Monday, November 28, 2005

Mixed Record for New J-REITs

An interesting article in the Nikkei last Friday pointed out a sobering fact: only half of the J-REITs which came to market in fiscal 2005 have opened at above their IPO listing price. REITs listed by much-watched Japanese fund management companies like Creed Corp. , Asset Managers Co. and daVinci Advisors KK, are among the losers.

Among the reasons are the lower quality of assets, in age, size, and building specifications, compared to those REITs listed by major real estate companies like Mitsui Fudosan and Nomura Real Estate. Another is the perception that the fund managers are spinning off REITs solely in order to recoup their investments of three to five years ago, without regard to the quality of the assets.

Source: The Nikkei Financial Daily

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不動産投資信託 クリード アセット・マネジャーズ ダヴィンチ 実績 価格

Friday, November 25, 2005

State of the Market

According to the Nikkei, J-REITs, private domestic funds, and foreign funds each currently have around 3 trillion yen of real estate assets under management. Because of the fierce competition for good buildings, expected yields for prime Tokyo office have declined from 6.3% in 1999 to 4.4% now, and the best assets can command less than 3.5%. At the same time, average leverage has gone up, from around 60% last year to more than 70% now. The search for yields has forced fund managers to diversify their strategies, making huge inroads into more risky plays such as regional retail, leisure/hospitality, and redevelopment. J-REITs are feeling the heat, too: many are also dabbling in development and some have been prompted to sell off less profitable buildings.
Meanwhile, more investors, both domestic and foreign, have continued to enter the market, expecting to make average leveraged yields north of 10%. Once a field dominated by US investment banks, foreign investment in Japan's real estate market now also involves real estate firms, hedge funds, and institutional investors from the US, Asia, Australia, Europe, and the Middle East. The reasons are twofold: expectations of a rise in rental income as the Japanese economy recovers, and also a sense that the US and European real estate markets are heading toward a cyclical decline. It should be noted, however, that their interest is speculative, and may not be sustainable if conditions in Japan become slightly less attractive, such as an interest rate rise. That being said, Japan's standing as a mature economy with the deepest and broadest real estate market in Asia, and the fact that its markets are finally recovering after a 15-year slump, should ensure continued investor interest for some time to come.
So when is the current cycle going to end? The jury is still out, as Andy Xie of Morgan Stanley wrote this week:
The global savings glut is the key factor in the rise of the global financial economy… he abundance of savings globally has made it more and more difficult to achieve high returns from physical investments. It has made financial speculation an attractive alternative for achieving returns. The rising demand for risk assets has made these assets less volatile, which increases their value ... if demand for risk assets is permanently higher, their value should be higher. It is still too early to say whether this higher risk appetite is a cyclical or permanent phenomenon.
The price of the growth is a declining risk premium…As long as the world keeps lowering the risk premium, financial markets can sustain growth by moving money across the world effortlessly, and I believe it would take a shock to trigger the risk reduction trade that could spell the end of the current cycle.

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More Fallout from the Aneha Scandal

Thirteen condos are to be demolished, and four hotels have stopped operations following revelations of falsified structural reports (see previous post). Meanwhile, Kimura Construction, the builder of many of the projects in question, has gone into bankruptcy. The Japan Times writes:

The builder emphasized lower costs and faster construction to win condo and hotel construction bids in the Tokyo area and posted 12.7 billion yen in sales for the year that ended in June.
... Kimura denied that his firm had ever pressured Aneha, but added that he had nothing but anger toward the architect's office.

The blame game is now in full swing. For his part, Aneha had complained that the false reports were produced under pressure from the construction company to cut costs.
Meanwhile, the Yomiuri Shimbun pointed out a critical loophole in the building-permit system: architects are allowed to choose which company to use for the required regulatory checks of their building plans.

Concerning the entry of private companies into the inspection service business, a senior Construction and Transport Ministry official said: "We had hoped that companies that conduct accurate and speedy inspections would be highly evaluated as a result of competition among private companies. But in reality, it was found that agencies that conducted strict inspections were avoided, and those that quickly passed plans were more popular, making big profits. The system didn't work properly."

