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Study sees Japanese disinvesting in US real estate.

After investing a total of $77.3 billion in U.S. real estate since the early 1980s, Japanese investors are selling or financially restructuring $17.6 billion or 23 percent of that total - including $3.9 billion in New York City - according to a study released recently by the national accounting firm of Kenneth Leventhal & Company.

The firm's analysis suggests another $12 billion of property assets are likely to be sold or restructured this year, bringing the total to 40 percent of all Japanese-owned real estate in this country.

In addition, Japanese institutions are "disinvesting" on the debt side as well, says Steven H. Shepsman, managing director of Leventhal's New York office. "The report's numbers cover equity investment, but Japanese lenders were active in New York and other parts of the country, and many of their loans have been, or are expected to be, restructured or foreclosed upon," he says.

Shepsman adds that Japanese lenders are more willing to negotiate loan restructures and to consider other alternatives than they have been in the past.

Jack Rodman, director of the firm's Pacific Rim Practice, says the Japanese have been hard hit by problem real estate loans and investments both at home and in the U.S. The pressure is on to dispose of these assets and redirect some capital into investments that offer higher returns.

"There is a tremendous amount of surplus capital looking to buy assets," Rodman adds. "U.S. banks and the Resolution Trust Corporation have sold most of their problem properties and prices have turned upward, so the Japanese are well positioned to take advantage of this situation in most markets."

In the past five years, Japanese investment in U.S. real estate has fallen 96 percent, from a high of $16.5 billion in 1988 to a low of $705 million last year. The Leventhal study tracked Japanese net disinvestment sales. foreclosures and financial restructuring - in U.S. real estate assets during 1992 and 1993.

"Most Japanese investors have been unable to effectively manage their U.S. real estate investments during the depressed market conditions these past few years," Rodman says. "They have to stop holding on to distressed properties that have little chance of appreciating significantly anytime soon and redeploy the capital into main business lines."

After a recent trip to Japan, Rodman noted that Japanese banks and investors may get the green light from their country's regulators to accelerate write-downs and sales of non-performing investments.

Alternatives to Selling

According to Rodman, Japanese banks unwilling to sell loans or properties that have declined substantially in value can adopt a phased-in sale that allows them to hold a continuing interest in the asset. While in Tokyo, he introduced this new structure, known as a "Japanese conduit."

"The conduit is designed to get problem loans off the books while raising new capital from U.S. investors and the American securities market," Rodman explains. The non-performing loans or foreclosed real estate assets held by U.S. subsidiaries of Japanese banks are transferred to their parent banks, so they no longer come under U.S. banking regulations that require hefty capital reserves, and accounting and regulatory write-downs. The Japanese bank then contributes the assets to a new U.S. entity in exchange for cash, favorable tax treatment and a continuing - albeit smaller - interest.

"The Japanese conduit is designed to meet international accounting and tax regulations. Key to the success of this transaction is the entity's use of experienced managers for distressed properties in the U.S.," Rodman says. "Because time is needed to turn around large-scale office and resort properties to realize the best returns, disposition of these assets will take place over a span of two to seven years."

1993 Investment Goes Into Completing Projects

There was very little "new" Japanese investment in the U.S. last year, with only $154 million spent to buy new properties (mostly smaller hotels and mixed-use projects) at an average purchase price of $22 million. The Leventhal study shows $133 million was spent on finishing resorts, primarily in Hawaii.

"Hawaii is still one of the world's premier destination resorts, but the sustained recession has taken its toll on tourism and negatively impacted many of the Japanese investments there," Rodman notes. "The state of Hawaii leads in disinvestment activity."

Of the cumulative $18.8 billion Japanese investors have poured into Hawaiian hotels, resorts, golf courses and other properties, some 28 percent of this total is in foreclosure, has been restructured or was sold as cash flows fell short of debt service.

Four States Continue to Garner Lion's Share of Investment

Hawaii and California captured 92 percent of total investment last year, including the majority of some $159 million for ongoing development of golf courses and some $179 million for completion of master-planned communities. New York captured $26 million of the 1993 investment total, with Illinois getting another $3 million.

Hawaii, California, New York and Illinois continue to be the top four states for cumulative Japanese investments, with a total of $59.6 billion.

The Kenneth Leventhal & Company Japanese Data Base tracks convertible debt and equity investment in real estate acquired or developed for investment purposes only. It does not include data on manufacturing facilities or the individual purchase of single-family homes.
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Title Annotation:report conducted by Kenneth Leventhal and Co.
Publication:Real Estate Weekly
Date:Apr 27, 1994
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