Smitten but not shy: Japan eyes overseas property

The Rockefeller Center Christmas tree stands lit during the 74th annual Christmas tree lighting ceremony in New York, November 29, 2006. The purchase of New York's Rockefeller Center nearly two decades ago became synonymous with the folly of Japanese investors rushing into the U.S. property market just before a crash.

SINGAPORE (Reuters) - The purchase of New York's Rockefeller Center nearly two decades ago became synonymous with the folly of Japanese investors rushing into the U.S. property market just before a crash.

Now, with global real estate prices soaring, Japanese firms are looking abroad again -- and Mitsubishi Estate Co. (8802.T), which bought the Rockefeller Group in the late 1980s, is leading the way with a confidence that markets still have further to go.

Mitsubishi owns a couple of buildings in Paternoster Square where the London Stock Exchange is located and a few projects are in the pipeline, including one in Central Saint Giles, in London's Westend district.

Japan's second-largest property firm also plans to buy foreign property investment management firms to capture investments opportunities around the globe.

"Rents are going up in England and lease contracts are long and that's great for landlords," said Kazuo Sakai, general manager for Mitsubishi Estate's international business department. "Overseas business is our growth area."

In the early 1990s, office prices in some U.S. cities dropped as much as 70 percent, and Japanese firms struggling with a similar property market crash at home had to sell many of their overseas assets.

Mitsubishi Estate was caught short on a $1.3 billion mortgage for Rockefeller Center. The property was later put into bankruptcy.

But undeterred by history, Mitsubishi Estate is one of a band of Japanese companies which have set their eyes on foreign assets as competition and prices heat up at home.

The country's 41 real estate investment trusts, which helped spark a rebound in the Tokyo commercial market three years ago with a rash of deals, are expected to be allowed to invest abroad in the coming year.

Their presence in the global market is still small but that will likely change as many firms are opening overseas offices and looking for local business partners.

Inter-regional real estate purchases by Japanese investors stood at $2 billion in 2006, dwarfed by the $17 billion U.S. investors spent in Europe and the $13 billion Middle Eastern investors invested overseas, according to Jones Lang LaSalle.

According to CB Richard Ellis, 10 out of 12 major global cities, including London and Shanghai, have already seen a 100 percent increase in office investment volume since 2002, depressing investments returns.

Office yields at the end of 2006 were 6.3 percent in New York, 3.75 percent in London and 8 percent in Shanghai.

"FINANCIAL ACCIDENT"

But Kurt Roeloffs, the Asia-Pacific chief executive at RREEF, dispelled the idea that Japanese investors were about to be burnt again, saying they had learnt their lesson.

RREEF, Deutsche Bank's (DBKGn.DE) property investment unit, is hoping to tap Japanese hunger for overseas property by setting up a securities fund in Japan.

"It was a financial accident," Roeloffs said of the late 1980s overseas buying frenzy, which was fuelled by a strong yen.

"I think the Japanese have digested that experience quite well," he said. "The fund managers now look at the world differently, and they are more sophisticated and ask the right questions. They'll do well."

Aided by a gradual recovery in the economy and rock-bottom interest rates to finance projects, Japanese property firms have managed to nearly halve their debt in the last six years and some of them are now posting record profits. Many believe the yen will weaken, so holding overseas assets will boost profit.

Mitsui Fudosan Co. Ltd. (8801.T), Japan's largest property firm, is launching private funds in the United States and Britain and taking on development projects in Singapore, Vietnam, Thailand, India and China. Mitsui Fudosan wants its overseas business to jump to 20 percent of operating profit by 2016, from 7 percent.

Smaller developers are also keen to leave a global mark.

Harakosan Co. Ltd. (8894.OS), a luxury condominium developer based in western Japan, has tied up with an unlisted Chinese firm to develop its first overseas project, a 28-storey apartment building, in Xiangtan in southern China.

Urban Corp 8868.T, a fast growing property developer which has opened up offices in South Korea and Singapore, is moving into Vietnam and Cambodia.

"I think we can make profit and also help developing countries by offering knowledge and brand," said Kazushi Matsuzaki, Urban's managing director responsible for overseas business.

Urban aims to manage about 50 billion yen of foreign assets. But Matsuzaki said the company would pull out of markets once competition intensified, hopefully by selling buildings to REITs -- from Japan.

"We know we are outsiders and once the market is filled with players, we will sell," he said.

(For stories from the Reuters Real Estate Summit in Singapore, New York and London on June 25-27, see <ID:nSP151663>)