The Other Mori Brother Says Japanese Real Estate Market Weakening

[Mulboyne]

[Mulboyne]

Here's a Yomiuri editorial, not just about the real estate market, but credit problems in general:

Shortage of funds drives firms into failure

A growing number of listed companies that had been in the black for the previous settlement term recently got stuck for funds and suddenly went under. Due to the economic downturn, the business performance of Japanese firms is rapidly worsening while financial institutions are increasingly cautious about lending. This negative cycle, whereby the economy further slows down with bankruptcies coupled with a contraction in bank lending, must be arrested. The number of corporate bankruptcies this year has topped 10,000, and the total number as of November had already exceeded last year's total. In particular, the number of bankruptcies of listed companies surpassed 30--a record postwar high. Sixty percent of such listed companies that recently failed were in the black for their previous settlement term. The bankruptcies have included not a few "sudden deaths" of companies such as a real estate firm that had been elated with recent rises in land prices in certain urban areas but had overoptimistic business plans and failed to guard against a downturn in the market. But, in addition to such "bubble" businesses, an increasing number of companies have been driven into a corner by sluggish sales in their core businesses and worsening cash-flow problems.

The government revised downward the nation's real gross domestic product from an annualized minus 0.4 percent in a preliminary report to minus 1.8 percent for the July-September period. Domestic demand also shifted from positive territory to negative. Due to the worsening economy, 80 percent of bankruptcies this year have been blamed on sluggish sales and other recession-related factors. Industries such as transport and wholesalers, which are closely related with domestic demand, saw a sharp rise in business failures. Major export-oriented companies such as automakers and electrical appliances firms have announced significant production cuts as their business performance worsened due to a slowdown in foreign economies. Smaller businesses, including subcontractors in the auto parts production sector, are being seriously affected by subsequent decreases in orders. During such bleak economic times financial institutions normally would be expected to extend lifelines to ailing companies until their businesses are able to get back on track. But the financial strength of such institutions also has been weakened as a result of the global financial crisis, falls in stock prices and increases in bad loans. Financial institutions, therefore, cannot meet the expectations of flagging companies in need of loans.

The number of failed companies that cited a shortage of operating funds as a major cause of their failure increased by 40 percent in November compared to a year earlier. Various surveys have shown a sharp rise in the ratio of small and midsize companies that say lending by financial institutions has become stricter. The government in its first supplementary budget for fiscal 2008 hammered out measures worth 9 trillion yen to help finances of smaller businesses, which will be administered through emergency loan guarantee systems and government-affiliated financial institutions. But the measures will have only a limited impact. The second extra budget, which includes additional measures worth a total of 21 trillion yen, should be passed as soon as possible so the chain reaction of corporate failures caused by a shortage of funds can be halted. But such measures serve only as an emergency stopgap. The finance sector exists in part for the purpose of extending loans to viable borrowers. It is necessary, therefore, to monitor the lending situation through inspections of lenders by financial authorities. Financial institutions, for their part, should beef up their capital so they can extend loans whenever necessary. This increase of their capital should not only be done by themselves, but also through injections of public funds when a revised law, expected to be passed soon, that aims at strengthening the functions of such entities is enacted.

[Mulboyne]

Bloomberg: Japan Corporate Bankruptcies Rose Most in Eight Years in 2008

...Creed Corp. and Toshin Housing Co., two publicly traded real-estate companies, filed for bankruptcy last week...

Creed's motto was: "Creed is the force to foresee an unforeseeable future"

[GuyJean]

.. Creed's motto was: "Creed is the force to foresee an unforeseeable future"

:D

Creed - One Last Breath
[YT]5yY1Nrznh4I&start=70[/YT]

That dude still annoys me..

GJ

[Mulboyne]

Alibaba: Challenger Kenedix eyes more Japan malls

Sydney-listed property trust Challenger Kenedix is looking to buy more Japanese shopping malls, believing its portfolio will weather the country's recession well, according to an executive. The trust, which listed in 2007 and owns 20 malls managed by its Japanese partner Kenedix Inc, last month slashed its forecast for fiscal 2009 distributions because of dwindling gains from currency hedging on a strong yen. Its unit price has dropped nearly 60 percent over a year and weak consumer sentiment is a worry. But Brett McCarthy, who manages the trust, told Reuters its assets are performing well. "Supermarket-anchored neighbourhood shopping centres are a defensive asset. The market is taking a very general approach...that all retail has a major problem. It's not necessarily the case," McCarthy said. "If you do your investigation thoroughly, there are a lot of good opportunities in retail."