I think at least one aspect of the system worked - the violations did come to light, and not after a disaster (as is often the case in other countries). At the end of the day, I hope, the system will be improved, which is all the better for building safety.

News stories linked to above are archived here.

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姉歯 木村建設

Sunday, November 20, 2005

Seismic Consequences

Last week, it was discovered that an architect had falsified structural analyses for 20 condominiums and a hotel in the Tokyo area – 13 of which have already been completed. At least four of the buildings might collapse in an earthquake with an intensity of upper 5 on the Japanese scale of seven.
The architect, Hidetsugu Aneha, admitted to falsifying the reports in order to ‘cut costs’. However, none of the developers or other firms connected to the buildings’ design have admitted any knowledge. The phony numbers were discovered during an in-house inspection by eHomes Inc., the firm which had originally certified Aneha's construction applications for the local governments.
Some shocked residents of the buildings are reportedly making plans to move out as soon as possible. Government agencies have been flooded with calls from other concerned tenants. Keio Presso Inn Co., which operates seven business hotels in Tokyo, said Friday that it closed the Kayabacho hotel named in the report once it learned of the falsified calculations.
Given the obvious nature of some of the reports’ deficiencies, it is unclear why no one - not eHomes, the developer, the local government, or the construction companies - failed to detect the falsified calculations in the first place. The Daily Yomiuri had a few choice words for the building industry in a Saturday editorial.
The Construction and Transport Ministry is reportedly ready to file a criminal complaint against Aneha on suspicion he violated the Building Standards Law. The ministry is also reportedly considering plans to take disciplinary action against eHomes. Some of the residents of the buildings said they also were thinking about filing a civil case against Aneha. However, the Tokyo government has stopped short of offering any special compensation or aid to render the buildings compliant to code.

News stories linked above are archived here.

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マンション 京王プレッソイーホームズ 耐震強度 偽造 姉歯

Saturday, November 19, 2005

Niigata to Pioneer Securitization of Public Assets

The government of Niigata is planning one of the first securitizations of local government owned assets. Two Tokyo housing blocks for employees of the prefecture are slated to be the first subject of the program. The buildings are in Kita-ku, Tokyo, and are valued at approx. 330 million yen (full story – Kyodo/Asahi Shimbun, Archive). Niigata Governor Izumida said on Thursday (11/19) that no specific firms had yet been selected to underwrite the scheme.
This could be the first of many more assets to be securitized by Niigata and other regional governments, who are faced with ballooning public debt, decreasing financial support from Tokyo, and a dwindling population.
The central government, despite encouraging the now-booming market for securitization, has flirted with it only briefly in 2000, when the Ministry of Finance sold some government land and buildings in Tokyo with the method (story: Nikkei).

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新潟県 証券化 資産 国有地

Friday, November 18, 2005

Retail Notes

Italy's Institute of Foreign Trade (ICE) puts out an excellent monthly newsletter with the latest trends in Japanese fashion retail. It has unrivalled coverage of new store openings in the sector, especially by international brands. They also have brief but concise introductions to some of the major domestic players such as Aoyama Shoji, Shimamura, Fast Retailing (Uniqlo), and Beams.
Here is an excerpt from their November edition on the first Banana Republic stores to be opened in Japan. (Translations and links are mine)
In September, Gap opened the first Banana Republic stores in Japan. The four stores are located in Ginza, Roppongi Hills, Nihonbashi and Yokohama. The Ginza outlet is situated in the Printemps Ginza department store and occupies approximately 650 sqm on the street and basement levels, bringing to mind the inauguration in 1994 of the first Gap store on the ground and basement levels of the nearby Sukiyabashi Hankyu. The new store's prices are considerably more expensive than in the United States: approximately 62,000 yen for a dress, more than 30,000 yen for a ladies' jacket and 30,000 yen for a cashmere sweater.
I wonder how successful they will be when a lot of Japanese go to Hawaii to pick up Bana-Ripa clothes at US prices? Of course, the quality and size selection is better in their Japan stores, and they do get points for not going head-to-head with Zara - which in my opinion is a much stronger retailer.
In the September edition the newsletter had a feature on the newest Barneys New York store in Ginza:
Since Barneys New York, affiliated with Isetan, launched a new store last October in Ginza, it has been a runaway success. According to industry sources, it rang up 2.8 billion yen in sales from its 2.900 sqm space in its first five months of operation, 23% more than forecasts. Isetan had counted on a turnover of 5 billion yen for the first year but it has since raised the target to 6 billion.
That's almost 200,000 yen per sqm per month in sales, folks! You can probably infer from that how much rent these high-end stores can pay in Ginza. The article goes on to say, however, that the other two Barneys in Shinjuku and Yokohama recorded year-on-year sales declines of 10.5% and 3.8% respectively.

