U. S. Realty Investment Pause : Japanese Sitting It Out

Most dollar-rich Japanese real estate investors who had been on a buying spree in the United States until the stock market crash, are now sitting on the sidelines, according to two Los Angeles real estate executives.

But how long this watch-and-wait attitude will last and whether it will result in lower U.S. property values is not clear.

Michael P. Zietsman, vice president of the Los Angeles office of London-based Jones Lang Wootton, believes that property values might decline over the short term while the Japanese stay out of the market.

Zietsman said that a $70-million Los Angeles real estate deal being negotiated by his firm was put on hold following the stock market crash.

Interviewed Executives

John Allen, senior vice president of Grubb & Ellis, Japan-Asia division, believes that property values won't decline--assuming that sellers negotiate effectively.

Allen recently returned from Japan after interviewing 43 executives representing 19 different firms, including C-Itoh Real Estate, Long Term Credit Bank of Japan, Mitsubishi Trust & Banking, Nomura Real Estate and Shuwa.

All invested heavily in Los Angeles real estate until the October crash, but have now largely withdrawn from the real estate market, he said.

Allen and Zietsman see the sitting-on-the-sideline period lasting about six months.

In 1987, Jones Lang Wootton will have handled about $1 billion worth of foreign investments in United States real estate, about 50% of it bought by Japanese.

Reasons Listed

Zietsman listed three reasons for the Japanese apparently taking time out:

1--The stock market decline--not just on Wall Street but also on the Tokyo exchange.

2--The Japanese Finance Ministry's efforts to hold down soaring Tokyo real estate prices.

3--Uncertainty in the yen/dollar exchange rate.

The decline of the Tokyo stock market has made less money available for investment, Zietsman explained.

The Finance Ministry's attempt to cool the Japanese real estate market is being accomplished, in part, by making it more difficult for property owners to borrow money against the equity in their Japanese real estate.

Real Estate Collateral

This limits investors' ability to purchase property in the United States by using their Japanese real estate as collateral.

Zietsman noted that the Ministry of Finance's regulations will not affect the Japanese institutions that are expected to continue their investments in the United States. However, he said, the institutions will be concerned about the exchange rate and the U.S. economy.

The primary factor causing Japanese investors to go to the sidelines, says Zietsman, is their uncertainty over just how far the dollar will fall against the yen.

Allen and Zietsman both said they hear from many Japanese that they believe the dollar will sag to 120 yen to the dollar in the next few months and even lower over a longer period.

Fall of the Dollar

While the dollar has fallen about 50% in the last 2 1/2 years, Allen's sources do not believe it will drop another 50% to the 60- or 65-to-the-dollar range.

When Japanese investors feel the dollar has bottomed out, they will return to the real estate market, Zietsman said. By then, he added, real estate prices might be lower.

What would it take to attract a Japanese investor today?

Zietsman said: "While before, we had investors ready to accept returns on investment of 6% to 7%, the majority are now looking for a minimum yield of 8%.

Decline in Prices

"The Japanese property companies are typically borrowing at 5 1/2% to 6% from their banks. Let's say, the dollar weakens again by 10%. There's still a sufficient margin between debt service and net income. Of course, if the dollar goes down further, cash flow would not cover debt service."

The other side of the coin is that in order to offer a higher yield, the seller must lower his price.

The resulting decline in property values, Zietsman said, not only would affect American owners of real estate but also Japanese who have purchased in the United States.

However, since most Japanese investors have long-term horizons, the decline might not cause them to lose sleep, Zietsman said.

Allen's view is that "Good property is always in short supply, and the Japanese are not the only buyers in the market--although the largest group."

Not Dependent on Banks

Both Allen and Zietsman said that the big Japanese investors, especially insurance companies and investment and pension funds, do not depend on banks.

Allen also believes that Japanese investors might take a lower return, such as 6%, on prime downtown property even if they insist on a higher return on other property.

Allen said that Japanese investors will return to the U. S. real estate market because they continue to believe that this country is a safe place to invest. In addition, he said, Japanese look for an increase in U.S. inflation, and given this, they would prefer to invest in real estate rather than the stock market.

Allen noted that in spite of the stock market decline and other factors, there is still an immense amount of cash in Japan that needs to be invested.

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