sponsor sometime in July according to their schedule.

3229 Nippon Commercial (38 office bldgs purchased for JPY249Billion, Pacific Holdings sponsor) retained a financial advisor late May so may require more time to get through the process.  Call the company for more info.

Beside these and the few deals already done (Lonestar getting New City, Ichigo taking on Creed, and Oaktree sponsoring the Re+ REIT), there are a lot of talks going on behind closed doors.   Those most likely to undergo some kind of restructuring are:

a) cases similar to Davinci – asset managers with highly levered private portfolios that are receiving refinancing pressure and look to spinning off the REIT management to lighten the load

b) smaller scale JREITs without a critical mass of assets under management where merger of two managers or portfolios creates value in efficiency

c) any new cases of a JREIT advisor`s sponsor going into bankruptcy or rehabilitation.   One would hope that the vast majority of this is behind us, but there are still a few real estate and asset manager companies out there that we look at and wonder how they have managed to make it through the carnage still alive…

Either way, certainly a lot of interesting deals ahead of us and certain to strengthen a floor on the equities sectors first and the real estate market lagging thereafter (starting in Tokyo).

An aside note to investors taking an initial look at Japan property:

1) From the point of an indirect investor, the opportunities in the J-REIT sector may be attractive although one must take care to not get dragged into any individual issue that still has the risk of being resolved unfavorably to the JREIT shareholders – as in the case that a 3rd party allocation to a new sponsor is made while prices are down.   It may be more comfortable to use ETFs or various property typed and sector indexes to get the desired exposure.

2) From the point of a direct or active investor, the issues of refinancing are still present and it is generally much easier to appease syndicates of low-interest providing Japanese banking and trust institutions with a big credible Japanese brand or (and a bit lower in priority) foreign institutional investor, than an opportunistic source.

3) Natural sponsors are real estate specialists that understand the asset game they are getting into.  It may be too eraly to tell yet but it appears the assumption made by pure private equity ventures into this space that a mere capital injection would allow value extraction was incorrect – not understanding the assets they were getting into has proven a headache and name brand pricing premium is not accessible by these type of ventures.

4) A JREIT management platform is easy enough to take over by buying the licensed advisor, but the platform cannot easily be extended to other asset management or even other J-REIT management without regulator permission.   These issues are being worked out gradually by authorities but generally speaking, a J-REIT platform is not the ideal method to access direct property portfolios or management in Japan.   There are plenty of private asset managers and portfolios out there that are not regulated or listed with myriad other stakeholders and management constraints.

Nikkei announced Daiwa Securities is taking over 100% the Davinci Select reit advisor and buying 13% of its managed JREIT DA Office Investment Corp (8976) at 190K/share. Daiwa plans to use its strong credit to work through refinancing issues and the synergies created to grow related income streams. This will take some pressure off DaVinci, looks like the market has already noticed though.

Expect more deals soon.

The J-REIT related debt refinancing issue, a big portion scheduled for September term-end debt issues, is now being addressed openly by the government and major players of the real estate arena in the form of a J-REIT support fund.

Original Yomiuri report here (Japanese, includes restructuring support note).

We will see in the coming weeks a detailed plan for for this fund to underwrite not only rolling over of J-REIT debt, but perhaps more importantly also the recovery of the J-REITs in general by supporting much needed restructuring of the industry.  If this is successful it will be a leading indicator for the Japan real estate industry in general to move back into more viable, liquid territory.

There are now a plethora of discussions going on behind closed doors at these highly regulated J-REITs, and it seems  this will likely produce the first of a series of mergers and other restructuring deals, much sooner than expected – EVEN DURING THIS QUARTER –  in this space that will create new efficiencies and further support for the market.  Indeed, restructuring may be a condition to receive the financing to be offered by the government-led consortium.

If J-REITs start coming back into the market as buyers toward the 3rd and 4th quarters this year, we will see a much desired and needed quicker recovery on the investable hard asset market side.

from Seeking Alpha, click link for entire article: Japan’s J-REIT Market to Get a $10.5 Billion Bailout

`While talking about it since March, the Japanese government (specifically, the Financial Services Agency and the Land Ministry) appears to be in the final stages of pumping over $10 billion into the J-REIT market and removing impediments to consolidation in the industry. The market-weighted average yield has recently been as high as 7%, but investors remained leery because of balance sheet and liquidity risk.`   Here`s their JREIT performance graph demonstrating the recent stabilization.

Banks can not very well avoid refinancing JREIT debt now with all of the government back up and regulator pressure.  This and the Lonestar pricing of New City has put a floor on the market – and likely an indicator of a bottom for the J-REIT sector.

It is `officially` time to get into the J-REIT market.

What was a few months ago a promising opportunity – buying up completed unsold condominium buildings and portions of buildings on the cheap from distressed sources and then moving them to the public at `outlet` sale prices – has suddenly seen a burst in asset bidders.

It seems that the defunct developers that have now found sponsors and those that were able to escape trouble unscathed with credit or cash remaining, have all jumped onto this bandwagon as low-hanging fruit rather than buying land to start the development process again.  It may be that lenders have also pushed in this direction also as the risk of development is seen to be very great in the current market.  What were discounts of 50%+ off the retail line have now been bid up to where there is very little profit left in selling at 20-30% discounts.  This is the case for Tokyo area, recent word has it that up to 50 bidders are arriving at some of these opportunities whereas there were only a few just a few months ago.   Have not heard the thing for regions yet – maybe Kansai will be the next to pick up.

This is great news for the condominium market which has been in the doldrums.   Our take on the market is that somewhere in the next 12-24 months when a near complete halt to new supply arrives, there could be a very quick strengthening of prices.   That may be quicker than most expect – it looks like sentiment on prices hold we are near the bottom.    Again, the world outside of greater Tokyo still has another year or so and some of the regions where aging populations are really setting in are doomed unless something major is done to create new demand – but positive signs for the Tokyo condominium market seem to be increasing.  A good time for the individual investor.

The latest JREI investor sentiment survey findings were just reported, opinions gathered in April so a fairly fresh view to the market.   Summary: Expected cap rates have gone up 50-100bp over the last survey 6 months ago and still 20-30bp higher than current market cap rates…  although I don`t believe there are enough transactions happening to underwrite that well.

The core of core Marunouchi/Otemachi Class A Office has moved moved upward to 4.5% or 300bp over the risk free and to match core Ginza Retail at the same 4.5% which are now the theoretical bases to which we add risk premium points for other classes, namely:

Omotesando Retail at 4.7%, Suburban Tokyo retail 6.5%, Regional Retail Downtown areas 6-7% / Suburban 7-8%

Tokyo Warehouse Single Tenant / Multiple Tenant 6%, other metropolitan hubs 6.3% to 7%

Residential at 6.0% to 6.3% and in the regions 6.6-6.7% for Yokohama to a high of 7.7% for Sapporo

Economy Lodging Tokyo 6.1%, Osaka 6.8%, Nagoya 6.9%, Fukuoka/Sapporo 7%

Some interesting views, toward the US side, on hospitality investment from various investors on Hospitality Net here. Colliers is saying the investment cycle is at a historical bottom and I would like to be on the positive note too but with de-leveraging just starting and a few years of falling fundamentals ahead of us I find myself still on the other side of the line.  Do concur with the opportunity to access key core assets but the best method seems to be through discounted debt… the Japan case will likely turn out to parallel over the next year or two.

The Financial Times recently focused on continued distress in the Japan real estate market, which we in the industry increasingly feel while developers go defunct daily and debt is still difficult to find.

