FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

Japan's Property Prices Rise as Investors See Rebound (Update2)

Japan's Property Prices Rise as Investors See Rebound

May 2 (Bloomberg) -- Japanese real estate funds and developers such as Mitsubishi Estate Co. are snapping up domestic property, betting the economy will expand enough to end 13 years of falling land prices.

Mitsubishi Estate, the country's largest developer by market value, in March outbid rivals for three real estate purchases that cost 194.6 billion yen ($1.8 billion). The Tokyo-based company on Jan. 20 purchased a 1,233 square-meter site in the city's Akihabara district.

Central Tokyo property prices rose last year for the first time in more than a decade, with residential property gaining 1.4 percent and commercial land rising 0.5 percent. The increase spurred Japanese investors to return for the first time since a series of recessions began in 1992. Foreign companies such as Morgan Stanley Real Estate and Lone Star Funds have been among the buyers.

``What's driving this market right now is not foreign money at all,'' said Sonny Kalsi, the Tokyo-based head of Morgan Stanley Real Estate Asia. ``It is domestic capital. That's something we haven't seen over the last few years.''

The rising land prices have been partly helped by a recovery in Japan's economy, which has spurred confidence and encouraged companies to expand. The economy, which has had four recessions since land prices started slumping in 1991, has recorded positive growth in eight of the past 12 quarters.

REITs Rise

Tokyo property prices have fallen as much as 70 percent from the 1991 peak. A sevenfold expansion in Japan-focused real estate investment trusts since 2001 has helped underpin the latest price rebound. The turnaround may also help the wider economy as consumer and corporate confidence improves.

``If households start to realize land prices are rising, then they have the incentive to get more involved in the housing market,'' said Richard Jerram, chief economist at Macquarie Securities Ltd., in Tokyo. ``It's similar with the corporate sector. Rising land prices simply improve corporate balance sheets, and that tends to improve corporate investment as well.''

Average commercial land prices in central Tokyo rose in 2004 for the first time in 14 years, while residential prices posted their first increase since 1987, Japan's Ministry of Land, Infrastructure and Transport announced on March 23.

Japanese pension funds and institutional investors probably spent more than 300 billion yen in 2004 on property funds, compared with 140 billion yen a year earlier, said Eiichiro Hara, a general manager at Secured Capital Japan Co. in Tokyo.

Foreign investors such as Morgan Stanley Real Estate, Goldman Sachs Group Inc. and Dallas-based Lone Star started buying Japanese property in the late 1990s.

Outpaces Stock Market

Japan's first two REITs, Nippon Building Fund Inc. and Japan Real Estate Investment Corp., were listed on the Tokyo Stock Exchange in 2001. Now Japan has 16 REITs, and last year they bought 791.1 billion yen in property, 41 percent more than in 2003, according to Mizuho Securities Co.

The market value of Tokyo-listed funds has risen sevenfold to 2 trillion yen, from 260 billion yen when the first REITs traded. The exchange's REIT Index rose 27 percent in 2004, outpacing a 10 percent gain by the Topix Index.

``Prices have fallen to such low levels they may be overdone, so the upside potential is much higher,'' said Leslie Chua, a Singapore-based director at Jones Lang LaSalle, a commercial real estate broker.

Shares of Nippon Building, Japan's largest REIT, have gained 8.5 percent this year and rose 0.9 percent, or 8,000 yen at 948,000 yen as of 3 p.m. close of trading on the Tokyo Stock Exchange. Japan Real Estate Investment, the second biggest, is little changed this year and rose 0.1 percent today to 866,000 yen.

Mitsubishi Estate

Mitsubishi Estate has focused on redeveloping central Tokyo's Marunouchi business district, an area the company has managed since buying it from Japan's Defense Ministry in 1890.

The company's March acquisitions included the former headquarters of UFJ Holdings Inc. and 39 smaller properties bought in one transaction. Mitsubishi Estate and its partners paid 14.1 billion yen for the Akihabara site, outbidding the nearest offer of 8 billion yen, the Nihon Keizai newspaper reported. The government-affiliated Japan Railway Construction, Transport and Technology Agency, which auctioned the Akihabara site, declined to comment on the amount of the bids.

``The fact that Mitsubishi Estate is winning bids suggests they are paying higher prices, and that shows how they've become much more aggressive,'' said Yoji Otani, a real estate analyst at Credit Suisse First Boston in Tokyo.

Mitsubishi Estate may release a new investment plan May 12. The company may revamp and resell more properties as opposed to holding them for rental income, spokesman Masahiro Kobayashi said.

Mitsubishi Estate forecast a 2.9 percent increase in profit to 36 billion yen for the year ended March 2005. Its shares, which have fallen 2.3 percent this year, rose 3.6 percent to 1,172 yen today on the Tokyo Stock Exchange.

Mitsubishi Estate's biggest rival Mitsui Fudosan Co., Asia's largest developer by sales, said on April 28 it expects net income to rise to 50 billion yen this year, 74 percent higher than its annual net income for the year ended March.

Shares of Mitsui Fudosan gained 38 yen, or 3.2 percent to 1,212 yen today in Tokyo.

Waning Returns

Overseas funds buying distressed assets in the late 1990s aimed for returns as high as 30 percent after selling them, according to data from Los Angeles-based CB Richard Ellis, the world's largest commercial real estate firm.

``Looking at other investors' success, the rest of them regret not having invested earlier,'' said Secured Capital's Hara. ``Now they are thinking about entering the market.''

Secured Capital runs an 80 billion yen real estate fund for Japanese investors including banks and pension systems. It also manages Japanese investments for the California Public Employees' Retirement System, the biggest U.S. public pension fund.

Gains are waning. Investments since 2002 now expect returns of between 10 percent and 15 percent, CB Richard Ellis says.

Risks

Real estate investors face risks from possible increases in interest rates by the Bank of Japan, said Yasuyuki Otsu, executive officer and general manager at Tokyo-based Mitsubishi Securities Co., which sells private property funds. Raising rates from zero would increase borrowing costs for those interested in buying land and possibly cool down the market.

Bank of Japan Governor Toshihiko Fukui on April 21 repeated a vow to maintain the policy of pumping cash into the economy and holding interest rates at almost zero until core prices show stable gains. The bank adopted the policy in March 2001. Core prices have risen just one month since April 1998.

The central bank's policy makers will probably defer their forecast for an end to deflation by one year, making it less likely they will raise rates, according to a median forecast of 12 economist surveyed by Bloomberg News earlier this month.


To contact the reporter on this story:
Kathleen Chu in Tokyo at [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000101&sid=apufxOB_lqfU&refer=japan