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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.

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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.