Japanese banks fuel renewed property boom

Japanese banks fuel property boom
July 15, 2005 - The Standard

Tokyo's real estate market hums as Japanese banks, eager to expand their loan portfolios, pour ever more cash into property. This is no flashback to the country's doomed 1980s asset bubble: It's happening now.
New lending by Japanese banks to real estate developers rose 15 percent to 8.18 trillion yen (HK$570.96 billion) in the business year to March 31, Bank of Japan data show, even as the volume of new loans for capital investment of all kinds fell by nearly 3 percent.
``It's like a mini-bubble, it's true,'' an executive at a major Japanese real estate firm said, describing the exuberance with which Japanese banks have returned to property finance, lured by bottoming land prices and new demand from commercial and residential builders.
But there are crucial differences between banks' real estate lending today and the speculative frenzy of nearly two decades ago, which left Japan's economy paralyzed and banks saddled with billions of dollars in soured loans.
``Banks have changed the way they lend, the way they manage risk,'' said Jason Rogers, chief credit analyst at Barclays Capital in Tokyo.
A key innovation is the expansion of non-recourse lending, which limits collateral to a single building or project, protecting the borrower's other assets and limiting the size of loans.
Repayment plans rely on rents and other cash flow, rather than expected land-price rises. Banks are also more careful to share risks with developers, typically funding 60-65 percent of a project with loans and leaving builders to pay for the rest through equity.
The rise in property finance reflects banks' return to health, analysts say. Bad loans at Japan's leading banks fell to less than 4 percent of total lending last financial year, in line with their global peers, from more than 8 percent in 2002. Epitomizing the turnaround is Mitsui Trust Holdings, Japan's seventh-biggest bank and one of the biggest property lenders with close to one trillion yen in outstanding real estate loans.
The bank, one of the hardest hit by the bad-debt crisis, posted an 85 percent rise in annual net profit for 2004/05 and forecast further gains. Growth in real estate lending has fed a string of new office towers reshaping Tokyo's skyline.
In a sign of renewed demand for property, commercial land values in Tokyo's five most developed wards rose in 2004 for the first time in 14 years. At the same time, mortgage rates have fallen, dropping below 2 percent in some cases for a 10-year loan, enhancing the appeal to residential buyers.
Still, while new non-recourse real estate loans topped four trillion yen last year, that amounted to just 1.5 percent of Japan's domestic lending, said Yoshinobu Yamada, a bank analyst at Merrill Lynch.
``Experiences during the bubble era have given many people the impression that real estate lending equals high risk,'' he said. But banks' more diverse loan portfolios and other advances in risk management mean there is little chance of a return to bubble-style recklessness, he said.
Instead, he and others familiar with the industry say the biggest risk for banks is that a rising supply of loans could squeeze margins and erode profitability.
Foreign banks that led the return to property finance in Japan in the late 1990s enjoyed sizeable lending premiums, but these have fallen sharply as Japanese banks have joined the fray.
Premiums on real estate loans compared with benchmark interbank lending rates have fallen by a third to half since 2000, a property executive said, and in some cases banks are lending at rates below what the actual lending risk demands. ``With the entry of the Japanese banks, the spreads really started to get squeezed,'' the executive said. ``They're being squeezed every day.''REUTERS

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