However, recently regulators have begun intervention in the JREIT market by directing asset managers to remember their fiduciary duty and not sell assets at a discount.  They back this up by monitoring banks and no longer allowing panicky refusal to refinance debt to these low-levered vehicles, which is what caused the NCRI issue. They argue that there was no reason for NCRI to need to file for civil rehabilitation.    Interview with FSA

Vulture investors flocking to Japan for distressed asset deals may be surprised not be able to find them in the JREIT market – except in the extremely discounted pricing of their stock shares.  The pricing of the NCRI bid may also surprise, as the Japan Development Bank is also participating.

But opportunities continue to arise in the real estate market.  Developers unable to sell to REITs and construction companies building it all continue to file for bankruptcy.  There is still a dearth of credit.  The NPL game is starting over again, but the best assets are still tightly owned by the large Japanese corps, conglomerates, and JREITs.

It is clear that distress continues in the Japan real estate market, and now the robust fundamentals are starting to erode due to a now deteriorating overall economic situation.  But we need to remember that the source of distress  in Japan was NOT in the fundamentals (and is not yet, except perhaps A-class office), it resulted purely out of the quick domestic stoppage to real estate debt market liquidity.  In the midst of the mayhem coinciding with a global credit crunch crisis, incidents like NCRI and defunct JREIT sponsors occurred and pulled the JREIT market down.   The government is finally getting their act together and we will likely see JREIT market support kick in as well as new liquidity measures from April and healthy banks looking at the sector again.

For opportunistic investors, the NPL market and developer/construction company-related situations allowing asset / debt discount acquisitions are arising.   For core/equity investors, it may be worth looking at the JREIT market again.

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.

We are honored to be have been granted a transaction license for brokerage of real estate trust beneficiary interests under the Financial Instruments and Exchange Law, Category 2 Financial Products, regulated by the Financial Services Agency and issued by the Kanto Finance Bureau as an extension of our Financial Products License #1712 and effective as of today. We look forward to serving our clients with the need to make transactions of larger and institutionally investable real estate through the form of real estate trust beneficiary interests under this license.

Creed Office REIT (TSE ticker #8983), after receiving a business improvement order from the FSA on Friday of last week regarding managing conflicts of interests and appraisal processes, announced yesterday (announced in Japanese only for some reason) that its shareholders had agreed to sell 100% of the REIT management company, Creed Investment Trust Management, to Ichigo Asset Management.   Ichigo is currently is the largest shareholder in the REIT itself with a 20.37% stake.   Creed Corp`s announcement said that the transaction is scheduled for this Friday the 12th.   Creed Corp holds 80% of the REIT management, with the other shareholders (Itochu, Chuo Mitsui, Mitsui Sumitomo Bank, and Morgan Stanley Capital, respectively holding 5% stakes).

The REIT manager made clear that the information sharing contracts with the major current REIT management shareholders: Creed Corp, Itochu Corp, and Chuo Mitsui Trust Bank, are to be severed immediately, clearing ties with the current sponsors.  Focus is on the economic issue to be dealt with immediately – refinancing of a JPY 10.5 billion tranche of corporate debt due to Shinsei Bank in March.  They noted they are working full force on potential sponsor tie-ups to help deal with this and the financing issue in general going forward.

Creed is also giving a quick, strong indication to the market that they are taking responsibility for any mismanagement and helping the REIT to move on.   Mr. Hasegawa, the co-president of Creed Corp announced at the same time he is leaving his post to focus on the private fund business arm as new president of subsidiary Creed Real Estate Investment KK (JPY 178 Billion in AUM as of May).   The market seemed to pick up on this with a 16% share price gain today and stop limit up on the REIT`s shares with 7%+ gain.   Granted these are both still at near all-time lows, but some very good news moving to stabilize the market – hopefully there is more of this (at least indirect) takeover activity to come.

They keyword spoken by many fund managers at the ULI Japan conference looking into 2009 was SURVIVAL.

So I think it`s time for us to all get prepared by dancing the TRF survival dance :  `no no cry more`

Opportunities will increase moving toward the fiscal year end and as some of these bankrupted and stressed real estate companies find sponsors and legal trustees work through others including the potential sale of assets.  But lenders/issuers of the majority of CMBS with terms ending in 2009 are much more likely to work with borrowers to restructure rather than resolve to a sale in this environment.  We have seen recent cases of lenders stepping back into a solution creating approach after checking the market, and working with owners to find a resolution – generally involving some sort of restructuring of terms, beneficial to both parties.   Excepting event driven cases (both on the borrower and on the lender side), this should be a theme for 2009.

Tokyo`s real estate supply / demand situation is very robust – compared to the rest of the developed world: supply is stagnant and new supply decreasing, rents are not really moving except for some strain at the top end of A class, occupancies continue to be very high, and recovery is generally expected to be much quicker than the US.  The continued risk is that strong government measures are not taken to begin healing the real estate debt liquidity crisis.

The Chinese are coming!!!   We are now seeing investors from the only major country relatively unaffected by the recent strengthening of the JPY arrive for bargain sales in the real estate equity markets.

Pacific Holdings (8902) was up 18% today (Website Here) on the announcement of a financial and management tie-up effectively giving management control to a group of unnamed major Chinese real estate companies and investors.  The market cap still JPY 1.8 Billion (USD 18 Million) – down 98% to date!!

Details of the proposed deal involve the group, represented by a Japanese investment platform KK Chuhaku Japan, a wholly owned subsidiary of Industrial Growth Platform Inc (IGPI), taking a 29% stake in common shares on the 19th of December, investing in 47 billion yen of class A preferred shares to be newly issued on the 26th of December and taking an issuance of new short-term (1 yr) nonguaranteed, uncollateralized corporate debt in the amount of 27 billion yen at the end of February.

Chuhaku Japan will effectively be given control of the board of directors and the right to select the new representative director and president of the company.   They are beginning discussions to create a new private real estate fund and retool the company management.

The Nippon Residential REIT (8962) stock price responded quickly to the news at 9% up but Nippon Commercial REIT (3229) did not respond as much up 1.6% today. (click for stock prices).

Japan inbound travel took another year-on-year hit for October, 3rd month in a row now at -5.9% compared to October 2007 but year to date figures were still up 4.3% at 300,700 more visitors than 2007 and figures from four countries were at an all-time high.

See JNTO report here.

Main reasons for the decline were strong yen (especially vs the Korean won), fewer flights from many countries, continued high fuel charges, and a general slump in consumption due to global financial situation.   Visitors from Korea (-15%), USA (-14%), Australia (-10%), Canada (-8%), and UK (-8%) were affected strongest, again the rapidly strengthened yen was the most major factor.

Growth continued from Hong Kong (+42%), Singapore (+10%), Thailand (+10%), and France (+6%) inbound visitors due to the Visit Japan campaign efforts and promotion, various events, and the continued Okinawa boom.   The number of visitors from all of these countries were at all-time highs.

We expect to see increased demand from the now declining fuel charges shortly but the cost of going to Japan (due to exchange rate) from particularly Korea and Australia / NZ has risen rapidly so we expect that it may take more time for across the board growth to recover.   In the short term, growth from short-haul countries will probably increase pushing demand from Hong Kong and Singapore, and in the mid-term we expect more demand from China mainland.

JREI just published its most recent investor survey showing expected cap rates as of October 1.

There has been some upward movement but surprisingly little compared to the distress discounts expected by many new opportunistic funds coming into the market.   Marunouchi Offices are 4%, Ginza Retail is 4.2%, Quality Central Tokyo Residential is in the mid 5% range.

