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Japanese REIT Bond Market Improves; Investors Still Face Risks, Fitch Says

Japan’s real-estate investment trust bond market is starting to thaw after two years as the economy rebounds, though property prices would need to rise for a full recovery, according to Fitch Ratings.

“New bond sales are recovering to some extent,” Toru Kobayashi, Tokyo-based director of structured finance at the risk assessor, said in an interview at his office. Some REITS still face risks, he said. These need to see “improvements in property performance.”

Sales of REIT bonds this year totaled 124.5 billion yen ($1.46 billion), recovering from a single public sale of 3 billion yen in 2008 and none in 2009, according to data compiled by Bloomberg. The Tokyo Stock Exchange REIT Index has gained 0.6 percent this year, while the Topix index has dropped 9.1 percent.

Land prices started falling in 2008 as the global crisis deepened with the collapse of Lehman Brothers Holdings Inc., previously a lender to property investors. New lending for real estate by Japan’s banks fell to the lowest in a decade in 2009, according to the Bank of Japan.

“Among some borrowers with a smaller size or inferior financial standings, we see extension of short loans or finance in the short term,” Kobayashi said. “Such REITs haven’t eased their finance risk.”

Japanese real estate asset manager Urban Corp. filed for bankruptcy in August 2008. Japan’s Ministry of Land, Infrastructure, Transport and Tourism said in August 2009 that a 500 billion yen fund would be formed to help REITs refinance their debt.

Tokyo’s office vacancy rate fell in July for the first time in 2 1/2 years, to 9.1 percent from a record high of 9.14 percent in June, according to Miki Shoji Co., a privately held office brokerage.

The extra yield investors demand to own Japan Prime Realty Investment Corp.’s 1.71 percent bonds due May 2011 instead of similar-maturity government debt averaged 0.7 percentage point yesterday, according to Japan Securities Dealers Association prices. It was as high as 2.11 percentage points in April 2009, the prices show.

To contact the reporters on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net.

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