Fortress Investment Group LLC, the investment company overseeing $46.4 billion, wants to raise $1 billion for a Japanese property fund by the end of the year, two people familiar with the plan said.
The company’s second Japan Opportunity Fund, which invests in assets including real estate debt, is in the process of buying $200 million of debt from Japanese and foreign banks with a total principal balance of $1.3 billion, said the people, who requested anonymity because the information is private. Todd Ladda, New York-based managing director and head of capital formation for credit at Fortress, declined to comment.
Fortress is seeking bargains in Japan’s property market following a record amount of defaulted debt from lending extended prior to the 2008 global financial crisis. Lenders and holders of commercial mortgage backed securities, who have been stuck with loans that no longer reflect their initial values, are seeking exits amid declines in real estate prices.
“Fortress is betting on the future recovery of property prices,” said Yoji Otani, an analyst at Deutsche Bank AG in Tokyo. “Acquiring good properties in Tokyo can be difficult because that can be very competitive. Buying real estate loans is a way to gain control of properties.”
Japanese institutional investors such as pensions and insurance companies account for 40 percent of investments in Fortress’s new fund, while those from the U.S. and Europe make up the rest, the people said. The fund, which will stop accepting new investment after December, has a targeted return of more than 20 percent, they said.
The fund, with a three-year investment period, started in December and raised $650 million as of March, according to the New York-based company’s earnings statement.
Fortress’s previous fund, the Japan Opportunity Domestic Fund, which raised 75 billion yen of capital in June 2010, generated 46.1 billion yen of returns as of the end of 2011, the company said March 14. In 2010, the fund bought loans made to Tokyo-based K.K. DaVinci Holdings, which ran Japan’s biggest private real estate fund.
Bonds backed by commercial mortgages linked to everything from shopping malls to office towers were used to finance $66 billion of property acquisitions in Japan in the three years to 2007, according to data compiled by Deutsche Bank. The annual volume dropped about 70 percent in 2008 after Lehman Brothers Holdings Inc. filed for bankruptcy and investors shunned securities that bundled property debt.
As much as 700 billion yen of defaulted CMBS debt is set to be redeemed in the next two years, according to an estimate by Koji Kumamaru, managing director in the structured finance group at Moody’s Investors Service, based on the CMBS it had rated.
Office property prices in Tokyo, which have declined about 40 percent from their peak in 2007, have been little changed this year, signaling the market is stabilizing, according to an estimate by Andy Hurfurt, an executive director at CBRE Group Inc. in Tokyo.
The building transaction volume fell 45 percent in the first three months of this year from a year earlier, indicating a lack of supply for sale, said Kayoko Hirao, the head of Japan research at DTZ Research in Tokyo.
“The market is approaching the bottom now in Japan,” said Hirao. “ There is a lot of potential to invest here now.”
The capitalization rate measuring investment yield for Japanese office buildings worth more than $10 million has declined to 5.57 percent in the first three months this year, down from an average of 5.74 percent in the past 12 months, according to Real Capital Analytics Inc. A drop in the cap rate, which is a property’s net income divided by the purchase price, usually signals an increase in real estate prices.