Actual trades are still showing about the same levels as in this survey although trades have slowed significantly this year.   We are beginning to see some distressed trades now but again, the level of discount is 20-30% above these levels and the discount is exactly correlated with the quality level of the asset.

We would reiterate the mantra that poor quality assets and non-income producing assets will continue to receive downward pricing pressure, but quality assets will not excepting in dire situations but there is an increasing demand for prime, institutionally investable assets.

With another developer down last week and another JREIT taking losses on acquisition cancellation penalties, the Japan real estate markets may be starting down a vicious spiral into perilous waters – and investors with `dry powder` are watching the situation closely.

The sentiment at the Real Estate Investment Japan conference last week was decidedly negative and nearly sarcastic regarding the state of JREIT regulation and liquidity, with no quick solutions in sight.  But amid the gloom a theme is emerging that Japan, in particular Tokyo, is in better shape fundamentally than the rest of the world, and investors that are still in the game will be making higher allocations and high expectations for opportunities here in 2009.   Sonny Kalsi of MS underlined that Tokyo IS THE MOST ATTRACTIVE RE MARKET IN THE WORLD, amid the global chaos.

Currently the ask/bid spread is very wide though, freezing the market.  Theoretically a deleveraging of 20-30% on securitized assets up for refi should bring prices down 20-30%, but the scarcity of debt capital and increase in target IRR has pushed expected cap rates to a level above this in the name of `opportunistic` investment.  Indeed, many investors need to double up on returns (and risk) to make up for other losses to date this year.

Beside the refi assets though, there is a pool of bankruptcy and rehabilitation situations, defaulted debt including JREIT debt, etc. arising and some percentage where lenders are willing or forced to cut exposure to shore up balance sheets.  We would suggest this is not the general trend and probably not going to be – for the prime assets everyone is after.  The majority of investors in the game are looking for class A assets, and lender discounts on prime underlying assets are going to be on the frugal side.   Assets with issues, no income or yet stabilized, not finished, etc. will be first to come up for quick sale solutions.  But distress processing takes a long time and if banks do not have a strategic prerogative to do otherwise, they are better off to hold on to the underlying if cashflow is good or assets are prime.   There is always a risk/return tradeoff and when dealing in property, prime assets are lower risk so the returns even in a distress situation will be lower.

One thing is sure, the political risk of delay to action is great and the longer no effort is made to stabilize the JREIT market and bring some liquidity back into the market, the ask/bid spread will continue at a standstill and more distressed situations will arise, feeding the expectation and possibly the need for lenders and syndicates to deal swiftly with more situations.  An interesting year is ahead.

One of the major Fukuoka developers went down last week, adding to continued negative industry news.

Dix Kuroki announced filing for rehabilitation proceedings last Friday the 14th, with JPY 18.1 Billion (abt USD 172M) in liabilities and 105 employees.   This is another case being similar to Urban Corp and this type of incidence is locally being referred to as totsuzenshi or `sudden death`, in that the company`s financial situation looks fine on paper –  last 5 yrs of fiscal reports showed strong growth in both sales and profits:

Dix Kuroki Unconsolidated Accounts                                                            JPY Millions
FY2004        FY2005       FY2006      FY2007        FY2008    (fiscal yearend is March 31)
Sales                   15,646        20,226        22,474        26,098        26,801
Operating Profit  460             865             1,444          1,734          1,962
Recurring Profit   303             590             1,136          1,486          1,525
Net Profit             138            311              599             826             854

Dix Kuroki has seen strong growth after listing by taking on larger projects with fund takeout promises, an extension of their local knowledge and long track record of building small 50-100 unit residential blocks for sale as income-producing investment properties to local individual owners.

The problem Dix ran into is that they stocked up on land, particularly in secondary Kyushu cities and Sapporo last year, which now is undevelopable and unsellable due to cuts in development financing allocation by banks and lost exits, also similar to Urban but on a smaller scale and regional assets instead of mainly Tokyo.

New City Residential announced the engagement of Nikko Citi as financial advisor for the rehabilitation proceedings this week.  Nikko will manage proposals received and make judgment as to which proposal will best benefit unitholders and other stakeholders in the now de-listed J-REIT.

Any potential option, including merger, buyout, sale of assets, etc. is open for discussion and they will take the solution which appears best benefiting to stakeholders.

In the meantime, CBRE Residential Management (the REIT manager) will continue to operate the portfolio through the proceedings to ensure the value of the assets is not diminished.

Proposals must be made by January 7, 2009, so hurry and call Takakura-san if you want to get in on the game.

Dynacity (8901) filed for civil rehabilitation today with JPY 52 billion (USD 540M) in liabilities, following Noel`s (8947) filing for bankruptcy proceedings yesterday with 41.4 billion (USD 430M).  Noel`s property management and brokerage subsidiary ENR also filed at the same time.

These are both companies that began as small Tokyo condominium developers and grew quickly the last several years by selling to REITS rather than individuals, expanded the business base outside of their residential specialty to other sectors and took in too much land at last year`s prices which now cannot be developed, liquidated nor can a lot of their newly built stock be sold as REITs aren`t buying for now.

There are still a few more out there with the same problems.

These follow a wave of dropouts from the sector from summer including Suruga Corp, Urban Corp, C`s Create, Landcom, L-Create, Urban Design System, and of course the Real Estate finance and securities businesses of Lehman Japan, culminating in the filing for protection by the New City Residence REIT, an altogether unprecedented case in itself which will be interesting to see how the process is dealt with.

Some of these companies will be looking for new sponsors so the private equity firms will likely benefit, but others will work through a liquidation.  Unfortunately, most of the assets in these companies right now are not very interesting except for Urban Corp`s very nice office portfolio (note the strong interest in the bid to be sponsor by foreign private equity firms and the like) and Lehman`s assets.

Nippon Residential (8962) and Nippon Commercial (3229), both sponsored by Pacific Holdings (8902), both had their credit rating cut by Moodys earlier this week to Baa3 (S&P BBB- level) see Nippon Residential announcement here, see Nippon Commercial announcement here.   Moodys underwrites this stating that although JREITS are independent entities, management trouble at the sponsor has proven to have an influence on their business in the recent case of New City.   Moody`s sees a risk in the delay of Pacific Holdings` capital investment by Daiwa Securities and says that Nippon Residential is under pressure with 30 billion yen of acquisitions scheduled through the end of the year, regardless of its 13 billion yen commitment line of debt.

In response, both Nippon Residential and Nippon Commercial have come out strongly against the decline in rating, stating that they are in good shape, have good relationships with their banks, and in the case of Nippon Residential, they will be able to deal with the new purchases through sale of assets.

We understand that they are working on this and believe that the risk of Nippon Residential not being able to come up with the liquidity is fairly low.  We also understand that very recently regulators, as following new government policy to halt the damage and in response to the New City JREIT situation, are now making efforts to bring liquidity back in the market through changes in lending direction to banks and support of the JREITs, especially large JREITs, and their sponsors which have a significant impact on the industry, and this is a very welcome policy change if belated.

That being said, there are still many developers and real estate asset managers including some listed ones, that have highly levered portfolios out there and these will continue under pressure to decrease the leverage.  It seems that pressure on some key players, including Pacific, may have been abated.

