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Friday, March 13, 1998
Foreign firms attempt to cash in on Tokyo's real estate bargains
Richard Ellis K.K., a real estate consulting firm in Tokyo's Minato Ward, is hiring to boost its workforce from 30 to 50 employees this spring.
A recent rise in the number of foreign customers in Tokyo is a chief reason for the expansion, said Yasuo Kawakami, the firm's representative director. "Land prices in Japan have declined to a range where real estate developers can expect sufficient returns. It's a business opportunity for them and for us," he said.
In 1997, land prices plunged to one fourth of peak levels registered in 1990 shortly before the asset-inflated bubble economy burst. Like Kawakami, real estate experts have begun to see that Japan's land prices -- especially those of commercial property -- are now near the bottom, and they hope foreign multinational firms will play an important role in revitalizing the real estate market.
While Asia's economic crisis has reduced investments from many Asian nations, including South Korea, some of Asia's internationally active real estate developers, such as Hong Kong-based Pacific Century Group, are still aggressively purchasing Japanese land, according to Kawakami.
For example, a Singapore government-affiliated investment company and Pacific Century were among participants that placed relatively high bids at auctions last month for two separate plots totaling 2.4 hectares near JR Tokyo Station sold by JNR Settlements Corp. "There is a growing need for large-scale buildings, and it would be easier for foreign investors to purchase such a huge plot of land instead of trying to buy small plots through separate negotiations with land owners," said Yasuhiro Takeuchi, senior manager of public relations for Mori Building Co.
People in the real estate industry point out that demand for large-scale commercial property remains firm especially with the "Big Bang" liberalization of the nation's financial sector approaching. Leading American and European financial institutions are gradually increasing their employees in Japan in anticipation of new business opportunities.
Takeuchi said that most of the new office buildings to be completed this year are already contracted by those firms. The average vacancy rate for office space usually runs at around 5 percent, but the rate in Tokyo's business districts -- Chiyoda, Chuo, Minato, Shinjuku and Shibuya -- was down to as low as 3.78 percent in January 1998, according to a report by Miki Shoji, a real estate dealer.
According to a survey of 557 corporate tenants of buildings held by the Mori Building Group, average floor space per worker -- an indicator of the spaciousness of an office -- has steadily expanded over the past five years. But average floor space per worker at foreign firms declined 3.9 percent to 17.2 sq. meters in 1997 from a year earlier, indicating they are increasing employees without increasing office space.
"Until 2000, the tight office conditions will continue because Tokyo will be short of new large office buildings," Takeuchi said, adding that most new office buildings will be completed after 2000.
Another Mori group survey shows that only 430,000 sq. meters of new office space will be supplied in Tokyo's 23 wards during 1999, compared with 920,000 sq. meters in 1998, he said.
Internationally known American and European financial institutions are also expanding their presence in Japan's real estate market by buying property-backed non-performing loans.
According to industry sources, Morgan Stanley Securities plans to purchase 1,500 condominiums that remain unsold from Daikyo Inc., a Japanese real estate company. A spokesman at Morgan declined comment on individual deals, but admitted negotiations are under way for some properties. The company also admitted that it is considering buying property-backed bad loans.
"We looked at Japanese real estate for investment after the bubble economy, but there weren't many properties for sale on the market at that time," the spokesman said. "Now, there are more properties in the market as some Japanese companies became more keen to liquidate their land, mostly collateral for their nonperforming loans."
Goldman Sachs and Co. reportedly plans to buy up to 500 billion yen worth of property-backed bad loans from Japanese banks by the end of 1998, while Secured Capital Corp. is also considering the purchase of 1 trillion yen in property-backed nonperforming loans. Merrill Lynch and other financial firms are negotiating similar deals.
However, developing purchased properties could be troublesome because much of the land is reportedly held in very small plots, making them useless. Even with large plots, it takes at least two to three years to construct a building and start generating income.
The interest of foreign firms also indicates the changing nature of the Japanese real estate market. Many industry experts say the market is becoming a highly risky one that requires professional knowledge to scrutinize land values. "Foreign firms that plan to invest in Japan are actively hiring lawyers and appraisers in Japan," Isobe said.