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バナナ・リパブリック バーニーズ ザラ プランタン 青山商事 しまむら ビームズ ユニクロ デパート アパレル ブランド 売上 銀座 坪効率 出店動向

Friday, November 11, 2005

That'll Teach 'Em Lyin', Cheatin' Real Estate Agents

The Fair Trade Commission wagged its finger at real estate firms who give misleading names to their apartment developments. At first I thought there had been complaints from irate buyers who bought a "Mansion" only to find out that it actually an "Apartment", a "Heights", or even a "Co-op" (see below for definitions).

It turns out they wanted to crack down on those naughty developers who call their newest block of rabbit hutches "Grande Maison Ginza" when the property is actually 20 minutes' walk from there, in like, Hakozaki or something. There has been a lot of this going on.

So from January, you can only call it "Residence Yoyogi-koen No. 7" if it's within 300 meters of the actual park. You know, while they're at it I wish they'd do something about the "seven minute walk from XXX station" crap ! Seven minutes, my pony.

Japanese Apartment Names
Manshon ('Mansion') = Modern concrete apartment building over two stories, with elevator(s).
Apaato ('Apartment') = Smaller 2-3 storey apartment building with smaller units and no elevators, with wooden or light steel construction.
Koopo ('Co-op') = Similar to "apaato", usually small and sometimes with shared bathrooms.
Haitsu ('Heights') = Name given to many "manshon"(usu. older), "apaato" or "koopo"

Note: In the past many property names would follow the pattern of [Owner Name + Type] such as "Yamada Manshon", or "Ichiki Haitsu". Nowadays the trend is towards an [Image/Brand Name + Location] approach like "Dynacity Takanawadai", "Core Road Senri" and "Kyodo Residence", or to dispense with the location altogether, like "Casa May Hills".

Full Story : Nikkei, FTC Fair Trade Directive (PDF)

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公正取引委員会 公正競争規約 物件名称

Another Blow to 'The Family'

Seibu Railways today announced its reorganization under a new holding company to be formed in March. Yesterday, it rejected a rival takeover bid launched by two brothers of the disgraced founding-family scion Yoshiaki Tsutsumi. As expected, the current management picked Cerberus and Nikko Principal Investments (see my previous post) to be the biggest shareholders in the new entity, Seibu Holdings.
Yuji and Seiji Tsutsumi had countered that the Cerberus-led deal would have valued each Seibu share at about Y700 yen per share, while they would be offering 1,150 to 1,300 yen. The cost for 100 percent ownership under those terms would have been 500 billion yen to 560 billion yen (FT). They were joined at the last minute by deep-pocketed Starwood Capital, joining Goldman Sachs and Morgan Stanley (who had been beaten by Cerberus) in clamoring for a piece of the action. Starwood, no doubt with its eye on Seibu’s Prince Hotel portfolio, offered the Tsutsumi brothers funding of up to 5 billion dollars, or about 580 billion yen, enough to fund the entire acquisition, according to the Nikkei. In spite of the higher price, Seibu shrugged off the offer and pressed on with Cerberus/Nikko.
The Tsutsumi brothers will press on with lawsuits to claim ownership and block the formation of Seibu Holdings.

