Fortress Seeks Japan Properties as Sales Loom: Mortgages

Fortress Seeks Japan Property as Debt Prompts Sales
The office vacancy rate for grade A, or prime, office buildings in the first quarter rose to 7.3 percent from 6.7 percent in the previous three months, according to DTZ Research. Photographer: Tomohiro Ohsumi/Bloomberg

Fortress Investment Group and Nomura Real Estate Holdings Inc. are buying Japanese property as a record 700 billion yen ($9 billion) of commercial buildings are set to be sold over the next three years to repay debt.

About 364.6 billion yen worth of properties will be offered by next year with the rest sold through 2014 as special servicers that oversee properties tied to defaulted loans sell buildings to repay lenders, according to Moody’s Investors Service.

Morgan Stanley Real Estate funds and K.K. DaVinci Holdings, which ran Japan’s biggest private real estate fund, are among landlords that defaulted on loans taken on prior to the 2008 global financial crisis, as easy credit inflated values. Property prices in Tokyo, which have declined about 40 percent from their peak in 2007, have been flat this year, signaling the market is stabilizing, according to CBRE Group Inc.

“The current market has a lack of office building supply,” said Hirokazu Anai, an analyst at JPMorgan Chase & Co. in Tokyo. “Sales of CMBS-related assets will be a positive for the market that has enough capital to buy these assets.”

Bonds backed by commercial mortgages linked to everything from shopping malls to office towers were used to finance $66 billion of property acquisitions in the three years ended 2007, according to data compiled by Deutsche Bank AG. The annual volume dropped about 70 percent in 2008 after Lehman Brothers Holdings Inc. filed for bankruptcy that year and investors shunned securities that bundle property debt.

The 46-member Topix Real Estate Index gained the most in more than a month, rising 3 percent at the close in Tokyo today, while the Tokyo Stock Exchange REIT Index increased 0.7 percent.

Raising Funds

Fortress, the New York-based asset manager with $46.4 billion, had raised about $650 million as of March 31 for its second Japan fund that will invest in real estate-related debt and other assets, according to the company’s earnings statement on May 3. Gordon Runte, a spokesman for Fortress, declined to comment.

Goldman Sachs Group Inc. plans to start as early as July a private real estate investment trust with as much as 50 billion yen to invest in office buildings, and some residential and retail properties mainly in the Tokyo metropolitan area, two people familiar with the situation said last month, asking not to be identified because the information is private.

Nomura Real Estate Asset Management Co., which set up Japan’s first private REIT, is acquiring more buildings that will double the size of the trust. Mitsui Fudosan Co., the nation’s biggest developer by sales, has also set up a private REIT with 72.7 billion yen.

‘Positive Signs’

“We have seen some positive signs in Japan’s property market,” said Atsushi Ogata, senior managing director and head of the fund management division at Nomura Real Estate Asset. “The office market may be near the bottom if it hasn’t already bottomed. Investors are finding it a good time to invest and that is why Goldman also plans to start a private REIT.”

About 507.6 billion yen of loans will mature this year, with more than half backed by offices, and the rest by residential, retail and hotel properties, according to the Moody’s report by Takahiro Okubo, a senior analyst in the structured finance group.

About 600 billion yen to 700 billion yen of defaulted debt will have to be redeemed by 2014, according to an estimate by Koji Kumamaru, managing director in the structured finance group at Moody’s in Tokyo, who spoke in an interview.

Special Servicers

Commercial mortgage backed securities, or CMBS, parcel bonds tied to property loans. The so-called tail period begins when the last loan in a CMBS reaches maturity and ends in about two to three years in Japan when the securities reach so-called legal maturity, the time when underlying assets of defaulted loans must be sold.

So-called special servicers are firms that handle troubled property loans and are in charge of selling properties after defaults.

The first default in Japan on loans included in CMBS rated by Standard & Poor’s took place in the second quarter of 2008 and increased to 137 cases with loans totaling 950 billion yen as of March, according to a May 14 report led by Yuji Hashimoto, a director at the rating company. Lenders have recovered about 501 billion yen after the underlying properties were sold, the report showed.

Ichigo Group Holdings Co., a real estate asset manager, has bought properties from defaulted CMBS and will continue to consider them because of a lack of buildings for sale, according to Wataru Orii, president of Ichigo REIT Management Co., a unit of Ichigo.

Vacancy Rate

The office vacancy rate for grade A, or prime, office buildings in the first quarter rose to 7.3 percent from 6.7 percent in the previous three months, according to DTZ Research. The transaction volume for buildings of all grades fell 45 percent in the first three months of this year from a year earlier, signaling a lack of supply of buildings for sale, said Kayoko Hirao, the head of Japan research at DTZ.

“Banks and other property owners are keeping the assets as they expect property values to increase,” said Hirao. “This has led to a low supply of buildings for sale.”

Values of grade A office buildings are about 60 percent of their peak five years ago, said Andy Hurfurt, an executive director at CBRE in Tokyo.

“It’s this correction that is now making properties in Tokyo look attractive to investors,” said Hurfurt.

Investment Yield

The capitalization rate, a measure of investment yield for properties, has declined to 5.57 percent in the first three months this year from an average of 5.74 percent in the past 12 months, according to Real Capital Analytics Inc., a New York-based research and consulting company. A drop in the cap rate, a property’s net income divided by purchase price, usually signals an increase in property prices.

Japanese Reits, known as J-REITs, that are publicly traded are also set to double the amount of capital they raise through share sales this year amid signs of a recovery in the nation’s property market, according to Deutsche Bank. J-REITs may sell as much as 500 billion yen worth of shares through public and secondary offerings in 2012, said Yoji Otani, an analyst at Deutsche Bank in Tokyo. A total of 216.3 billion yen of share sales have been announced this year, compared with 223.8 billion yen sold in all of 2011, based on data compiled by the bank.

The REIT Index, tracking the country’s 34 trusts, has gained 6.6 percent this year, helped by the Bank of Japan’s asset-purchase program aimed at boosting the economy. The central bank has acquired 90.4 billion yen of J-REITs since it first began in December 2010.

Buyer Demand

There is a lot of demand from the buyers, said Kiyokazu Ishinabe, executive officer and the head of CMBS Servicing Headquarters at Orix Asset Management & Loan Services Corp., which has sold more than 300 buildings since 2008.

“Residential properties have been the most popular among investors based on its stable return,” said Ishinabe. “Since last year, investors have expanded their interest into other types of properties such as office buildings and commercial facilities.”

In Japan, 194.6 billion yen of CMBS has been arranged this year, about 10 percent of the issuance in 2007, according to data compiled by Deutsche Bank.

“The real estate market as a whole is moving to the next phase but the CMBS market is pretty much gone,” said Junichi Shimizu, a credit analyst at Deutsche Bank in Tokyo.

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