Aug. 13 (Bloomberg) -- Japanese developers fell the most in two weeks after GDP data revealed an unexpected decline in housing investment and on concern that credit is tightening in the building industry.

The Topix Real Estate Index closed 3.4 percent lower at 1209.23 on the Tokyo Stock Exchange. The decline was the biggest since Aug. 1, when the 55-member index fell 4.1 percent.

Shares of developers declined after gross domestic product data released today showed housing investment fell 3.4 percent in the three months ended June 30, as demand for new condominiums slackened. Economists had forecast a 1.4 percent increase. The slump in sales combined with a decline in bank lending has squeezed real estate companies, leading to a series of bankruptcies in the sector.

``Investors are becoming cautious as the number of real estate companies filing bankruptcies rises,'' said Yoshinori Nagano, a senior strategist in Tokyo at Daiwa Asset Management Co., which manages about $94 billion. ``The share performance of real estate stocks was affected by today's GDP data.''

Zephyr Co., a Tokyo-based builder of condominiums, filed for protection from creditors with debt of 94.9 billion yen on July 18. Kyoei Sangyo, a construction company based in western Japan, sought protection from creditors on the same day. Sampei Construction filed for bankruptcy on July 24.

In all, the number of bankruptcies among real estate companies more than doubled to 60 in July from 27 a year earlier, according to credit research firm Tokyo Shoko Research Ltd.

``Demand for new homes has weakened, and we believe residential investment is unlikely to recover much further in coming quarters,'' said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.

Vicious Circle

More failures could follow, according to Akihito Murata, a research analyst at Deutsche Bank.

``The business failure of a real estate firm is likely to set off a vicious circle of bankruptcies rippling onto construction companies,'' Murata said in report yesterday.

Murata said Sampei failed because of a lack of liquidity, as more claims from construction work became irrecoverable.

``A risk is the possibility that the factors behind Sampei Construction's bankruptcy are not limited to this company but are common to other companies in the industry or even span the entire industry, leading to a succession of corporate bankruptcies,'' Murata wrote in the report.

The 103-member Topix Construction Index fell 2 percent or 10.56 to 499.20.

Harakosan Co., a condo developer, fell to the lowest in almost five years. The Yamaguchi-prefecture based company dropped 12 percent, or 4,000 yen, to 28,800 yen. The last time the company's shares traded lower was on December 15, 2003, when they dropped to 28,500.

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

Last Updated: August 13, 2008 03:51 EDT