Mitsubishi targets growth of tiny property funding business

TOKYO Fri Sep 28, 2012 5:20am EDT

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TOKYO (Reuters) - Japan's top trading house Mitsubishi Corp (8058.T) is expanding its small real estate financing business to benefit from rising property purchases by foreign investors in the country and an expected jump in refinancing of loans, a senior executive said.

Diamond Realty Management Inc, a real estate asset management firm wholly owned by Mitsubishi, aims to raise 10 billion yen ($128 million) from Japanese investors in a second fund as early as March to provide mezzanine financing for deals, Diamond Realty's CEO-designate Takashi Tsuji said in an interview.

Mezzanine loans, subordinated to senior debt provided by banks, are used to stretch the amount of borrowing. They were popular during the pre-2008 crisis property boom in Japan when many assets were bought with highly leveraged financing.

After the property market burst in the financial crisis, many providers of mezzanine loans faded away.

But such financing could be in demand now when the property market in Tokyo has started picking up and foreigners are eyeing buying properties.

Angelo Gordon & Co, the $24 billion New York-based asset manager, bought in June the 13-storey Aoyoma Bell Commons property in Tokyo's posh Aoyama district, while MGPA, an Australian property investment firm, bought eight office buildings in the same month for around 12 billion yen.

"It is true that the Japanese banks are willing to lend money, so senior loans are accessible," said Tsuji, who is currently Diamond Realty's chief operating officer and will become its chief executive in November. The company manages about 550 billion yen in assets.

"However there is still a limit for senior lending when the balance of the loans and property value is considered. Mezzanine loans are instrumental in filling the gap between senior loans and equity."

Diamond Realty will approach Japanese pension funds, regional banks and corporations for the fund-raising, Tsuji said. Its first fund, set up in October last year, also raised a similar amount.

REFINANCING OPPORTUNITIES

Mezzanine loans generate higher returns than senior loans, which is good for investors seeking alternative investments when the stock markets are stagnant and bond yields remain low, Tsuji said.

A large amount of loans maturing would create refinancing needs, Tsuji added.

Moody's Investors Service expected about 500 billion yen of loans, which are repackaged as commercial mortgage backed securities, would mature this year, a reflection of the hangover from the last property boom in 2007 when a record 2 trillion yen of CMBS were issued.

Diamond Realty will also start managing its first private real estate trust next month, which is expected to expand to as large as 250 billion yen in five years, said Tsuji.

The REIT will initially start with three assets in retail, logistics and residential properties, worth 32 billion yen, he said.

Mitsubishi's financial business, which includes real estate financing, posted a net profit of 2.9 billion yen for the three months ended June 30, up nearly six-fold from the same period of the previous year. The whole company's net profit for the latest quarter was 98.1 billion yen. ($1 = 77.6950 Japanese yen)

(Editing by Muralikumar Anantharaman)

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