What was a few months ago a promising opportunity – buying up completed unsold condominium buildings and portions of buildings on the cheap from distressed sources and then moving them to the public at `outlet` sale prices – has suddenly seen a burst in asset bidders.

It seems that the defunct developers that have now found sponsors and those that were able to escape trouble unscathed with credit or cash remaining, have all jumped onto this bandwagon as low-hanging fruit rather than buying land to start the development process again.  It may be that lenders have also pushed in this direction also as the risk of development is seen to be very great in the current market.  What were discounts of 50%+ off the retail line have now been bid up to where there is very little profit left in selling at 20-30% discounts.  This is the case for Tokyo area, recent word has it that up to 50 bidders are arriving at some of these opportunities whereas there were only a few just a few months ago.   Have not heard the thing for regions yet – maybe Kansai will be the next to pick up.

This is great news for the condominium market which has been in the doldrums.   Our take on the market is that somewhere in the next 12-24 months when a near complete halt to new supply arrives, there could be a very quick strengthening of prices.   That may be quicker than most expect – it looks like sentiment on prices hold we are near the bottom.    Again, the world outside of greater Tokyo still has another year or so and some of the regions where aging populations are really setting in are doomed unless something major is done to create new demand – but positive signs for the Tokyo condominium market seem to be increasing.  A good time for the individual investor.

The Financial Times recently focused on continued distress in the Japan real estate market, which we in the industry increasingly feel while developers go defunct daily and debt is still difficult to find.

However, recently regulators have begun intervention in the JREIT market by directing asset managers to remember their fiduciary duty and not sell assets at a discount.  They back this up by monitoring banks and no longer allowing panicky refusal to refinance debt to these low-levered vehicles, which is what caused the NCRI issue. They argue that there was no reason for NCRI to need to file for civil rehabilitation.    Interview with FSA

Vulture investors flocking to Japan for distressed asset deals may be surprised not be able to find them in the JREIT market – except in the extremely discounted pricing of their stock shares.  The pricing of the NCRI bid may also surprise, as the Japan Development Bank is also participating.

But opportunities continue to arise in the real estate market.  Developers unable to sell to REITs and construction companies building it all continue to file for bankruptcy.  There is still a dearth of credit.  The NPL game is starting over again, but the best assets are still tightly owned by the large Japanese corps, conglomerates, and JREITs.

It is clear that distress continues in the Japan real estate market, and now the robust fundamentals are starting to erode due to a now deteriorating overall economic situation.  But we need to remember that the source of distress  in Japan was NOT in the fundamentals (and is not yet, except perhaps A-class office), it resulted purely out of the quick domestic stoppage to real estate debt market liquidity.  In the midst of the mayhem coinciding with a global credit crunch crisis, incidents like NCRI and defunct JREIT sponsors occurred and pulled the JREIT market down.   The government is finally getting their act together and we will likely see JREIT market support kick in as well as new liquidity measures from April and healthy banks looking at the sector again.

For opportunistic investors, the NPL market and developer/construction company-related situations allowing asset / debt discount acquisitions are arising.   For core/equity investors, it may be worth looking at the JREIT market again.

The most recent survey of Japan land prices for 4th quarter 2008 in the “Land Price LOOK Report“, issued Feb 24th by the Japan Ministry of Land, Infrastructure, Transport and Tourism (MLIT) shows how how far things have turned downward for the last half of 2008 after a flat start to correction during the first half.

Both 3rd and 4th quarter 2008 results were down generally across the country, with particularly bad news in Sendai, Nagoya, Osaka, and Naha, central area land prices all down 9%+ for the 4th quarter, following 3rd quarter news which was nearly as bad.

The results for Tokyo were also poor in the -3 to -9% range with bright spots in Marunouchi, Bancho, and Shibuya (0 to -3% range) and negative spots in Ikebukuro and Shinagawa (-9%+).   The popular area of west tokyo down to Yokohama including Kawasaki was generally much better than the north and east side of the city out toward Saitama and Chiba.   That being said, the whole Greater Tokyo area was down for 2 consecutive quarters.   The number of transactions are also down significantly as developers go bust and banks refuse to lend to new projects.   We expect this abrupt slowing of new supply starting in 2008 and continuing for the time being will have a very positive impact on central area condominium prices 2-3 yrs down the road.

Surprising spots where land prices remained robust although not moving upward were right in front of Niigata and Kagoshima Chuo main stations.  Assumedly the major redevelopment of these stations including preparation for the new bullet train access to Kagoshima have held the land prices.

The MLIT official land prices `kojikakaku` for 2008 will come out later this month giving another indication.    For now, the debt liquidity pressure remains but in most cases existing real estate loans to property in private funds and JREITS seem to be working out solutions with lenders to extend financing periods at reasonable terms.   We hope that government measures and new financing sources will ease the market pressure more starting in April.