U.S. Private Equity Firms Seek Bargains in Japanese REIT Market

Japanese REITs, which have lost more than 50 percent of their value on the Tokyo Stock Exchange since their peak last year, are increasingly attracting the attention of U.S.-based private equity firms like Oaktree Capital Management, which has launched the first tender offer for a REIT in Japan. Japan has been hit hard by the global credit crunch, particularly the REIT market, which relies on banks to fund investments. “Banks (in Japan) are really loath to go into property at all now, even if the underlying fundamentals are really strong,” Peter Culliney, director of research at Real Capital Analytics, told CPN. The good news for firms like Los Angles-based Oaktree is that the price of Japanese REIT shares is cheap now, he said. Calling them “low-hanging fruit,” Culliney said J-REITs are trading at a significant discount. “It’s smart now to buy. They own property that’s worth a heck of a lot more than these shares,” Culliney said. “It’s a great opportunity to buy the best companies. Firms that are being bought into are probably the strongest firms that are suffering from the market inactivity.” Late last week, Oaktree said it was aiming to increase its stake in Re-plus Residential Investment Inc., to 48 percent through a tender offering, the first for a Japanese REIT, according to various Tokyo news reports. If successful, the tender offer would make Oaktree the largest shareholder in Re-plus, increasing its investment to 15.72 billion yen, or U.S. $144 million, Reuters reported. Oaktree had just recently completed the purchase of shares of Re-plus that gave it a 37.6 percent share of the REIT that invests in residential properties throughout Japan. The activity by Oaktree has given Re-plus and the struggling Japanese REIT market a much-needed boost. Shares of Re-plus have risen 6 percent since Aug. 12, when Re-plus announced the first Oaktree investment. The new share sale will enable Re-plus to raise 12.3 billion yen to pay back debt and pay for new projects, according to a Bloomberg News report. Also late last week, Dalton Investments L.L.C., another Los Angles-based investment firm, said it was hiring a new managing director, Yoshisuke Kiguchi, to help it focus more on Japanese stocks and REITs. Kiguchi, who had been a director at Russell Investments, will work on product development in Japan, including investments in distressed assets, according to a Bloomberg News story by Tomoko Yamazaki and Elijiro Ueno. Dalton, which has about 70 percent of its assets in Japan, had announced in May that it was raising about 30 billion yen for a fund that would invest in Japanese REITs, Bloomberg News reported. Culliney said the Japanese REIT market started tightening up just as the land prices were starting to go up a bit last year after being stagnant for a long time. In its mid-year Global Capital Trends report, Real Capital Analytics noted that Asia now accounts for a third of the global property acquisitions, doubling its market share in one year. Transactions in Japan grew 11 percent for the first half of 2008 compared to 2007, the report noted. In office property sales, Tokyo topped the list of active markets and Japan was the second most active country, coming in behind the United States with $12.6 billion in office property transactions so far this year while the U.S. had $28.6 billion, according to the survey. Tokyo had two buildings on the top 10 office deals list compiled by Real Capital Analytics: The Resona Maruha Building, which sold for about $1.6 billion, and the Shinsei Bank headquarters building, which sold for $1.1 billion. “It’s not a booming market where trades are happening all over the place. The record market is long over. We know that,” Culliney said. “But if you have a building that really shines like the GM Building here in New York, that building will still get a really great price.” In industrial deals for the first half of the year, Japan ranked fifth out of 10 countries with about $1.4 billion in deals. It also ranked fifth for retail property deals with approximately $2.3 billion in sales. While hotel property sales were down 65 percent in Japan for the first six months, the $1.6 billion in properties that did change hands was enough to make Japan the third most active country. The $2.6 billion in apartment properties that were sold by mid-year in Japan was 15 percent higher than the same period in 2007, placing it second behind the U.S., which saw a 45 percent decline in multi-family property sales with $19.7 billion but still topped the list, according to the Real Capital Analytics report.