Echoes of the 80's: Japanese Return to U.S. Market
By TERRY PRISTIN
Published: January 26, 2005
Japanese investment in United States real estate soared in the 1980's, as companies and financial institutions poured nearly $300 billion into high-profile properties like Rockefeller Center in New York and the Pebble Beach Golf Club in California. But the value of many of these assets plunged by as much as 50 percent in the early 90's, and for more than a decade, the Japanese have been sellers rather than buyers.
After a 15-year hiatus, however, Japanese capital is re-entering the United States market, but much more quietly and cautiously this time. "They have begun to test the waters again," said Bill Collins, who runs the capital markets group at Cassidy & Pinkard, a real estate services firm in Washington.
For the first time in years, for example, Mitsui Fudosan, Japan's largest real estate company and the owner since 1986 of 1251 Avenue of the Americas, the former Exxon Building, is searching for other buildings to buy in the two most competitive markets in the United States, said Michael W. McMahon, a senior vice president. "We're targeting Midtown Manhattan and Washington, D.C.," he said.
A survey released this month by the Association of Foreign Investors in Real Estate, a trade group, found that most of its members expect the Japanese to lag only Germans and Australians as the most active foreign buyers of United States property.
"We have seen more activity from Japan in the past six months than we have in the past six years," said James A. Fetgatter, the trade group's chief executive. "I have Nikkei Shimbun coming in to talk to me today," he said, referring to the Japanese newspaper. "I've never met anyone from Nikkei Shimbun before."
So far, much of this Japanese money has been used to buy shares in publicly traded companies, rather than individual buildings. In October 2003, it became legal in Japan to sell portfolios of shares in real estate investment trusts, allowing special funds to be marketed specifically to Japanese investors. Some of these funds buy shares only in REIT's based in the United States, which largely own property in this country, while other funds own a portfolio of REIT shares from various countries, including the United States.
Since these funds were first sold, investment in them has steadily increased, reaching $4.6 billion last month. Although this sum is just a fraction of the total $300 billion invested in United States REIT's, real estate specialists say it is significant nonetheless. "It's not a huge number, but it's an encouraging number," said Michael R. Grupe, a senior vice president of the National Association of Real Estate Investment Trusts, a trade group. "It's been a fairly even growth path."
Takayuki Kiura, the managing director of a new Tokyo office that Heitman, a Chicago-based company that manages capital on behalf of pension funds and other investors, opened just this month, estimates that two-thirds of the $4.6 billion is invested in United States REIT's, with the rest in REIT's in other countries.
A treaty that went into effect on July 1 gives Japanese investors in United States REIT's the same tax status as American investors, enhancing the appeal of these funds, said Tony Edwards, the general counsel of the REIT trade group.
Heitman is just one of several American companies that have teamed with Japanese financial institutions to create REIT funds that are marketed to investors in Japan. Heitman manages about $270 million worth of assets for three funds with Nomura Asset Management and a fourth with Sumitomo Trust Bank.
AEW Capital Management, a Boston company whose clients are mainly institutions, has a similar relationship with Nissay. And LaSalle Investment Management, part of the real estate services company Jones Lang LaSalle, manages a global REIT fund for Nikko that is aimed at Japanese investors.
The American companies say they are focusing on Japan because it has an aging population with a long tradition of accumulating savings and a need for current income that cannot be met by low-yielding government bonds.
REIT's, which pool money from investors to buy property, are required to return 90 percent of their taxable income to their investors, which means that they usually offer higher yields than most other types of securities.
The Japanese have their own real estate investment trusts, but the industry is still relatively new, with only about 15 so-called J-REIT's in existence. The average dividend is about 3.5 to 4 percent, compared with an average of 6 percent for American companies.
"Besides that," Jeroen Beimer, an analyst for Global Property Research, a company in Amsterdam that provides data for financial institutions, wrote in an e-mail message, "J-REIT's primarily invest in Tokyo offices and to a lesser extent retail, so the spread of the portfolio in sector and geographical terms is limited. Another reason is that the underlying Japanese real estate market has faced tough times in the past 10 years, with declining prices and rising vacancy rates. The confidence in the market is therefore not that high."
Mark A. Grinis, a partner in Ernst & Young's real estate practice who recently moved back to New York after spending seven years in Tokyo, said that given their experiences of the past decade, Japanese investors would logically find more transparent and liquid investments in real estate attractive. "You have a menu of options today that you didn't have in the late 1980's," he said.
The new focus on Japan is part of a growing globalization of the REIT industry. Mr. Grupe of the REIT trade group said that publicly traded real estate companies can be found in about 20 countries. "They come in all different forms," he said. "Many of these countries tend to use the moniker 'REIT' to refer to that particular sector, but not all."
This trend is providing investors with a way to further diversify their real estate portfolios, said Michael J. Acton, the director of research for AEW Capital Management. "Every city has its own cycles," he said.
Although the downturn in the United States real estate cycle in the early 1990's caused painful losses for many Japanese investors and banks, the Japanese continue to have significant holdings in this country. Mitsubishi Estate, for example, lost control of Rockefeller Center itself, but the company, through its wholly owned Rockefeller Group, still owns 7.7 million square feet of space there, including the Time & Life Building at 1271 Avenue of the Americas.
Early last year, the Association of Foreign Investors in Real Estate reported that Japan was the leading source of foreign investment in American real estate, with a 26 percent share, the latest figure available. But Mr. Fetgatter cautioned that "any statistics about foreign investment are always sketchy" since the countries do their own reporting.
Sumitomo Life Realty (N.Y.) Inc., a subsidiary of the large Japanese insurance company (and a separate company from Sumitomo Trust), has a relatively new business strategy for geographically diversifying its United States portfolio in the hope of lowering its risk, said Norio Morimoto, the company president. Sumitomo Life Realty formed a partnership with Hines, the Houston-based real estate company, to invest in prime office buildings.
The Japanese company subsequently sold four buildings to the fund: 499 Park Avenue, 425 Lexington Avenue and 600 Lexington Avenue in Midtown Manhattan and 1200 19th Street in Washington. About one-quarter of the investors in the Hines-Sumisei U.S. Core Office Fund, which now owns four more buildings in Houston and San Francisco, are Japanese, said Charles N. Hazen, the president.
But other Japanese real estate companies are once again seeking to compete for buildings directly. Mr. Collins said that starting about six months ago, a "handful of seasoned real estate companies" began looking for buildings priced around $100 million. Woody Heller, who heads the capital transactions group at Studley, the brokerage firm, said: "We haven't seen any high-profile purchase, but we're all beginning to have conversations with them. Whether they will be competitive is unclear in my mind."
Mr. McMahon, the Mitsui Fudosan America executive, said his company was not looking for trophy buildings but rather for those that have potential for improvement. He acknowledged that bidding for properties in Washington and Midtown Manhattan, is challenging. "We don't know at this point whether we're going to be successful," he said.
In the last decade, Japanese investors have become more sophisticated about market cycles, Mr. Morimoto said. "We learned a lot from the experience," he said. "The best strategy is to diversify the location and timing of the investment, and by doing that we could have diversified our risk."
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