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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.


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