Dec. 5 (Bloomberg) -- Challenger Financial Services Group, an Australian asset manager backed by billionaire James Packer, plans to start a Japanese real estate investment trust early next year, said two people with knowledge of the matter.

Challenger, which manages A$36.5 billion ($29 billion) of real estate, mortgages and utilities, will raise money from Australian investors and target Japanese residential and office property, said the people, who declined to be named before an announcement is made. Mike Tilley, chief executive officer of the Sydney-based company, said in August he may start a second property trust within 12 months.

Macquarie Bank Ltd. and Babcock & Brown Ltd., Australia's two biggest investment banks, have already established real estate trusts in Japan, where land prices in the three biggest cities rose for the first time in 16 years in 2006. Shares of the first real estate trust established by Mori Building Co., Japan's largest privately held real estate developer, have soared 20 percent in their first week of trading.

``Many foreign investors have been looking at the Tokyo property market thinking that after 10 to 12 years of falling prices it was getting cheap,'' said Pascal Masse, who manages about $2 billion of Japanese stocks at Aberdeen Management Asia Ltd. in Tokyo. ``We are now getting to a point where good deals are getting very rare.''

Japan's government in July announced a plan to raise about $100 billion by selling land, housing for officials and office buildings to help pay debt. In Australia, most investment-grade property worth A$5 million or more is already owned by trusts.

Looking Abroad

Angela Warburton, a Sydney-based spokeswoman for Challenger, declined to comment.

Packer, Australia's richest man, is Challenger's biggest shareholder with a 22 percent stake.

Australian property managers are looking overseas for expansion, because most domestic real estate valued at A$5 million or more is owned by property funds, according to UBS AG.

Macquarie Global Property Advisors, a unit of Macquarie Bank, last month raised $865 million for its Japan Core Plus Fund, which will invest in offices, residential and industrial property. The Sydney-based bank, Australia's largest securities firm, plans to raise a further A$350 million for a fund that will invest in Japanese property, two people with knowledge of the matter said in September.

Shares in the Babcock & Brown Japan Property Trust, which began trading in April last year, have gained 10 percent this year. The trust is managed by Sydney-based Babcock & Brown, Australia's second-largest investment bank.

Property Gains

Galileo Japan Trust is seeking to raise A$284 million to invest in office, residential, retail, industrial and hotel properties in Tokyo and other major Japanese cities, according to offer documents. Its shares will begin trading on the Australian Stock Exchange Dec. 11.

Japan's Topix Real Estate Index reached a record this week amid expectations recovering land prices and increasing property demand would boost developers' profits. The index has risen 17 percent this year, outpacing a 1 percent gain by the broader Nikkei 225 Stock Average.

Challenger has hired UBS AG to advise on the Japanese REIT, the people said. The company raised A$327 million ($258 million) in September for an Australian real estate investment trust.

Challenger's assets and loans under management climbed 16 percent in the year ended June 30, 2006. The company's shares have fallen 3.7 percent this year, the second-biggest decline on the 56- member S&P/ASX 200 Finance Index, which has gained 14 percent.

To contact the reporter on this story: Joyce Moullakis in Sydney at Jmoullakis2@bloomberg.net

Last Updated: December 5, 2006 01:43 EST