Bankruptcy bonanza

Though property prices in Japan are reaching new heights, Japanese property developers are falling to new lows. By Dave Keating

Moods were already glum in the Japanese construction sector at the end of August when Sohken Homes, a mid-size developer, announced it had filed for bankruptcy with ¥33.8 billion ($309 million; €229 million) in debt. It was hardly an isolated incident. Sohken is the latest Japanese developer to fold in the past few months, as the country's developers face difficulty getting funding to buy new properties and refinance existing ones in the face of the credit crunch.

Sohken's announcement came just a day after unlisted apartment developer Sebon folded with ¥62 billion in debt.

Earlier in August, Japanese real estate developer Urban Corp., a widely recognized name, filed for bankruptcy with debt of ¥255.8 billion, making it the largest bankruptcy among listed companies in Japan this year.

Despite the soaring prices that have come along with the country's economic resurgence, Japan's developers are having a very difficult time getting credit, and this has led a number of them into bankruptcy.

According to Tokyo Shoko Research, 60 Japanese property companies went bust by July this year more than double the 27 that declared bankruptcy in the same period in 2007. And the second quarter marked the fourth straight quarterly decline for lending to Japan's real estate industry, according to the Bank of Japan. Some of the larger property firms in Japan to declare bankruptcy over the summer included Tokyo-based condominium builder Zephyr and construction company Tada.

Property values in the country are currently quite high – with Tokyo over the summer overtaking London and New York as the most active office sales market in the world. But despite the soaring prices that have come along with the country's economic resurgence, Japan's developers are having a very difficult time getting credit, and this has led a number of them into bankruptcy.

For its part, Sohken said its difficulties started last summer when it was unable to get new loans. And as property prices have soared, customers have become reluctant to buy new homes, particularly as they worry about the global economic uncertainty.

These distressed developers could become attractive acquisition targets. At press time, reports were still circulating that Urban Corp. was set to become the target of a bidding war between as many as ten international financial firms. Officials involved in the talks have said that competition for the assets is going to be very intense.

The foreign suitors are likely eyeing the company's $4.4 billion real estate portfolio, which could be broken up and sold off for a tidy profit. Observers will be watching the bidding process for Urban closely to see how overseas investors value these properties being sold in distress, particularly in light of Japan's ongoing property sale boom. The country saw office property sales rise 103 percent between the first half of 2007 and 2008, with $12.6 billion in sales at the end of June 2008, according to a recent report from Real Capital Analytics.

And sell-offs from distressed sellers may not be the only opportunity opening up here. With the development companies badly in need of assistance, foreign firms may be able to step in as debt investors as well. Japanese banks such as Mizuho Financial Group, Mitsubishi UFJ Financial Group have reportedly cut their exposure to senior loans after being hit by the subprime loan crisis. Lone Star is one of the firms likely eyeing the vacuum this has created. Last month, it was reported that the private equity and real estate firm had decided to start extending loans for real estate deals in Japan.

In a statement, Urban said the Tokyo District Court would select a buyer for the company by November, with the company naming Deutsche Bank's Japanese unit as the financial adviser for the bidding process. It will be an interesting bidding war to watch as foreign firms eye the developer distress occurring in Japan.

Tishman to raise $1bn India fund
Tishman Speyer is talking to investors about raising a $1 billion fund in a bid to expand its investments in India, according to a report by Reuters. Revathy Ashok, managing director of the New York-based property developer and fund manager's India operations, told reporters at a capital markets conference last month, the firm was planning to raise the fund in the next eight to 10 months, following on from a $350 million private fundraise earlier this year. Ashok said that although the firm hadn't started any road shows yet: “We still have some money left over from a previous [fund] and we are already talking to investors for our next fund.” Real estate prices in India have started to cool over the past six months following a series of interest rate hikes. Ashok said there was still “some pain left for the real estate market in India.”

Oaktree makes $144m bid for Japanese REIT
Oaktree Capital Management has made a tender offer for up to 10.79 percent of the issued investment units of Japanese REIT, Re-Plus Residential Investment. The bid amount is ¥15.72 billion ($144 million, €97.4 million), or ¥260,000 per investment unit. The bid was made by AppleRingo Holdings, a company owned by Oaktreemanaged funds. The company already owns 63,000 units in the REIT through a previous third party allotment, and if the tender offer is successful it will bring AppleRingo's total holdings to 48.4 percent. This is the first tender offer to be launched to acquire investment units in a REIT in Japan. Re-Plus Residential Investment has assets of more than ¥100 billion invested in a portfolio of residential properties throughout Japan.

Walton Street raises first India fund
Walton Street Capital is raising a $1 billion real estate fund for India with a first close expected in the next few months, the Business Standard has reported. The firm's Indian arm, Walton Street Capital India, is expecting a final closing in March next year. The fund will be the first India-dedicated fund for the firm. Previously, Walton Street's $2.5 billion global fund had invested a significant amount in the country, where Walton Street has been operating for the past year and a half. Last year the firm invested about 8 billion rupees (around $200 million) in special purpose vehicles in the country, investing in retail malls, office buildings, housing and hospitality. In November last year, Walton Street made a $100 million investment in Bangalore-based property developer Shriram Properties, picking up an undisclosed stake in the company.

Ashington targets $240m for Australia fund
Australian real estate development firm and fund manager, Ashington Capital, is targeting A$200 million ($164 million; €115 million) for its third opportunistic real estate vehicle. Ashington is expected to close the Ashington Development Fund III by the end of November. This is the first time Ashington has sought equity commitments outside Australia. The fund will target real estate developments on Australia's east coast, particularly in Sydney and Melbourne.