Carlyle eyes $1 billion of Japan elderly homes

HONG KONG Thu Feb 21, 2008 4:16am EST

HONG KONG (Reuters) - Shunning a popular but pricey Tokyo office market, Carlyle Group wants to build a portfolio of homes for the elderly worth up to $1 billion in Japan that could be spun off into a listed property trust in a couple of years.

With a global credit crunch hampering big deals in the United States and Europe, U.S. buyout firm Carlyle CYL.UL and other private equity firms are shifting to Asia, where companies need capital for growth but full-on takeovers are often frowned upon.

Carlyle entered Japan's $1.2 trillion property market in 2004, but unlike other foreign property investors, it is focusing on senior housing, and industrial and retail buildings rather than Tokyo's sizzling office market.

Rio Minami, head of Carlyle Japan Real Estate, said the firm wanted to build and buy between 20 and 30 elderly residences over the next two to three years, growing the collection to as much as $1 billion from about $250 million now.

"We're a forerunner in this sector," Minami told Reuters in a telephone interview from Tokyo. "We like senior housing for its strong demographics."

Because of a baby boom after World War Two, followed by a drop in the birth rate, the proportion of Japan's 127 million population aged 65 or older is expected to double to 40 percent by 2055. But with an average $100,000 in the bank, Japanese pensioners are well off compared to those in most countries.

"Facilities for senior housing are undersupplied, making this a promising area," Minami said.

"Many people have perceptions that Japanese live together -- three generations in one house -- but that's in the past," he added. "Society is changing and elderly people want to stay in cities and be close to their families."

REIT SPIN-OFF

Carlyle has teamed up with Tokio Marine Nichido Samuel, which is operating the elderly homes that typically would provide health and other care services.

Last month, the private equity firm bought nursing homes from the Goodwill Group 4723.T for about $136 million, after the government ordered the Japanese firm to temporarily close branches for breaching employment law.

Minami said Carlyle was thinking of spinning the senior housing assets into a real estate investment trust (REIT), securities that pay most of their rent as dividends.

REITs have caught on in Japan in the last six years as investors enjoyed steady income that easily beat rock-bottom bond yields with share price growth from a property market rebound.

"Once the portfolio reaches a size of around $500 million or $1 billion, there should be an opportunity for us to potentially transform it into a senior housing J-REIT," he said.

Among Japan's REITs, LCP Investment 8980.T has some exposure to senior housing, and trades at a 4.40 percent yield, compared to a 10-year bond yield of 1.47 percent.

Minami declined to give the property yield for Carlyle's senior housing. But he said Japanese banks regarded the sector as riskier than other property types, typically giving loans of up to 70 percent of a property's value, rather than the 80 percent they usually allowed for purchasing an office block.

"Senior housing can offer a premium return to office or residential properties," he said. "But this sector has its unique issues. There's typically a single tenant for the property, which means the credit of the tenant is important."

Although Minami believed the Tokyo office market was overpriced, he did not rule out investing in it. With supply tight and space almost full, top grade office yields have dropped to as low as 2-3 percent from 4-5 percent three years ago.

"The office market has been too pricey, too competitive," Minami said. "A correction will happen, and maybe it has already started. We will look at that sector too."

(Reporting by Dominic Whiting; Editing by Anne Marie Roantree)

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