Sept. 9 (Bloomberg) -- New City Residence Investment Corp.’s creditors rejected Lone Star Funds’ revised plan to take control of Japan’s first failed property trust, opening the way for a rival bid from Daiwa House Industry Co.

Creditors voted down Dallas-based Lone Star’s plan to pay 12.4 billion yen ($134 million) for Tokyo-based New City at a meeting at the Tokyo district court today, New City’s lawyer Makoto Tahira said.

The decision, which follows the rejection of Lone Star’s initial offer on July 15, comes as creditors seek higher payment after property and credit markets recovered from the rout that led to New City’s collapse in October. Daiwa House-managed property trust BLife Investment Corp. said in a statement it will propose its own rehabilitation plan after the rejection.

“The Japanese real estate market is emerging out of crisis condition so it’s natural that creditors are seeking better conditions,” said Hideyuki Shinkai, a Tokyo-based fund manager for Norinchukin Trust & Banking Co., which doesn’t hold the stock. Its parent Norinchukin Bank is among New City’s creditors.

No one was available to comment at Lone Star’s Tokyo office.

New City, which earns rental income from more than 6,700 apartments it manages across Japan, sought bankruptcy protection on Oct. 9, saying its failure was caused by difficulties in raising funds and selling properties because of the global financial crisis. New City’s liabilities were 112.4 billion yen as of August 2008, according to the firm.

Creditors included Aozora Bank Ltd. and Chuo Mitsui Trust & Banking Co., the Nikkei newspaper reported earlier today.

Masaaki Harada, a spokesman for Tokyo-based Aozora, and Takeshi Nakamura, a spokesman for Chuo Mitsui in Tokyo, both declined to comment.

REIT Market

The Tokyo Stock Exchange REIT Index has gained 18 percent since April, when Lone Star was selected by New City, beating firms including Daiwa House and Oaktree Capital Management LLC. The bid was subject to creditor and shareholder approval.

BLife today reiterated its plan, backed by Daiwa House, to merge with New City.

A New City investor group, which claims to represent holders of more that 50 percent of the outstanding units, on Sept. 1 said a merger with BLife would provide the “best long- term value” to unit-holders and creditors.

Daiwa House has a 10.3 percent stake in BLife, according to Bloomberg data. Tokyo-based BLife gained 5.1 percent to close at 389,000 yen on the Tokyo Stock Exchange before the announcement. Daiwa House lost 0.2 percent to 1,007 yen.

To contact the reporters on this story: Katsuyo Kuwako in Tokyo at kkuwako@bloomberg.net; Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net

Last Updated: September 9, 2009 03:41 EDT