Link - Nikkei/Dow Jones : Seibu Goes with Cerberus, Nikko; Nixes Tsutsumis' Bid

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西武 コクド 堤 サーベラス TOB 株価 スターウッド

Tuesday, November 08, 2005

Alex Kerr on Japan's Recovery

The Japan Times recently had an absorbing interview (full text here, archived here) with Alex Kerr, author of the insightful and sometimes shocking Dogs and Demons :
Things are getting good again economically a little too soon. What that does is lull everyone back into a feeling that everything is going to be OK: "Let's talk about reform, but we don't really have to take the pain of it."

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犬と鬼 アレックス・カー

Friday, November 04, 2005

Got Glut?

Anyone in the business can tell you that yields for Japanese real estate has fallen significantly in the past two to three years. You used to be able to buy a prime office building in Tokyo for a 5% cap rate. REITs now purchase at around 4%, and some recent transactions have even gone below 3.5%. As I’ve covered previously in various posts, the big investors are diversifying their strategies - buying up non-stabilized properties and overlooked asset classes. They’re snapping up buildings in regional areas of Japan, and commissioning developments, which they buy pre-completion. Some of the capital is from international investors – from all the world’s richer countries, including the US, Australia, Germany, the Middle East, and Singapore - but most is from Japan.

The Wall Street Journal yesterday had an important article (archived here) explaining this phenomenon: there is now a worldwide glut of capital looking for investments, chasing not just Tokyo office buildings, but anything with a reliable return. The world’s pension funds, insurance companies and mutual funds have $46 trillion at their disposal, up almost a third since 2000. U.S. companies alone have $1.3 trillion in liquid assets. This capital, when compounded through leverage, pushes up the price in investment markets, in turn reducing overall return. This means that investors are demanding less compensation than usual for taking on the risk inherent in owning the assets. This in turn can lead to a feedback cycle of more money chasing fewer returns. Or as one person quoted in the article says, "It’s a global game of chicken."

Sounds like you better get some while it lasts!

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Image : The view from my office (the setting sun can sure be pretty).

Tuesday, November 01, 2005

Japan Economy Outlook : Recovery to Last Through 2012

A few excellent articles on Japan’s recovery :

Jesper Koll (Chief economist, Merrill Lynch Japan): Japan has successfully worked off its post-Bubble excess debt, excess capacity, and excess unemployment. Labor costs are falling, and structural inefficiencies have been effectively diminished, allowing for increased productivity. The chances of Japan re-emerging as a high-growth industrial powerhouse are very high. (See also this summary by the Japan Stock Blog; Full article)

Yuji Shimanaka (Chief economist, UFJ Institute) : Economic indicators, in particular that for firms’ capital investment, show that Japan has started a phase of recovery, with the next peak of the cycle in 2010. Land prices will probably start growing again nationwide in 2006. In contrast, the US housing bubble has started to burst, indicating that its economy will peak in 2007 and enter into a recession that will last until 2012. (Full article, in Japanese)

Nobuyuki Saji (Chief economist, Mizuho Securities) : The Japanese economy will definitely remain on a recovery track through 2013. Over the next eight years, the economy will maintain an annual growth rate of 2.5-3% in real terms, though it will likely go through correction phases. Corporate capital spending will initially serve as the main driving force. (Full article)

Worth mentioning here is Mr Saji’s opinion that the decrease in the labor force will actually boost corporate spending, and the generational shift will boost consumer spending (paraphrased below):
The retirement of baby boomers in large numbers, due to take place in 2008 and 2009, will cause a shortage of skilled labor; however, this will prod manufacturers into accelerating factory automation investments through 2007.
From 2008 onward, consumer spending will pick up steam again, because the children of the baby boomers will enter their 40s and become able to spend more money on culture and leisure. As the ratio of unmarried people in their 40s will be higher than now, their consumption on activities such as trips, sports and cultural involvement, which they often enjoy with their friends, will increase. The ratio of working women will grow to about 72%, a figure on par with the U.S. level, and will continue to stimulate consumption.
Therefore, the nation's overall consumption expenditure seems likely to continue growing at an annual rate of over 3% through 2013.

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日本経済 予測