(Corrects the number for the Bank of Japan’s purchase program in seventh paragraph in story published March 31.)
Japan’s real estate investment trusts may stall property sales and suspend fundraising plans in the short term as the nation’s strongest earthquake, tsunami and nuclear crisis damp investor appetite for assets.
United Urban Investment Corp. (8960), a Tokyo-based REIT, canceled a plan to raise as much as 64.9 billion yen ($783 million) four days after the March 11 earthquake. Rival Invincible Investment Corp. (8963) dropped a 4.8 billion yen share sale to a Fortress Investment Group LLC unit on March 23.
“Deals under agreement may be scrapped because buyers may get cold feet,” Dan Fasulo, managing director at Real Capital Analytics Inc., a New York-based research firm, said in a phone interview. “You will see a bunch of previously agreed transactions being canceled due to the fact that confidence has fallen apart in the short term.”
The slowdown in sales may hurt the recovery of the world’s second-most active real estate market. Credit Suisse Securities (Japan) Ltd. halved its 2011 estimate for investments by Japan’s REITs, known as J-REITs, to 500 billion yen from 1 trillion yen.
“We had expected J-REITs to double their purchase in 2011 from last year, but now I expect them to suspend acquisitions over the near term until a recovery in investment unit prices can be confirmed,” said Masahiro Mochizuki, an analyst at the local unit of Credit Suisse Group AG in Tokyo. The property market will probably take three to six months to recover, Mochizuki said.
The Topix Real Estate Index fell 0.4 percent at the close of trading in Tokyo, while the Tokyo Stock Exchange REIT Index rose 1.2 percent.
The Topix Real Estate Index (TPREAL) has fallen 13 percent since the March 11 earthquake. The REIT index has gained 13 percent since March 16, almost recouping a loss of as much as 14 percent following the temblor, after the Bank of Japan said it will double purchases of Japanese REITs to 100 billion yen.
“Because of the effect of the earthquake we canceled” the sale, Akiko Watanabe, a spokewoman at Consonant Investment Management, which manages Invincible assets, said on March 29 declining to give further details.
The decision to cancel the new issuance was made “after taking into account such factors as the effect of the earthquake, recent equity market conditions, and related factors,” United Urban said in a March 15 statement. Hiroshi Nakamura, a spokesman of Japan REIT Advisors Co., which manages assets of United Urban, declined to comment on March 29.
Japan’s real estate investment trusts more than doubled their acquisitions to 544.4 billion yen last year, according to the Association for Real Estate Securitization, driving prices higher after a two-decade slump.
The quake and tsunami damaged a nuclear plant owned by Tokyo Electric Power Co. 220 kilometers (138 miles) north of Tokyo, sparking the worst nuclear crisis since Chernobyl in 1986 as radioactive materials leak into the atmosphere. Power plants in the country’s northeast were damaged by the tsunami, resulting in blackouts in Tokyo and affecting production at manufacturers such as Toyota Motor Corp. and Canon Inc.
The earthquake may hurt “undercapitalized” property owners that have loans maturing, said Martin Lamb, a director of Asia-Pacific real estate investment at Russell Investments.
“Unfortunately, those owners will be more distressed,” Lamb said. “The velocity of the property recovery will slow, at least in the short term. People will want more information before they make long-term commitments.”
The total defaulted loans from commercial mortgage-backed securities reached 463.2 billion as of February, according to a report by Moody’s Investors Service released on March 7, on top of 1.42 trillion yen of debt from the asset-backed securities that will mature in the next two years.
Banks may become more selective after the quake, said Shoji Misawa, a managing director and head of global coverage group at Orix Corp. (8591), the Tokyo-based real estate financier.
“Lenders will become cautious and be more careful in terms of evaluating properties and land sites when they provide financing to investors,” Misawa said. “We will probably focus more on providing lending to better quality buildings such as those in central Tokyo that have proven to withstand strong earthquake.”
Mizuho Securities Co. said a recession in Japan is “almost certain,” while Stephen Roach, nonexecutive chairman of Morgan Stanley Asia, said in a March 16 Bloomberg Television interview that Japan’s economy may be pushed into its fifth recession in the post-bubble period. The economy shrank in the fourth quarter.
“The investment interest by overseas investors may remain low for a while because it’s difficult to predict Japan’s economic outlook at the moment,” said Takashi Ishizawa, a real estate analyst at Mizuho Securities Co. in Tokyo.
Still, Japan is likely to stage a rebound in the second half, according to a Bloomberg survey of nine economists.
“I don’t see any significant negative impact on property prices in the long run as a result of the recent earthquake or tsunami,” said Buddy Ferrie, general manager of Investment Services at property consulting firm Colliers International in a phone interview in Tokyo.
Shares of the nation’s biggest developers and REITs may bounce back because the quake had “almost no effect” on their buildings, especially those in Tokyo, said Curtis Freeze, founder of Prospect Asset Management Inc., which manages $280 million and has invested in Japan for more than two decades.
“Demand for housing, condominiums, real estate office will be quite firm,” Freeze said in a Bloomberg Television interview on March 22.
Mitsubishi Estate Co. said on March 28 that it completed buying two buildings in central Tokyo from Lone Star Funds on March 14. Japan’s second-largest developer decided to go ahead with the purchase after confirming that no damage had been done to the buildings, said Ryuichiro Funo, a spokesman.
Property damages were limited to less than 0.1 percent of the portfolio values of REITs, whose buildings “apparently suffered little damage,” Moody’s said in a March 24 report.
Japan’s average land prices nationwide fell 3 percent in 2010, narrowing from a 4.6 percent drop a year earlier, the Ministry of Land, Infrastructure, Transport and Tourism said in a March 17 report. Land prices declined every year since 1991, except for 2006 and 2007.
“What’s unusual about this event is that with the nuclear power plant situation unresolved, it is not clear what the future path is and how that will affect the economy and demand for real estate,” said Russell Investments’ Lamb.
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