Moodys JREIT Ratings, please log into Moodys Japan Site to see details:

Issue (click for stockprice) Bond Issuer CP Other
Long-term Short-term
Global One JREIT (8958) A3
Kenedix JREIT (8972) A3 A3
Japan Excellent JREIT (8987) A2
Japan Hotel and Resort JREIT (8981) A3
Japan Real Estate JREIT (8952) Aa3 Aa3
Tokyu Real Estate JREIT (8957) A2 A2
Topreit JREIT (8982) A2
Nihon Accommodation Fund JREIT (3226) A1 A1
Nihon Commercial JREIT (3229) ↓Baa3 ↓Baa3
Nihon Building Fund JREIT A1 A1
Nihon Prime Realty JREIT (8955) A2 A2
Nihon Retail Fund JREIT (8953) A1 A1 P-1
Nihon Residential Fund JREIT (8962) ↓Baa3 ↓Baa3
Nihon Logistics Fund JREIT (8967) A1
New City Residence JREIT (8965) ↓B1 ↓B1
Nomura Real Estate Office Fund JREIT (8959) A2 A2 P-1
Nomura Real Estate Residential Fund (3240) A1
Hankyu JREIT (8977) A2
Premier JREIT (8956) A3 A3
Frontier JREIT (8964) ?A1
Mori Hills JREIT (3234) A3 A3
United Urban JREIT (8960) A3

We would assume that those REITs with a scale large enough to be issuing corporate debt and have a credit rating issued will now have support and there are probably a lot of good buys in this bunch or as a portfolio for diversification.   Fundamentals continue to be strong, especially rents and occupancy of assets owned by the JREITS for the most part, although marketwise there is downward pressure coming onto the top class office rents and retail sales are slowing considerable.  Urban residential is a very strong play.

30 of 42 JREITs now have projected yields over 9% and the top ten yields are 26-55%!!!

JREIT Yield Ranking here

The 3rd JREIT index, 2nd for the TSE was launched yesterday by Nikko AM.  The previous on the TSE was by Nomura AM and first to list was on the NYSE by Northern Trust.

The JREITs at a huge discount even in comparison to the US and UK REIT market indices:

`For the past year, the Japanese REIT market is down 49%, according to AME Global REIT Indexes, which is an even larger drop than markets in which the subprime credit crisis had a direct influence on performance (34% in U.S.; 33% in the U.K.).   Within the JREIT sector, residential reits are down much further.`

We feel that the strategy of many fundamentally solid JREITs may move toward stock buy-backs and the government has laid way for more of this temporarily.  Hopefully if this happens the market will recognize the risks are lower than presumed and some of these stocks have been crazily undervalued in comparison with the well-performing underlying assets.

One might assume that the JREIT index launches were aiming to catch the bottom of the sector, although this has proven wrong.   The fact that Japanese AM firms are moving to do the same as Northern Trust, and at this juncture, may indicate a sentiment that the sector cannot go down much further.

After a few wild weeks in the market, many of us are left stunned at the J-REIT wreckage and civil rehabilitiation precedent that many believed was not possible with this financial product.

It has taken a little time to sort this out but I think we can point to a few culprits:

Too restrictive structural legislation, renegade regulators, and perhaps some poor management decisions.

Mr. Hiromoto of the Mitsubishi-UBS Retail REIT focused on the structural problems facing J-REITs that need to consolidate or be allowed other fundraising methods to increase their equity base and credit.

Mr. Takakura of Nikko-Citi Securities has indirectly focused on the regulators having no basis for forcing the current domestic credit crunch as all of the underlying assets of all of these REITs are performing superbly.

I will note that New City Residential may possibly have been able to avoid or at least delay this juncture until things could be worked out by using more caution in pushing debt terms out longer and also that the back-breaking Ikebukuro deal was with a sponsor firm with a conflict of interest, so some negotiation should have been possible than with an entirely outside third party.   But as far as we understand, the sponsor New City Corporation is having its own troubles so the situation must have been very difficult.

But ultimately this comes down to the banks said no to the purchase…  why?   Was there pressure?  New City`s LTV was under 50% and credit rating A+ the day before filing for rehabilitation proceedings.   The occupancy of the portfolio was 93%+ and no possibility that it could not pay down its liabilities.   The assets are very sound and residential sector rents and occupancy are in particular, very stable and robust.

However, the decisionmaking process required for J-REITs does not always fit with the quickly moving real estate market… full due diligence needs to be completed before contracts can be entered into and announced, banks will not give the OK until all of this and other paperwork are in place, and in the month or more required to do so the market can move substantially.   Structurally this places the J-REIT open to risks, and particularly in this case, the risk that valuation will go down and financing will be denied.

We will be bold though and agree with Mr. Takakura to blame the current situation entirely on the witch hunters and poor government.   If I were a shareholder in any of these REITS that have lost 80-90+% in market value over the last year, I would call up these regulators and demand a refund right now.   The J-REIT product was created to allow indirect exposure to stable income-producing real estate assets for the funds, pensions, and other long-term investors.  There are a lot of regional banks, a lot of pensioners, a lot of buy-and-hold investors holding holding this stuff and the regulator was supposed to keep it safe.  People should be pissed.   The decline is uncalled for and completely out of hand.   A lot of foreign distress funds are going to make money as white knights, again.   But this time they can directly credit bad management of the Japanese government for their check…. taxpayers should be up in arms too.

The National Australian Bank (NAB) Tokyo Branch today began retail business offering mortgages to foreigners, including Japan nonresidents from Australia, Hong Kong, or Singapore, taking collateral directly on Japanese property.

For nonresident persons from these countries, the terms look to be slightly better than Commonwealth Bank with spreads at 2% for urban residential properties with a 60bp placement fee, versus a 2.75% spread at CB.   For urban properties, both will lend at 80% LTV, but for Niseko properties NAB will lend at 70 or 80% where CB will lend at 50% and a higher spread.

However, Commonwealth Bank is open to lending to persons resident in more countries (in addition to Australia, HK, and Singapore–> UK, US, New Zealand, China, Vietnam, Indonesia, Fiji, etc. wherever they have a branch).

Initially, NAB is offering mortgages for the purchase of urban (Greater Tokyo, Greater Kansai, Nagoya and Fukuoka) residential properties including investment properties, and holiday homes in Niseko.

The Japan Tourism Agency was created today as an adjunct to the Ministry previously known as MLIT for Ministry of Land, Infrastructure, and Transport… soon to be called the `MLITT` adding Tourism onto the plate.  Until today, there has been no dedicated government department to spearhead and manage a budget directed specifically to tourism in Japan.   We believe this is an extremely positive development for hospitality in Japan as the smaller measures taken by the government over the past several years have really paid off.

Specific targets of the agency are:

10 million visitors to Japan

20 million outbound travelers

JPY 30 trillion (abt USD $275 billion) in tourism spending

Average Japan domestic trip length of 4 days

50% growth of international conventions held in Japan

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.

Japan inbound tourism of recent years has been booming since the implementation of the national government`s efforts to the industry since about 2003 and further program extensions from 2006 in the Visit Japan! (Yokoso Japan) program through JNTO.   This culminated in year-on-year growth of over 1,000,000 persons last year to 8.3 million visitors.

In 2008, Japan inbound tourism has continued along the strong growth track to a record figure in July of over 825,000.  However, the monthly inbound tourism stats report issued today by JNTO indicates that a slight decline, -2.2% below last year`s August number resulted (although the year-to-date figure is still up 7.5% yoy), mainly due to risen fuel charges and the declining strength of the Korean Won –  the most visiting tourists are from South Korea.

A closer look shows us that in addition to the South Korean decline at -8.6%, China at -6.3%, Thailand at -12.4%, USA at -9.2%, UK at -10.7%, and to a lesser extent Canada at -2.2%.  In absolute numbers, South Korea and China have a significant impact and the others not so much.