Financing any acquisitions could be tough because of the trust's depressed share price, and McCarthy said any capital raising would have to wait until the unit price recovers. But he said selling assets to buy better value ones may be an option. "A possibility is to do asset sales and rollover them into other types of retail property that have good value opportunities," he said.

McCarthy said some landlords in Japan may find it difficult to refinance debts at their March book closing, forcing them to sell assets at a discount. And new investors may sell after finding that falling rents do not justify the high prices they paid for assets in the last couple of years. In recent years, many struggling Japanese retailers have sold property to investors to free up cash, and analysts believe the current economic downturn will accelerate the trend.

Hit by the global financial crisis, consumer sentiment is weakening in Japan, with retail sales falling 0.9 percent in November from a year earlier and overall household spending dropping 0.5 percent for the ninth consecutive month. In a sign of the difficulties, Aeon Co, the nation's second-largest retailer, said in December that it would tie up with Mitsubishi Corp to cut procurement costs. But McCarthy said his portfolio of smaller neighbourhood shopping centres, mostly selling necessities, would stay strong. "The trend you are seeing now is people have stopped eating at restaurants and they are buying at supermarkets and they are eating at home," said McCarthy, who lived in Japan for nine years.

Challenger Kenedix is one of four trusts that listed Japanese assets on the Australian bourse -- using currency hedging to artificially boost low yields from Japanese property. Taking advantage of interest rate differences between Japan and Australia, the so-called "capital hedge" has contributed about 20 percent of earnings. But the global financial crisis raised concerns about refinancing by property trusts, and the rapid fall in the Australian dollar and rise in yen has disrupted hedging strategies.

Allco Finance Group, the ultimate parent company of the asset manager for Rubicon Japan Trust, is going through restructuring. Share trading of Babcock & Brown, parent firm of Babcock Brown Japan Trust, has been suspended as the company negotiates with lenders. Galileo JapanTrust cut distributions and announced asset sales. Challenger Kenedix also cut its distribution forecast for the 2009 fiscal year to 6.5 cents from 17.2 cents as recent yen strength reduced the headroom under its capital hedge.

But its borrowing facility does not expire until April 2012, and 10 of its properties that were revalued last month saw only an average 3 percent drop in values from 12 months earlier. However, analysts say investors now prefer simple structures for Australian property trusts -- pure rental streams, rather than trusts with complex capital and currency hedges. "They're really going to be looking for a vanilla plain product where there is certainty how to operate and what sort of factor is going to impact on the vehicle," said Dugald Higgins, associate director at Property Investment Research.

It's always fun when someone tries to convince you that forthcoming asset sales are a sign that they are really intend to buy more.

[Mulboyne]

Asahi: Condo seller collapses under debts

Japan General Estate Co., a major seller of condominiums, has filed for bankruptcy protection, officials said Thursday. The company had 197.5 billion yen in liabilities. Its application for court-led rehabilitation under the Corporate Rehabilitation Law was accepted by the Tokyo District Court. The company made headlines last November when it proposed paying out 1 million yen in compensation to each of 53 students who had job offers retracted. At a news conference Thursday, President Makoto Nishimaru said, "Financial institutions were clamping down very hard and the changes were unbelievable." Japan General Estate was listed on the First Section of the Tokyo Stock Exchange in 2003. It had consolidated sales of 118.9 billion yen in the fiscal year ending March 2008 and net profit of 4.6 billion yen. However, the company was hurt by cash flow problems after the subprime loan problem surfaced.

