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Japanese Reits likely to be takeover targets

Those trading at less than their net asset value are likely to be bought out

(TOKYO) Japanese real estate trusts and asset managers may be ripe for takeovers after share prices plunged and stricter compliance guidelines raised costs, said property managers including a local real estate executive at Morgan Stanley.

Regulations to boost investor protection went into effect on Sept 30, raising compliance costs which may make it difficult for smaller real estate managers to survive.

Real estate investment trusts (Reits) trading at less than their net asset value are likely to be takeover targets.

‘Consolidation is imminent,’ said Marcus Merner, managing director for real estate at Morgan Stanley Japan Securities Co, at a conference on Wednesday. ‘All the arrows are pointed in the right direction for that to happen.’

The Tokyo Stock Exchange Reit Index has fallen even as land prices advanced.

The index has dropped about one-third in the past six months, eroding gains earlier in the year, after rising defaults of sub-prime mortgage loans in the US prompted some investors to sell stock to make up for losses elsewhere.

Japan may see buyouts of property holders similar to some of those in the US, said Alan Miyasaki, managing director of the Blackstone Group Japan KK.

Blackstone Group LP bought Equity Office Properties Trust (EOP), the biggest US office landlord, for US$23 billion in March, and may have made as much as US$2 billion in profit by selling off properties in EOP’s portfolio, according to Bloomberg calculations. ‘Growth fundamentals in the market place are appropriate to have similar M&A here in Japan,’ Mr Miyasaki said.

Thirty out of 40 Reits listed on the Tokyo Stock Exchange (TSE) trade below their net fixed asset value, according to Bloomberg calculations.

The share declines may have prompted LaSalle Investment Management Inc, a unit of the world’s second-largest commercial real estate broker, to take control of eAsset Investment Corp, the first ever takeover in Japan’s 4.9 trillion yen (S$64.6 billion) Reit market.

LaSalle, a subsidiary of Jones Lang LaSalle Inc, bought the asset manager of eAsset on Nov 19 and plans to expand the trust.

Earlier this month, Goldman Sachs Group Inc and Aetos Capital LLC bought property manager Simplex Investment Advisors Inc for 154.1 billion yen.

Goldman plans to invest about 200 billion yen this year in Japanese property, betting that real estate is short of its peak after a two-year rally.

Tighter regulations under the Financial Instruments and Exchange Law have increased administration costs for compliance standards, and the burden could turn smaller funds into takeover targets, said Yasuhiko Amino,

operating officer and chief marketing officer of Japan at GE Real Estate Corp.

‘The number of opportunities will increase,’ Mr Amino said.

As land prices recover, property values on some companies’ books are increasing at a faster pace than their market worth.

Property assets generated more profit last year for Sapporo Holdings Ltd, Japan’s third-largest beermaker, than its alcohol business did.

Sapporo formed a property alliance with Morgan Stanley on Oct 30 as it seeks to fend off a hostile bid from Warren Lichtenstein’s Steel Partners Japan Strategic Fund, which wants the brewer to sell off its real estate.

Mitsubishi Estate Co and Sumitomo Realty & Development Co, Japan’s second and third-biggest developer by revenue, are among builders that have set up takeover defences this year.

 

Source: Bloomberg (Business Times 23 Nov 07)

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