However, even in this expensive travel environment we still see that the holidaygoers of Hong Kong (+32.7%), Australia (+20.9%), Singapore (+11.8%), France (+10.7%) and Germany (+3.1%) continued to increasingly choose Japan as a place to enjoy the summer…  a very positive indicator that the efforts put into the Visit Japan! program are really paying off.

We see long-term strength in the Japan prime tourism destinations both city and resort, with Tokyo and Kyoto predominating the city sector and destinations such as Hakone/Izu, Japan Alps (Nagano/Hakuba), Hokkaido and various onsen destinations faring strongly in the resort sector.  The increasing cost to travel is a temporary setback for the mainstream market, especially group tours from Korea and China.  In the mid to long-term we expect that the growing wave of outbound Asian travelers will only increasingly benefit Japan as it becomes the default cultural destination for Asians to visit within Asia similar to the role that France has taken in Europe.   The absolute number of outbound travelers from China and India are expected to grow exponentially and they must visit Japan first before going on further to destinations outside the region.

While cap rates are up, especially regional city hotels, we would suggest that selective acquisition and development of quality assets in targeted Japan destinations is a strong strategy.   Contact us if you would like our assistance in doing so.

The Nikkei confirmed over the weekend that Oaktree holds 35% in the Re-Plus REIT Management company and is negotiating to acquire 55% owned by the now-defunct Re-Plus.  The Japan Times article was correct.   When acquiring their first tranche of third-party allocated new shares of the Re-Plus JREIT, Oaktree also took a 35% shareholding in the management company making them one of the sponsors.  Now they will have priority negotiating rights to take over the management.   They also noted Oaktree`s intention to change the company and REIT names.

We would like to get on to other stories but it looks like the RePlus situation might lead to more interesting movements in the JREIT market.  Oaktree has definitely taken advantage of the recent bankruptcy and very timely for moving the market positively in their favor.

Bloomberg announced that Los Angeles-based Oaktree Capital, which manages $58.7 billion of assets, plans to buy a 48.4 percent stake in Re-Plus through purchases of new shares and a tender offer.

Any one investor pushing above the 50% stake level will trigger a taxation condition that deletes the REIT dividend pass-through status and makes it subject to corporate tax.

Re-Plus had announced on Aug. 12 that it would issue new shares to Oaktree at 175,000 yen each, raising funds to acquire assets and refinance loans. That transaction was completed on Thursday, lifting Oaktree’s stake to 37.6 percent.  Oaktree also plans to buy 18,063 shares through a public tender offer at 260,000 yen each, 33 percent more than the current closing price.

A Japan Times article stated that Oaktree is also intending to take control of the REIT manager but we have not confirmed this.  The REIT manager is or was a wholly owned subsidiary of Re-Plus and Oaktree should have a priority opportunity to bid at this if they wish to control both the management and assets.  JREITs are purely asset holding assets, completely separate entities from the private and licensed management companies.  They are similar to the Australian model except that in Australia these separate entities are at times `stapled` together, but different from the US model where REIT management and assets are one in the same entity.

However, an easy way to take control of the assets and forge a larger M&A to create a strong story for the listed entity would be to buy the manager and merge management / assets with another smaller residential REIT.  It will be interesting to see if the Oaktree strategy goes in that direction – no JREIT mergers or privatizations have succeeded to date.  For now, they have taken advantage of good timing to capture the exposure to resi assets at a discount.

Re+ applied for bankruptcy procedures in Tokyo Regional Court yesterday and the application was received.

The hard work and brains of Re+ President Hirofumi Kang have unfortunately been overcome by market forces stopping their asset management process and cutting corresponding management fees this year.  Pressure from banks to sell assets has increased where the debt term has completed.  The business of supporting asset growth of the RePlus REIT, as well as many other JREITs, involves acquiring and stabilizing assets on a corporate book or within another private fund before selling stabilized tranches of buildings into the separately managed REIT.  Market pullback in the JREITs this year has halted this process and left the assets tagged for the REIT in limbo with increasing lender pressure.  The large deals in Beijing they were working on have also been hit this year.

RePlus has 32.59 Billion JPY (USD $292 M) in corporate liabilities as of today and 382 Billion in assets under management including private and public funds within the RePlus group as of yearend 2007, including assets of the RePlus REIT.  The effect to the REIT is that the sponsor can no longer create a stable let alone growth scenario and this may actually benefit those looking to force a merger or acquisition of the REIT management subsidiary (and control of its assets)… OakTree would be an initial prime suspect for the REIT.

The assets held by RePlus itself, their design and various management divisions and subsidiaries, the RentGo system, etc. are all up for grabs to potential sponsors now.

There are a number of asset managers managing JREITS and private funds under similar pressure and we would hope recent pickup in the market will bring sponsors out of the woodwork before more of these situations occur.  The underlying fundamentals of the assets are still very strong, especially in urban areas.

The MLIT released the 2008 kijunchika or `land price survey` figures on Friday.

The kijunchika land price survey is done by the prefectural governments by taking data from transactions and appraisals over the year and evaluating the land value of some 23,749 representative tranches of land across the country as of July 1st each year.  The tranches are divided by usage: residential, commercial, and industrial.  The gathered information is analysed and numbers published by the MLIT in late September.

These kijunchika figures along with the chikakoji, `public notice of land prices` which is a similar study but done by the MLIT for land values as of January 1 of each year (published late March), are the government`s official view on how land values are moving.  These figures are different from tax assessment values but they are used by the local governments in determining those tax values in some part.

The official government land price figures are an important indicator but also need to be taken with a grain of salt as they do not represent specific transactions but rather a trend and it can be biased to the conservative in many cases.  However, as there is no public record of actual transactions available in Japan, these figures are a valuable tool to understand the trend.  The MLIT land price English website is here, but the studies are only published in Japanese and shown on the Japanese website.

General observations from this year`s figures are that the strong growth of main urban areas seen in 2007 has slowed and most regional areas outside of Greater Tokyo, Osaka, and Nagoya, Sendai and other main cities, values continue to drop.

In Tokyo, the most central wards saw double digit and up to mid-20% growth in 2007 but this fell to low single digit growth for 2008.  The average growth for Greater Tokyo was 1.6% resi / 4.0% commercial and the numbers for each prefecture in Greater Tokyo (Saitama, Chiba, Tokyo, Kanagawa) was positive.

The strongest growth in Japan lying in Kanagawa prefecture, south-east from central Tokyo where Yokohama saw residential price growth at 2.6% range and commercial at 4.1%, with prices in the most central part of Yokohama City at 8-10% for residential and 10-15% for commercial.

Tokyo Prefecture itself moved from 9.9% resi / 17.2% commercial growth in 2007 down to 1.9% / 4.6% growth this year.   Osaka prefecture was positive at 0.8% resi / 4.4% commercial, down from 2.8% / 10.4% last year while the surrounding Kyoto and Kobe and Shiga were flat.  The Nagoya area of Aichi Prefecture was also positive at 1.7% resi / 1.8% commercial, down from 2.5% / 7.2% last year.  The only other growth for an entire prefecture was seen in commercial land in Miyagi Prefecture, where Sendai City is located.   Otherwise, the average prices for all other prefectures were down but no more than -4.6% for residential (Kochi Pref, with Fukui and Tokushima close at -4.4%) and -5.9% for commercial (Kochi Pref, Akita Pref, with other north-eastern prefectures Aomori, Iwate, as well as Fukui close).

