Sept. 19 (Bloomberg) -- Land prices in Japan's three biggest cities of Tokyo, Osaka and Nagoya rose for the first time in 16 years as competition intensifies among real estate investment funds for acquisitions.

Property prices in the three cities rose an average 0.9 percent, the Ministry of Land, Infrastructure and Transport said, with residential land prices in three central wards of Tokyo surging 18 percent, while commercial areas gained 14 percent in the year ended July 1.

``In Tokyo, big property companies are getting bullish,'' said Takehiro Sato, a Tokyo-based economist at Morgan Stanley. ``Higher rents will likely lead to a further rally in land prices.'' He spoke before today's report was released.

Total assets held by the real estate trusts known as REITs surged 65 percent to 4.8 trillion yen ($41 billion) in the year to August, STB Research Institute Co. statistics show. Real estate investors are engaged in ``fierce bidding competition'', the Japan Real Estate Investment Corp., Japan's second-largest real estate investment trust, said in a report issued in May.

The number of real estate trusts rose to 38 from 22 in the year that ended in August. The balance of securitized real estate assets in Japan is more than 10 trillion yen, according to a Sept. 1 report by STB Research Institute. About 45 percent of those assets are held by REITs.

Commercial land price declines narrowed nationwide, recording the smallest drop since 1992, as areas in regional cities grew. Commercial land prices dropped 2.1 percent and residential prices fell 2.3 percent nationwide, the land ministry's report showed, compared with 5 percent and 3.8 percent declines a year earlier.

Local Cities

``Some areas in local cities, too, are rising,'' Morgan Stanley's Sato said. ``This is not simply Tokyo versus countryside bifurcation.''

Only areas with profit potential are rising, Sato said, unlike the situation in the land bubble of the 1980s when prices rose indiscriminately.

``We expect the Bank of Japan to avoid the kind of land price rises seen during the bubble period, in light of continuing low interest rates,'' said Kakutaro Kitashiro, president of the Japan Association of Corporate Executives.

The central bank raised rates in July for the first time in six years. Policy makers are committed to gradually raising interest rates even after recent signs that economic growth slowed and consumer prices rose at about half the pace economists anticipated in July, Bank of Japan board member Atsushi Mizuno said last week.

Biggest Cities

Land prices in central areas in the three biggest cities are still at a pre-1977 level for commercial land, and about the same as the 1981 level for residential land.

Some residential areas in Tokyo's Minato and Shibuya wards rose by more than 20 percent from a year earlier, as prices in prestige locations increased, ministry data showed. The biggest increase in Tokyo's three central wards was a 31 percent rise, to 8.6 million yen a square meter, for a property in Minami- Aoyama, in Minato Ward, from 6.6 million yen a year earlier, the land ministry report showed.

Prices around four railway stations along the Tsukuba express line, which started running between Tokyo and the outlying region of Ibaraki in August last year, were among the 10 biggest gainers in percentage terms for residential areas this year, with gains of at least 24 percent.

Biggest Gains

Five of the 10 commercial sites that had the biggest percentage gains, one less than last year, were in Nagoya, in central Japan, with a plot near JR Nagoya Station recording a 35 percent rise. The same site rose 31 percent in value a year earlier. A real estate subsidiary of Toyota Motor Corp. is co- developing the Midland Square Building, in front of Nagoya Station. The project, set to open in March 2007, will be the new headquarters for Toyota's sales division.

Today's land report is based on the assessment of 25,000 residential and commercial locations that are surveyed annually by prefectural governments nationwide. The report confirms the growth trend in land prices seen in earlier reports this year.

Other Measures

Commercial land prices in Japan's three biggest cities rose for the first time in 15 years last year, a land ministry survey released in March showed.

Nationwide land prices along major roads rose last year for the first time in 14 years, a National Tax Agency survey said last month.

Shares in Mitsui Fudosan, Japan's largest real estate developer, fell 20 yen or 0.7 percent to close at 2,670 yen in Tokyo. Mitsubishi Estate Co., the second-biggest developer, slipped 10 yen, or 0.4 percent, to 2,575 yen. The Tokyo Stock Exchange's TOPIX index of 49 real estate companies fell 0.5 percent to close at 1,751.85.

``The nationwide figure for average land prices lacked strength,'' said Kazuhiro Takahashi, a Tokyo-based general manager at Daiwa Securities SMBC Co. ``Some buying of real estate stocks was already noted at the end of last week in anticipation of today's data.''

To clean up bank bad loans, the Japanese government in September 1998 introduced real estate securitization, a financial tool that pools assets into tradable securities, making property investment easier and creating liquidity in the market.

In 2001, Japan's first two real estate investment trusts -- Nippon Building Fund Inc., and Japan Real Estate Investment Corp. -- were established.

``Securitization played a very important role in Japan's recovery,'' said Timothy Marrable, director of research at KBC Securities Japan.

``The freeing-up of capital and assets for more productive uses was essential for getting the economic engine jump- started.''

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; or Eijiro Ueno in Tokyo at e.ueno@bloomberg.net

Last Updated: September 19, 2006 02:27 EDT