Dec. 20 (Bloomberg) -- Japan's real estate investment trusts face acquisitions or being taken back into private ownership with about 75 percent of those that are listed trading below net asset value, industry participants say.

The Tokyo Stock Exchange REIT index fell 24 percent in the past six months, eroding gains earlier this year after rising defaults on U.S. subprime mortgages prompted some foreign investors to sell to raise cash. The decline comes as commercial land prices in Japan rose for the first time in 16 years.

``Japanese REITs are showing continued volatility,'' said Dan Klebes, chief investment officer at Aetos Japan LLC, which bought property company Simplex Investment Advisors Inc. for $1.1 billion with Goldman Sachs Group Inc. on Nov. 10. ``I wouldn't be surprised to see some of them being privatized.''

The index is headed for its first annual decline since inception in 2004, even though Japan's commercial land prices are rising for the first time in 16 years and rents are at a 13-year high. Only two REITs have listed this year, compared with 13 in 2006 and 12 in 2005.

American International Group Inc., the world's largest insurer, canceled plans to list a real estate investment trust on Dec. 3 in Japan, citing poor market conditions. Able Inc., a realtor, also withdrew an initial share sale plan of a REIT on Dec. 10 for the same reasons.

The Tokyo Stock Exchange REIT Index gained 0.7 percent to stand at 1,857 as of 11 a.m. in Tokyo.

Deep Discounts

``With some REITs trading at a deep discount to book, nobody is going to buy a new one if they can buy an existing one at these levels,'' said Curtis Freeze, chairman of Prospect Asset Management Inc., a Honolulu-based fund with $2 billion invested in Japan. ``The industry knows it has to improve the performance and quality of the current market before doing new issues.''

Thirty out of 40 REITs listed on the Tokyo Stock Exchange trade below their net fixed asset value, according to Bloomberg calculations. Twenty-six of 41 REITs listed on the exchange have a market value of less than 100 billion yen ($882 million), according to Bloomberg data.

``Many small-size REITs are stuck as their stock price is lower than the asset value and public offer price,'' said Tomoyuki Yoshida, head of Japan real estate operations for GE Real Estate Corp. ``Their options are pretty limited.''

LaSalle Investment Management Inc., a subsidiary of Jones Land LaSalle inc., took control in November of eAsset Investment Corp. in the first takeover in Japan's 5.1 trillion yen REIT market. LaSalle bought the asset manager of eAsset for an undisclosed sum.

``One by one, each of the smallest REITs will end up doing a deal with a much bigger sponsor,'' said Freeze. ``People who want to enter the market will do so via a joint venture or through a takeover, and that's how the market will recover.''

To contact the reporter on this story: Kathleen Chu in Tokyo at kchu2@bloomberg.net.

Last Updated: December 19, 2007 21:31 EST