UPDATE 3-Japan property firm Zephyr folds amid market slump

(Updates with details, background)

By Nathan Layne

TOKYO, July 18 (Reuters) - Japanese property developer Zephyr Co 8882.T said on Friday it had filed for court-led rehabilitation with about $893 million in debt, the largest failure of a listed firm in Japan in nearly five years.

A handful of mid-sized Japanese real estate companies have folded in the past few months as banks, reeling from the subprime loan crisis, rein in lending to a sector seen at risk as the world's second-largest economy slows.

Apartment developers like Zephyr have also been struggling to cope with higher construction materials costs and stricter building codes put in place last year that have delayed projects and depressed the housing market overall.

Zephyr said it has had difficulty raising funds after the bankruptcy of wholly-owned subsidiary Kondo Sangyo in late May made lenders wary. Since that announcement, Zephyr's stock has tumbled about 70 percent.

"Bankruptcies among mid-sized property developers have been widely expected in the market, and Zephyr's case probably won't be the last," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

"The biggest problem is that they can't secure funds. Unless banks stop their reluctance to lend money, this will continue. Banks can't lend money even if they want to because the state of the economy is bad."

Selling on real estate shares has picked up steam since the surprise folding of construction firm Suruga Corp 1880.T in late June.

Zephyr's failure with 94.9 billion yen in liabilities makes it the biggest for a listed Japanese company since builder Morimoto Gumi folded in October 2003 with a hefty 215 billion yen in debt, according to Tokyo Shoko Research.

It was not immediately clear how the failure would impact Zephyr's main bank, Sumitomo Mitsui Banking Corp. It also has loans from Japan's other two megabanks, Mitsubishi UFJ Financial Group (8306.T) and Mizuho Financial Group (8411.T).

Financial services conglomerate SBI Holdings (8473.T) said it had 12 billion yen in loans to Zephyr and held 21.36 percent of its equity. SBI said it had plenty of collateral for the loans but warned that it may need to provision for the shares.

Shares of Zephyr, which develops apartments for sale mainly in the Tokyo area, closed Friday down 1.7 percent at 16,700 yen, giving it a market capitalisation of about 5 billion yen.

Other mid-sized real estate firms that have seen their shares beaten down in recent sessions include Urban Corp 8868.T, Kenedix Inc (4321.T), Joint Corp (8874.T), Goldcrest Co Ltd (8871.T) and Zecs Co Ltd (8913.T).

The smaller and mid-sized firms are thought to be much more vulnerable to the tough market conditions than Japan's top 3 property firms, Mitsui Fudosan Co (8801.T), Mitsubishi Estate Co (8802.T), and Sumitomo Realty & Development Co (8830.T).

"Other developers of similar size and with similar operations to Zephyr should be in similar conditions and are very unlikely to escape booking huge losses," said a real estate analyst at a Japanese brokerage, who asked not to be identified.

"The big three developers, on the other hand, should practically be free of impact from the subprime-linked jitters." (Reporting by Nathan Layne, Aiko Hayashi and Yumiko Nishitani; Editing by Sophie Hardach and Tony Austin)