News Archive : Japan Real Estate

Thursday, November 24, 2005

ANALYSIS: Property Funds Steer Money Into Resort Facilities

Tuesday, November 22, 2005
ANALYSIS: Property Funds Steer Money Into Resort Facilities

TOKYO (Nikkei)--With investment capital continuing to flow into property, the holdings of such assets by Japanese and overseas real estate investment trusts (REITs) and unlisted investment funds total about 10 trillion yen, exerting upward pressure on land prices in Tokyo.

There is also a looming danger of these funds increasing their reliance on loans from banks as a fundraising source.

Construction of a large hotel with more than 400 rooms has started near Tokyo Disneyland. A real estate fund contracted out the work to Kajima Corp, with its fund manager saying, "We can expect a stable stream of income from subletting the hotel to a hotel operator." The fund plans to set lower room rates for the hotel than those offered by other resorts surrounding the amusement park.

This year, funds have actively bought resort properties, such as golf courses in Chiba Prefecture, chapels on Okinawan islands, hotels in Hakone -- a time-honored resort area in Kanagawa Prefecture -- and facilities in Guam.

Because investment returns from office buildings in central Tokyo that produce stable rental revenues have been faltering due to the higher prices of those buildings, funds have begun pouring money into buildings in regional cities, seeking to rake in higher returns. They are now looking to resort properties as a potential income source, despite the fact that these properties are vulnerable to economic ups and downs.

Rock-bottom interest rates have also prompted a flow of money into the property market. A total of about 10 trillion yen has already been injected into promising real estate, including more than 3 trillion yen in REITs as of the end of September and slightly more than 3 trillion yen in domestic and overseas real estate funds, respectively.

In line with active investment in real estate, the yields on such investment, which are measured by dividing rental revenue by the purchase price of properties, have been on the decline.

According to a survey by the Japan Real Estate Institute, the expected rate of return on investment in office buildings in Marunouchi and Otemachi -- Tokyo's main business districts -- stood at 4.4% at the end of October 2005, down 1.9 percentage points from the levels seen in 1999.

Although the impact of land prices bottoming out in Tokyo have started spilling over to prices in regional areas, not a few investment firms are moving to sell properties whose prices have slumped.

Orix Jreit Inc. for instance, sold seven properties on Nov. 1, incurring capital losses on the sale of four small buildings in Sendai, Miyagi Prefecture and Mito, Ibaraki Prefecture. These buildings had long suffered low occupancy rates.

Explaining the reason for the sales, an official at the investment firm said, "We want to improve our management efficiency by getting rid of small properties worth less than 1 billion yen."

Some properties have little prospect for increasing their rents, industry observers said.

Investment funds usually procure money from both investors and financial institutions. However, the recent tendency indicates they are relying more on bank loans. Estimates by STB Research Institute Co. show that 70% of their fund procurement this year has comes from borrowings, from slightly more than 60% at the end of last year. This is because increasing the ratio of bank loans amid historically low interest rates makes it easier for funds to raise their dividend yields to investors, an observer said.

Despite some changes emerging in the property market, funds are continuing their brisk investment in the sector. Takashi Ishizawa, chief real estate analyst at Mizuho Securities Co., said, however, "Investors have grown more selective in choosing properties."

-- Translated from an article written by Yusho Cho and Daisuke Zaima, Nikkei staff writers.

(The Nikkei Financial Daily Tuesday edition)