The top 10 performing locations in Japan for the following sectors were:

Residential:                                Commercial:                                     Industrial:

Niseko, Hokkaido at 40.9%       Sendai City, Aoba Ward at 22.3%       Chiba, Funabashi City at 26.4%

Sendai City, Aoba at 16.2%       Sendai City, Aoba at 21.6%                 Chiba, Ichikawa City at 25.0%

Sendai City, Aoba at 15.7%       Tokyo, Shinjuku at 20.2%                   Kawasaki, Kawasaki at 21%

Nagano, Karuizawa at 14.5%     Nagoya City, Nakamura at 19.8%       Kawasaki, Kawasaki at 10.6%

Nagano, Karuizawa at 12%        Sendai City, Aoba at 18.7%                 Saitama, Sakado City at 8.5%

Nagano, Karuizawa at 10.8%     Tokyo, Ginza at 18.6%                        Osaka, Sakai City, Nishi at 8.3%

Aichi, Karitani at 10.6%             Saitama, Kawaguchi at 18.4%             Shiga Pref, Kurito City at 8.1%

Aichi, Karitani at 10.5%             Nagoya City, Nakamura at 18.1%       Saitama Pref, Higi-gun at 7.9%

Kobe, Ashiya at 9.8%                 Sendai City, Miyagino at 18.1%          Saitama Pref, Irima City at 7.7%

Nagoya City, Midori at 9.8%      Osaka City, Umeda at 18.0%              Kanagawa, Yokohama, Totsuka at 7.3%
Let us attempt to interpret this at least in general terms.  In the residential sector, the continued strength of Niseko developing into an international destination has come through but to put this in perspective the base land value is still relatively low at 31,000 yen/sq.m.  Compare this to the other mountain resort location on the strong growth, Karuizawa, where the official prices ranged from 20,500 to 95,000 / sq.m.

We add as a brief note that EastEdge has undertaken sales of the first 5-star hotel condominium in Niseko (and Japan, for that matter).  Further information is available on our website for those interested in investing in this upcoming destination in Japan.  Please contact us for details in English and pre-public pricing.

While residential prices in the main cities Tokyo and Osaka cooled a bit, last year`s wave to secondary cities is seen as continuing to flow at least through the 1st half of 2008 in the Sendai, Kobe, and Nagoya figures.  The Karitani growth is an anomaly due to special measures the city has done to successfully revive the local economy and increase the population.

In the commercial sector, the same phenomenon is seen as the strongest growth areas in central Tokyo slowed down first while the wave out to Sendai and Nagoya is still taking place.  Within Tokyo and Osaka, the strongest retail areas of Shinjuku, Ginza, and Umeda seem to still be holding up as of July 1 but we would tend to believe the upward trend has stopped since.  A decline in Shibuya in favor of Shinjuku during the 1st half of this year seems to demonstrate that the Shibuya/Aoyama market saw too sharp of a growth during 2006 and 2007 and cooled off first.

In the industrial sector, most of of these locations are growth due purely to the redevelopment of large sites for new distribution and logistics centers.  If there is no land amalgamation and/or redevelopment, industrial sites are not going to see any growth.

The worst performers ranged from -13 to -18% and were concentrated in the far corners of Kochi, Akita, Hiroshima, Niigata, and Kumamoto Prefectures.

On the whole, growth has slowed and the most popular urban areas are those that have been affected the least.  We expect that over the coming 12-18 months this general trend will maintain.  Increasing distressed situations will drive average prices down but we stress that these are merely distressed situations due to structural and liquidity issues and not the fundamentals of the Japan real estate market, which continue to be robust in the urban core.  The buying opportunities in Tokyo are becoming abundant and on the macro view we would maintain that the market is more attractive than most other developed markets in the world today.

The shock of the quick appreciation in the yen/dollar over the weekend and escalation of the troubled Lehman / Merrill shops as well as other bad news pushed the TOPIX down 5% today. This was expected.

But the REIT index went down another 7% today, again, impacted by the bad news abroad but the Japanese real estate market is not fundamentally correlated to the US.

We DO see risk in the JREITs, but this is risk uncorrelated to other markets:

1) Poor price performance of the J-REIT equities means that debt LTVs are up without taking on more debt… Most JREITS have an LTV threshold around 60% and getting into that LTV range sets off triggers to creditors to push the equity back up – esp in the case of smaller cap JREITS that have predominantly asset-backed syndicate loans.  Those JREITS with more corporate debt have less of an issue.  The easiest way to push the equity up is to sell assets, but this is not a favorable environment to sell in.

2) JREITs with shorter-term debt that needs to be rolled over have serious creditor pressure and also may be forced to sell assets at a discount just to pay off the debt.

3) Spreads for both new non-recourse syndicated loans and new corporate debt have gone up, and will impact dividends at some point, again influencing JREITS that have shorter-term debt.

HOWEVER, as of today there are 9 out of 42 JREITs with a forecast dividend yield over 10% and at the top Tokyo Gross REIT with a whopping 14.6% forecast.

Now last time I checked my Japanese online trading account, I could borrow 70% on margin at 3% interest, which may be more expensive than some shops in Japan but even assuming such a 10% dividend yield gives me a 26% yield on equity.  That`s a whole lot better than 0.1% in my Tokyo Mitsubishi account.

Why aren`t the Japanese pensions and pensioners figuring this out?  The govt pension lost 4% last year, right? You would think the pensions would be the most natural investor to prop up their own country`s indirect real estate market, and have quite a bit to gain from it at this timing.  But often bureaucratic institutions don`t work so quickly here, it seems to take years to change mandates and get consensus.

We aren`t analyzing very deep here to make any buy recommendations so just in general, any JREITs with average debt term shorter than a few years, those that start to cut dividends and any that have recently sold assets at prices significantly below book value should be red flagged.  Otherwise, the strong JREITS are a super value and we should expect quickening consolidation, takeovers, and taking private of the better assets and better managed JREITS in the coming months.

The first exchange-traded fund linked to Japanese real estate investment trusts debuted in New York, giving American investors closer access to the Japanese property market, the TSE announced yesterday.

investment manager Northern Trust Global Investments listed the product tied to the TSE REIT Index on the New York Stock Exchange.  A J-REIT ETF has not been listed in Japan, but Nomura Asset Management plans to list one on the 18th of this month.

Nomura`s brief analysis of the J-REIT market last weekend emphasized the extreme discount and potential undervalue that can be seen in the sector as average dividend yield spread over the 10-year JGB is back to the level of 4.5%.

Good news this time from amongst the woes we keeping hearing about daily from the Japan Real Estate market.

Joint Corporation, one of the larger `emerging` developers that had diversified into a whole wealth of real estate products and services extending from its original base in residential development, received an injection and back up from ORIX officially yesterday. Orix will take a 39% voting stake in the company in the form of JPY 4 billion common stock, plus 6 billion preferred equity, and give a debt commitment line of 20 billion yen to help tidy up their refinancing issues.

The announcement Monday seemed to be already taken up by the market on Friday as the stock jumped 14%,  from its 80% discount to the beginning of this year.   We heard through the grapevine that Pres. Shoji made a speech to employees that they will NOT be filing for bankruptcy or anything of the sort… big celebrations over the weekend.

Joint Corp`s stock price was well over JPY3000 late last year but had plummeted below 200 yen by Thursday of last week.  I would imagine ORIX is going to make a killing on this one…. the game now is, who will get sponsored to recapitalize and who will not.   Those with good assets and decent management will be the first to be picked off at these dirt cheap prices, while others will have to wait to be consolidated with the winners or reshuffled by their banks.   Let the games begin!

