UPDATE 3-Japan real estate stocks fall after Zephyr collapse

(Updates with background)

By Mariko Katsumura

TOKYO, July 22 (Reuters) - Shares of midsize Japanese real estate companies sank on Tuesday after property developer Zephyr Co 8882.T folded with $893 million in debt in the largest failure of a listed firm in Japan in nearly five years, sparking speculation that others in the struggling sector may fail.

Japanese banks, reeling from the credit crunch, have been tightening lending to real estate companies now seen as risky as sales of apartments weaken and the outlook for the world's second-largest economy dims.

Many developers are now looking to shore up their finances by selling vacant land and buildings, but the extra supply has depressed prices and potential buyers are finding it more difficult to secure loans.

"Even if they sell excess property, buyers would not pay much and seek a big bargain," said Yutaka Kakizaki, a real estate sector analyst from Chibagin Asset Management, adding that this meant developers end up selling property at a loss.

"It will just be a matter of time until we see the next (corporate failure)," Kakizaki said.

On Tuesday, shares of midsize developer Urban 8868.T lost 16.7 percent to 140 yen, their lowest close since February 2004. Shares in C's Create 8921.T fell 14.6 percent to 5,850 yen and those of Joint Corp 8874.T shed 16.1 percent to 401 yen.

Sparking the sell-off was Friday's announcement by Zephyr that it had filed for court-led rehabilitation due to difficulty raising funds in the wake of the bankruptcy of wholly owned subsidiary Kondo Sangyo in late May. [ID:nT292958]

Zephyr, which will be delisted from the Tokyo Stock Exchange on Aug. 19, ended untraded with a glut of sell orders at 14,700 yen, down 12 percent or 2,000 yen from Friday's close of 16,700 yen. Japanese markets were closed on Monday for a national holiday.

Financial services conglomerate SBI Holdings Inc (8473.T), which has a 21.4 percent stake in Zephyr and 12 billion yen in loans to the firm, plunged 12.6 percent to 20,830 yen.

Builders Wakachiku Construction Co (1888.T) and Tobishima Corp (1805.T) also saw their shares plunge because they have loans to Zephyr that may not be recoverable.

But the property sector's subindex .IRLTY.T recovered from earlier losses to end 1.2 percent higher, buoyed by gains in big developers such as Mitsubishi Estate Co (8802.T) as investors figured such firms would have no problem getting funds.

SELLING ASSETS

Zephyr joined a growing list of midsize property companies to go bust this year. In addition to stricter lending, they have grappled with a rise in construction materials prices and a tougher economic climate that has depressed demand for homes.

Their tumbling stock prices have made it more difficult to raise funds from the market. The only option for some developers is to offload buildings no matter what the cost.

Condominium developer Joint Corp, for example, told Reuters earlier this month that it plans no new investments this year as it focuses on reducing its assets. [ID:nT345027] Pacific Holdings Inc 8902.T has unveiled plans to nearly halve its assets in the next few months.

"I don't know how our company can cope with this situation ... the more we struggle (to secure funds), the more pressure we get from the market. It's just an endless negative spiral," said an official at a midsize developer.

"I think foreign funds that are not so hurt by subprime-loan issues would be interested in buying developers like us at bargain prices," he added, asking not to be named because he is not authorised to speak publicly on the matter.

Funds, meanwhile, are now sniffing around for chances to pick up assets on the cheap.

Activist fund Dalton Investments said earlier this month that it could raise up to about $450 million to invest in struggling Japanese real estate investment trusts (REITs). [ID:nT349804]

In February, GIC Real Estate, the property investment arm of the Government of Singapore Investment Corp (GIC), bought the Westin Tokyo hotel from funds managed by Starwood Capital and Morgan Stanley for an undisclosed sum.

But the outlook for the residential market remains weak.

Data by private research firm Real Estate Economic Institute showed that new condominiums put up for sale in Tokyo and neighbouring areas plunged 30 percent in June from a year earlier to 4,004 units, falling for the 10th straight month.

The research firm also said the market is likely to have a tough time in the second half of this year, with Tokyo-area condominium sales expected to fall 16.3 percent in July-December from the same period last year. (Reporting by Mariko Katsumura; Editing by Chris Gallagher)