The latest JREI investor sentiment survey findings were just reported, opinions gathered in April so a fairly fresh view to the market.   Summary: Expected cap rates have gone up 50-100bp over the last survey 6 months ago and still 20-30bp higher than current market cap rates…  although I don`t believe there are enough transactions happening to underwrite that well.

The core of core Marunouchi/Otemachi Class A Office has moved moved upward to 4.5% or 300bp over the risk free and to match core Ginza Retail at the same 4.5% which are now the theoretical bases to which we add risk premium points for other classes, namely:

Omotesando Retail at 4.7%, Suburban Tokyo retail 6.5%, Regional Retail Downtown areas 6-7% / Suburban 7-8%

Tokyo Warehouse Single Tenant / Multiple Tenant 6%, other metropolitan hubs 6.3% to 7%

Residential at 6.0% to 6.3% and in the regions 6.6-6.7% for Yokohama to a high of 7.7% for Sapporo

Economy Lodging Tokyo 6.1%, Osaka 6.8%, Nagoya 6.9%, Fukuoka/Sapporo 7%

from Seeking Alpha, click link for entire article: Japan’s J-REIT Market to Get a $10.5 Billion Bailout

`While talking about it since March, the Japanese government (specifically, the Financial Services Agency and the Land Ministry) appears to be in the final stages of pumping over $10 billion into the J-REIT market and removing impediments to consolidation in the industry. The market-weighted average yield has recently been as high as 7%, but investors remained leery because of balance sheet and liquidity risk.`   Here`s their JREIT performance graph demonstrating the recent stabilization.

Banks can not very well avoid refinancing JREIT debt now with all of the government back up and regulator pressure.  This and the Lonestar pricing of New City has put a floor on the market – and likely an indicator of a bottom for the J-REIT sector.

It is `officially` time to get into the J-REIT market.

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.