[Mulboyne]

AFP: Japanese real estate investment firm files for bankruptcy

Japanese real estate investment firm Pacific Holdings Inc. said Tuesday it had filed for bankruptcy after reporting huge losses triggered by its exposure to the US subprime mortgage loan crisis. The Tokyo-based company, which filed for protection from creditors with the Tokyo District Court, said it had liabilities of 163.6 billion yen (1.7 billion dollars) as of the end of February. Pacific Holdings said it had suffered net capital deficiency after reporting "massive extra losses" due to a slump in the real estate market triggered by defaults in the US subprime mortgage loan space. It is Japan's third largest bankruptcy this year, following moneylender SFCG Co. and Japan General Estate Co., Kyodo News reported. Japan is seeing bankruptcies soar as the effects of the global credit crunch and world economic downturn hit home. A survey showed on Monday that Japanese bankruptcies rose 10.4 percent in February, marking a ninth straight year-on-year increase. Debts left by failed firms surged more than 236 percent to 1.23 trillion yen.

[Mulboyne]

Reuters: Japan condo developer Azel to file for bankruptcy

Japanese condominium developer Azel Corp said on Monday it would file for bankruptcy, hit by the property market slump and credit crunch. It is the latest in a growing list of Japanese real estate companies going under as the world's second-largest economy falls deeper into recession. In a statement, the firm said it had given up trying to continue its business and would liquidate it after it failing to secure working capital to service debts. It said its condominium sales have been hurt by the downturn in the property market following the global financial turmoil. The firm's general contractor business also suffered as some client condominium developers failed to pay it on schedule, it said. It said it had about 44.2 billion yen ($451 million) in debts.

[Mulboyne]

Reuters: Japan distressed property market eyes recovery

It was supposed to be a luxury beach resort but now an abandoned plot of land on the southern tip of Japan is just a reminder of how dysfunctional the world's second-biggest property market has become. The land on sub-tropical Miyako Island is just a fraction of the estimated $19 billion in distressed property assets in Japan. With an estimated $12.7 billion (8.8 billion pounds) in properties needing refinancing this year, falling land prices and a tough environment for loans, investors are struggling to value property, bringing distressed sales almost to a halt. Investors hope some big transactions in the pipeline, such as the sale of three big Tokyo properties by Davinci Holdings and a revival plan for failed New City Residence Investment, will help set benchmarks to price other deals.

"The (overall) property market is so motionless that valuation is driven mostly by sentiment now," said Goldman Sachs analyst Sachiko Okada. Hit by a dearth of investment and a fall in land prices last year, the first slide in three years, Japan's property market has hardly seen any big transactions in the past few months. Japan's property market became highly leveraged in the past few years when foreign players such as Morgan Stanley and Goldman Sachs dominated the market with a series of huge deals including Morgan Stanley's $2.4 billion acquisition of hotels owned by All Nippon Airways.

But foreign players have retreated due to the global credit squeeze, leaving behind a growing amount of distressed property -- such as failed developments, companies unable to refinance loans and a string of over-leveraged, bankrupt developers. Okada is one of many who say investors need to regain confidence in property valuations before Japan's distressed property market starts moving again, and when that happens the sector will see more transactions.

Property sales became difficult because failed developers such as Urban Corp and Suruga Corp failed to attract new investment, making it harder to gauge the risk appetite of investors and thus how much a property was worth. "This market is abnormal and making bankers less confident that their valuations are valid," a real estate banker at a U.S. investment bank said. "We want to make sure what we are using isn't outdated." Japan now accounts about 23 percent of the world's $82 billion in distressed property, placing it second behind the United State's $46 billion, says Real Capital Analytics, a real estate research firm.

NEW CITY, DAVINCI IN FOCUS

Despite its size, Japan's distressed property market has been inactive except for some sales of Lehman Brothers real estate loans, as many investors have found it hard to raise funds. That is why the pricing of New City Residence, the first Japanese REIT to fail, will be closely watched for some indication about the value of Japanese real estate, said Curtis Freeze, chairman of U.S. property investor Prospect Corp. According to a Shinkin Asset Management report, New City, with 105 residential properties in its portfolio, had a net asset value NAV.L per unit more than eight times the actual REIT unit price at the time of its failure in October, suggesting the REIT had been oversold.

New City is due to announce a revival plan by April 7. "The market will be watching how New City's assets will be calculated," Freeze said, adding that a logical valuation would help restore investors' confidence and encourage markets. Property investor Davinci's expected sale of three landmark buildings it bought for a combined $4.5 billion is also on investors' radar screens as they are keen to see who buys them and how much they pay. Davinci needs cash to repay debts with a loan on one of the three buildings due by June, sources told Reuters this month.