EastEdge Partners is a hospitality specialist in Japan sourcing for and advising foreign clients wishing exposure to the attractive market here, which may be otherwise difficult to access for foreign firms.

Deals we work with range from small boutique resort to large business and city hotels, USD$5M on up to portfolios of value several hundred million.

The fundamentals are very strong in major Japan cities and resort destinations with inbound tourism from Asia increasing rapidly, domestic outbound tourism being diverted to inbound due to soaring travel costs, and a quickly growing retiree population.

Discounts are appearing due to refinancing problems and we believe it is a good time to get into the sector. Cap rates from 5-6% in the city to over 10% in resort product can be achieved, while the 10-yr prime lending rate is still ultra-low at 1.2% and likely to stay there for a while.

EastEdge Partners is a Japan licensed broker and investment management firm based in Tokyo.

EastEdge Partners can source, help with structuring, manage assets, operate, facilitate repositioning and redevelopment, etc. Whatever support you need on the ground in Japan for hospitality assets, we can provide.

If you have a desire to look at deals available, or any questions about hospitality in Japan, please give our advisory division a shout:

Advisory Division
EastEdge Partners
PH: +81 3 3584 5067
FAX: +81 3 3584 5068

Even on the official book, land prices in Japan have now turned as of 2nd quarter 2008.   The intention to cool off a perceived urban land bubble, desired by regulatory bodies cutting the money supply to real estate since last year, seems to be taking effect well in the market.

The quarterly “Land Price LOOK Report“, issued by the Japan Ministry of Land, Infrastructure, Transport and Tourism (MLIT) gives an indication of trend only.  As of the 2nd Quarter of 2008 (April through June), the trend was slightly downward for more than 50% of the surveyed locales in Tokyo.  In other cities, the same trend showed with only the very center holding.

We see from the report that the most central, popular areas in Chiyoda, Minato, and Shibuya wards are still on the stable or slightly upward trend but still a steep contrast to the spiraling growth of last year.  Tokyo station (both Marunouchi and Yaesu sides) , Ginza, and Omotesando areas are still on the upward trend, according to the report.

The significant increase in construction costs during the past year has also put pressure on the price of raw land.   Developers now are facing stagnating cap rates and must focus on land price as a last resort to allow a profit on new build projects.  We will likely see an increase in players who lose out on this battle to refinance and sell at a gain in the now illiquid market into bankruptcy or rehabilitation in the coming months.  We will not name names, but we`ve seen a lot of big hawks in the skies around Tokyo recently…

See WSJ article on Developers` Woes.

Today the announcement was made that on August 29 2008, developer URBAN DESIGN SYSTEM announced that it had filed for bankruptcy. The company filed for protection from its creditors under the Civil Rehabilitation Law and the Tokyo District Court accepted its application.  The company’s liabilities totaled 20.38 billion yen (US $180 million).

Urban Design System started as an collaboration of a group of upcoming architects and bloomed into an innovative designer/developer producing some unique work over the past few years.  They began with the cooperative house concept bringing end users and architects together to plan and develop condominiums together, moved into other residential products and then branched into larger projects including retail and hotels.  See pictures of some works here.

In the hotel arena we were very impressed, as were others, with the renovation of a Meguro warehouse into the unique and boutique hotel CLASKA.  The Granbell Hotel in Shibuya is not quite so exciting, more like your standard contemporary Japanese urban look, although fitting to its Shibuya clientele.  But they really upped the ante with the plan for Sezoko Island, a 5-star contemporary beach resort hotel on the secluded north side of Okinawa.

Unfortunately, this huge undertaking has probably become the downfall of UDS, as is the case with many other upcoming developers that have moved quickly to catch up with a fastmoving market through 2007 but now the liquidity rug has been pulled out from underneath.

It will be interesting to see who raises their hands to sponsor the group now, as fundamentals for Okinawa tourism are very good and the UDS projects were good, although those undertaken in 2007 were probably pricey.  Domestic tourists have steadily grown from 2.6 million 20 years ago to an expected surpass of the 6 million mark this year!  That has resulted in direct tourism revenues over $4 billion USD and estimated economic effect over $22 billion.  The perceived `summit effect` of increased tourism after the 2000 G8 Summit held in Okinawa was actually well underway beforehand and since then Okinawa has become the default domestic beach resort destination.

While this has led to an overdevelopment the last few years, leading some companies getting a bit out of control like Zephyr to their recent demise also, the fundamentals are still good and the very well done, truly 5-star hotels are still far and few between.  We`ll be watching to see what eager parties come to the plate this time.

Good timing!

PERE News Report:

The firm has completed fundraising for the opportunity vehicle, which will focus chiefly on Japan, China and South Korea.

LaSalle Investment Management, the property investment arm of Jones Lang LaSalle, has raised a $3 billion (€2 billion) property fund targeting Asia.

In a statement, the firm said it would use leverage to increase the vehicle’s spending power to as much as $12 billion, focused primarily on China, Japan and Korea. LaSalle was unavailable for comment.

In June the firm told Reuters it expected assets under management in Asia to double in the next three years.

“Asia remains a key strategic priority for our business and we have a very active plan to grow our operations in the region,” LaSalle’s managing director Philip Ling said in the statement. “We see a lot of opportunity in Japan, which contains 50 percent of the total value of real estate in Asia, although we also see opportunities in Korea, China and elsewhere in Asia Pacific.”

In May LaSalle formed a joint venture agreement with Realty Vailog, an Italian industrial sector development company, to acquire and develop logistics facilities in the Greater Shanghai region. That acquisition was made by LaSalle Asia Opportunity Fund III, a $1 billion vehicle targeting opportunities across Asia.

In what could be a sign of things to come, the firm has made the firs tender offer for a J-REIT in Japan as the publicly listed vehicles continue to be undervalued to NAV.    PEI Article Here

This will give the RePlus Reit an advantage to stock up on quality assets while they are at a discount.

The Japan residential sector has been hit hard the last half year:

1) Smaller J-REITs with a market cap under JPY 30 billion initially have had trouble from the start convincing the market they could grow and boost liquidity so received a discount to the other sectors.

2) This year even the larger resi J-REITs got pushed down over the higher rent growth seen in office and retail, continued emersion of assets with questionable earthquake resistance remant from the Aneha incident last year, and rising construction costs.

3) The overall market has been pushed down on global credit concerns but coincidentally regulators began to cut the money supply to real estate on concerns over an asset bubble… strange timing!

4) The result is that the sector has dropped 50%, some are discounted to near 50% of NAV, sector yield is averaging 8% with some over 10% and average implied cap rates are now at 6% – that`s about 5% over the 10 yr bond yield folks.

So there is a big discount for residential, is it justified?  Well, we would think otherwise…

1) Rents and occupancy in the central cities have not moved, but actually trended upwards.  Virtually 100% occupancy when accounting for normal turnover – how does that compare with other major global cities!  Even as some weakness is being seen in the overall Japan economy, if it continues urban residential rents will be the very last sector to suffer and it will take several years of a serious recession to have an impact.  So this is not the problem.

2) Architectural worries, economic worries and issues with developers have cut consumer demand so strata sales have declined.  Overregulation after the Aneha scandal and increased construction costs has  nearly halved new supply just this year, and new construction start figures show the supply will continue downward.   With the urbanization to central areas continuing to move population up and the drop in supply, rents (and prices) should theoretically go up in the coming years.

So what is the big issue, and is it sustainable?

