30-Year Loan? How About 50? Japan Bank Zeal Surprises Loadstar

  • Regional bank loans to real estate sector rise to 36% of total
  • ‘Financial firms are getting aggressive’: Loadstar president

Loadstar Capital K.K., a Tokyo-based real estate investment firm, asked for a long-term loan to buy an office building. It wasn’t expecting to get money for 50 years.

QuickTake Negative Interest Rates

“We had thought a 30-year loan would be about the limit, but negative rates have changed things for banks,” said Tatsushi Iwano, the president of Loadstar and a former fund manager at Goldman Sachs Group Inc. “At a time when a lot of banks are having trouble finding borrowers, the real estate sector is attractive because there’s collateral and financial firms are getting aggressive.”

Iwano said his firm got funds from a regional financial institution he declined to identify, reflecting a jump in property funding by smaller banks. Such loans by regional lenders made up 36 percent of the total as of March, up from 27 percent seven years earlier, according to data from SMBC Nikko Securities Inc.

Japanese banks are under pressure to boost revenue as negative rates weigh on their bottom line, with regional firms predicting an 18 percent drop in net income in the year started April 1 according to the Regional Banks Association of Japan. Total loans to real estate companies hit record levels at the end of March, prompting Mizuho Securities Co. and Deutsche Securities Inc. to warn of the risk the property market could overheat.

“A 50-year loan is abnormal, and the fact banks need to make such loans is problematic,” said Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo. While the ratio of bad debt held by regional banks isn’t significant now, “if the current low interest rate environment continues, it will increase in the future and cause problems,” he said.

Banks can’t make money on short-term loans because of the disappearance of lending margins, so they are offering more long-term, fixed-rate funding, Miura said.

New loans to the real estate sector totaled a record 11.2 trillion yen ($106 billion) in the year ended March 31, exceeding the 10.2 trillion yen in fiscal 2007 at the start of the global financial crisis, according to Deutsche Securities. Bank lending to property companies as a ratio to all loans is now 14.5 percent, a level that could prompt authorities to clamp down on such funding, the brokerage says.

“Financial firms’ lending to the real estate sector has risen to levels where it wouldn’t be surprising if lending regulations are imposed, so it’s doubtful loans will continue rising,” said Yoji Otani, an analyst at Deutsche Securities in Tokyo.

For a story about investing in Japanese hotel debt, click here.

Banks still focus on whether a prospective borrower has property as collateral when deciding whether to offer a loan, and that means that venture firms with no assets are at a disadvantage when fundraising, according to Takashi Ishizawa, a senior researcher at Mizuho Securities.

Some signs are emerging that in spite of negative rates, Japan’s real estate market is slowing.

The number of new condominiums sold dropped for a seventh straight month in June, according to Real Estate Economic Institute Co. data. Rents at top-level Tokyo office buildings rose at a slower pace for a second straight quarter in the three months ended June 30, Jones Lang LaSalle Inc. data show.

“In the short term, I don’t see any reason for the real estate market to collapse,” said Masahiko Sato, an analyst at SMBC Nikko Securities in Tokyo. “But when you look at Japan’s population trends, it seems risky” that loans to the property sector are growing so much, he said.

Shrinking Population

The population of the aging nation shrank 0.12 percent last year, according to internal affairs ministry data. Japan is estimated to have 32 percent fewer people by 2060 compared with 2010, the National Institute of Population and Social Security Research says.

“Unnecessary risks that banks took could come back to haunt them,” said Masashi Mizunaga, the chairman of Star Mica Co., a Tokyo-based real estate investment company. “Property prices are above levels before Lehman Shock. I don’t understand the view that prices will continue rising at a time when the population is shrinking a lot.”

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