More than 150 Japanese properties are in a distressed state, Real Capital Analytics says, including the 54 hectares of land in Miyako that failed Zephyr Co was planning to turn into a resort. For a recovery to get underway, UBS Securities senior analyst Toshihiko Okino said there needed to be increased turnover in the distressed market." We might be able to say the market is moving if we see a big volume of transactions in the coming six months or so. But the question is whether buyers can get financing. It will all depend on the debt market," Okino said.

Investors have begun to hunt for deals. An Osaka-based property company bought one small lot from bankrupt Urban, but these transactions remain relatively small at around $10 million each. Real Capital Analytics says some $12.7 billion of commercial mortgages fall due this year in Japan, suggesting more real estate might soon join the "troubled" field, offering opportunities for investors keen to scoop up bargain deals. But it would be too optimistic to expect a jump start in the distressed property market, said Goldman Sachs' Okada, with a deepening recession likely to continue reducing demand for space and weigh on property values.

[Mulboyne]

Short-term lease apartment company Leopalace21 has just announced a downward revision to its consolidated earnings forecast for the financial year ending March 2010. They now expect an operating loss of 28.2 billion yen, up from the previous forecast of 11.1 billion. At a net level, the loss will now be 35.1 billion yen versus a forecast of 19.1 billion. Leopalace21 reported net assets of 146 billion yen in the last financial year so the company has the wherewithal to survive this hit provided creditors remain onside. However, it's a substantial blow which might see some assets sales or site closures.

For the full year of the fiscal year ending March 31, 2010, the forecast for net sales has been revised downward as the impact from the continuing economic slowdown has been greater than anticipated. The forecast for operating income (loss), despite an ongoing effort to streamline operations and cut operating expenses, has also been revised downward due to the slow recovery in the occupancy rate in the Leasing Business and ensuing addition to the provision for apartment vacancy loss. The forecasts for recurring income (loss) and net income (loss) have been revised downward to incorporate losses on foreign currency exchange and other factors.

Leopalace21 expects to post a substantial loss for the subject fiscal year as a result of the economic slowdown. The Company will continue to strengthen operating structure, supported by all the directors, and work to achieve profitability by implementing fundamental business restructuring measures. Leopalace21 will present a business plan at the announcement of results for the subject fiscal year (ending March 2010).

Source (PDF)

[nottu]

[Mulboyne]

35.1 billion yen net operating loss on assets of 146 billion yen -
They're goners.

There are apparently some assets on the block right now.

The company runs a softball team and also sponsors the Japanese synchronized swimming team so they may need money from elsewhere. It's slightly worrying that the company is booking forex losses because all they've got overseas is a hotel in Guam.

[Catoneinutica]

There's a lengthy article in Finance Asia which makes a couple of interesting points, in particular about the problems faced by REITs. The title is a little misleading: the "gold rush" is only for those who hope to find opportunities as more real estate companies become distressed.

Is Japan real estate poised for a gold rush?

Tempora mutantur: "I have no idea on the likely future trend in land prices but I wouldn't have minded making 30% in Omotesando last year as one residential REIT was able to do." -Mulboyne, 2006


Plus ca change: "The supersized American housing bubble is beginning to deflate, and the tsunami of foreclosures of toxic-loan-financed properties, on top of the death blow to the real estate, mortgage, home-building and related industries - which up to now have been the catalysts for a large share of the economic growth in the US - will cause a huge debt-driven recession." -some moron calling himself "catoneinutica," 2006

[Mulboyne]

...I wouldn't have minded making 30% in Omotesando last year as one residential REIT was able to do." -Mulboyne, 2006...

They kept the profit because they sold the property when I mentioned it. There are some, not many, investors who have a good record reading the market correctly on the way up and the way down. That's who I wouldn't mind being.

In Japan, some of the smarter guys sold up when they started getting rich bids from local companies who had earlier turned their nose up at getting back into the market. There were also a lot of smart guys who thought the market looked expensive but just couldn't say "no" to investors wanted to give them money. Their reputations aren't looking so hot these days.

[Mulboyne]

A couple of foreigners say they are coming back in to the commercial market:

Pacific Alliance to invest more in Japan

LaSalle to invest $3.3 billion in Japan