Debt financing has dried up, J-REITS can`t buy, so developers with projects in the works and funds with refinancing terms pressing must cut prices to create liquidity or they are out of luck like Urban and Zephyr, Sohken Homes, Sebon falling the last few weeks and more in the pipeline.

The solution comes down when will financing become readily available again, which is unforeseeable at this point but the pressure for policy change and deregulation is coming on very strong now.  Meanwhile, those willing to buy at conservative LTVs will enjoy a very nice yield indeed…

Where else in the developing world, yet a major city, can you find yield spreads at 5% and above?  It was about this level in Tokyo when the foreign investment banks and `vulture` funds started looking at Japan last and spurred development of the securitization market reaping huge profits on low borrowing rates and normalization of the spread over several years.

Do I hear hovering?

EastEdge has undertaken exclusive Japan domestic marketing for ABOVE + BEYOND NISEKO, the first 5-star resort hotel condominium to be offered in Japan.  Owners of the 1,2,3 Bedroom Suites and 4-bedroom Chalets benefit from world-class ski resort operation income while enjoying up to a month of personal use per annum.  This is a very unique, upscale real estate product for Japan, the most upscale in Niseko to date and will likely see strong appreciation in the offplan before completion next year.

General materials are available in Japanese at the links below, or contact us if you need English materials:

Pre-public prices are available only now before the ski season begins, so contact us quickly to reserve.

アバヴ+ビヨンド ニセコ

・EastEdgeは、日本初の5ツ星リゾートホテルコンドミニアム完全分譲、ABOVE+BEYOND NISEKOの日本国内専任販売を行っております。  1,2,3LDK及び4LDKシャレータイプの高級デザイナーホテル別荘オーナーは、国際5ツ星リゾート基準の運営で収益を受けながら年間1か月の自己使用もできる、国内では珍しい不動産商品です。

物件に関する情報はこちら: eBrochure FAQ チラシ プラン シャレー



The last year has seen a severe regulatory cut to the money supply specifically to real estate in Japan and this is the major cause of the current liquidity downturn in addition to J-REIT troubles with some effect from sub-prime outflows from foreign investors, not any problems with fundamentals.

The sudden inability for funds, institutions, and J-REITs to finance acquisitions is starting to spur refinancing defaults and illiquidity of newly completed buildings, in turn causing the bankruptcy of several real estate developers including Urban Corp last week, Zephyr, etc. and more is expected to come over the next year.

For property investors the expected yields are moving to levels we have not seen for 5 years and this means a yield spread over the risk-free rate that is the highest in the developed world and increasing. An unprecedented buying opportunity, but the exact timing of an oncoming acquisition rush is difficult to see.

We have access to off-market opportunities in all commercial sectors, with special strength in Tokyo and residential and hospitality assets including hotel, ryokan and resort. For retail buyers, we can offer smaller Tokyo properties and exclusive resort properties. Please contact us if you are interested in accessing the market at this juncture. Tokyo Office: +81 3 3584 5067 from outside Japan or 03 3584 5067 within Japan.

Commonwealth Bank has recently started the first retail business to offer mortgages to foreigner nonresidents taking collateral directly on Japanese property. Loans to purchase residential properties or holiday homes are available, contact them directly for details.

HSBC Premier is also offering mortgages for visa-holding resident foreigners, including luxury properties over value JPY 100M. Please contact them directly for details. Other foreign and domestic private banks also offer this service so please consult with your private banking representative.

Lone Star has started extending loans for real estate deals in Japan, according to Reuters.

The US private equity firm will originate debt through Star Finance, and focus on a gap in supply of mezzanine debt tranches which has appeared from late 2007.

The move comes as Japanese city banks such as Mizuho Financial Group, Mitsubishi UFJ Financial Group and others have changed policy to push LTVs down following heightened regulation and US-based overseas real estate lenders such as Morgan Stanley, Capmark, Lehman Brothers, Citigroup, and Merrill Lynch have reportedly cut their exposure to securitized loan products amid the subprime loan crisis.

Lone Star / Hudson Japan has been investing in NPLs and real estate in Japan but not debt financing until now. They hired over some senior directors from Morgan Stanley`s shop and they have been closing deals from what we hear.

I hope this is an indicator that at least some of the liquidity dropped by the Japanese banks is going to be increasingly taken up by foreign firms.

Well are about to take the plunge.  Don`t know how it will turn out, but seems like everyone is doing it so why not see if it will work for us.

First of all, EastEdge is in property in Japan and that is what we are going to be talking about, around, and inbetween.  We have collectively been in Japan for over 100 yrs and crazy about the place, so hope we can get you all to enjoy just as much of it as we do.

I will be altering between discussion that is familiar to the real estate professionals here, and those who are just interested in what is going on in this sphere.  And hopefully, it will become an interesting conversation and get more people in on our discussion.

For now, that is our intro… visit our website to find out more about us.

Article in the Nikkei this morning:

July occupancy for major Tokyo hotels improved 0.4 percentage points (ppt) year on year (yoy) to 72.7%, the first turn to positive figures in 32 months.  It appears that inbound travelers from Asia who had put off plans to Japan due to swine flu have returned.

The Osaka major hotels were still down 3.5% yoy, with room rates yet to recover so the full economic effect of a hotel rebound is still ahead of us.

The Japan Nikkei News undertook a study of 21 major hotels in Tokyo and 18 in Osaka.  According to the study, Tokyo hotels came back above the 70% occupancy line, which is generally thought among the industry to be the break-even line for Tokyo hotels.  Especially strong were figures from the Keio Plaza in Shinjuku, which has been effective in attracting Asian leisure travelers.  The recent increases in Hong Kong and Taiwanese guests was noted.

The Keio Plaza occupancy for July improved 6.4 ppt over last year to 95.0%.   Guests from Hong Kong increased nearly 40% and those from Korea increased more than 10%.   Keio management commented that people who had been putting off travel plans due to swine flu in Japan had finally come through.  Nevertheless, the average daily rate (ADR) is still down 15% from a year ago.

Competitors Hilton Tokyo and Hyatt Regency Tokyo, also in Shinjuku, both are also seeing occupancy recovery.   According to hotel officials, as the Shinjuku hotel rates are about 5000 yen lower than mid-city areas such as Akasaka and Hibiya at  around JPY15,000, it is an area popular with Asian leisure customers.  (Comment:  The Shinjuku figures are likely a proxy leading indicator for the larger Tokyo business hotel submarket)

On the other hand, inbound travelers from Europe and the Americas are still down and the higher star sectors continue to suffer.  Imperial (Teikoku) Hotel Tokyo was down 10.5% yoy to 55.8% occupancy and ADR down 4.3% to JPY28,747.

Osaka July numbers continued down 3.5% to 76.5%, now a 12 month negative trend but the downward trend has slowed and month on month Osaka was up 13.5% – other than the seasonal effect, some influence from passing of the swine flu chaos.  Hotel Nikko Osaka was down 15.7 ppt yoy for June at 59%, but in July those figures came to only -2.5ppt and occupancy of 76.6%.  They stated that the pace is slow but Asian traveler reservations have been recovering from the first half of July and during the second half some effect from a major summer high school event Kinki Mahoroba, pushing occupancy beyond the forecast.

Hotel New Otani Osaka came down 4.9ppts from last year July to 59% occupancy, but that was an improvement of 7.3ppt from the previous month.   Hotel management also reiterated that improvement was seen from settling of the swine flu issue and entrance into the summer season, but that the economic downturn was still felt especially in a slowed recovery of demand from foreign guests.