Japanese Buy Record $12.7 Billion of U.S. Property
Japanese investors spent a record $12.7 billion on U.S. real estate in 1987, an increase of 70% over the previous year, according to new data compiled by an accounting and consulting firm.
The data indicate that the Japanese investment boom is diversifying beyond office buildings and hotels into industrial and residential property, and the investors are expanding from major cities into suburban and secondary real estate markets, such as San Diego and Orange County.
The information is contained in a report prepared by Los Angeles-based Kenneth Leventhal & Co., which is scheduled to be made public Wednesday at a conference in Los Angeles sponsored by USC. An advance copy was made available to The Times.
The $12.7-billion figure is the highest estimate yet of Japanese investment in property in the United States and may mean the Japanese are the largest foreign holders of U.S. real estate.
Even the $12.7 billion may not be the full amount. Leventhal Managing Partner Jack R. Rodman said the figure does not include all real estate transactions or any Japanese investments in other areas, such as the $2-billion purchase of CBS Records Group by Sony.
But real estate has been the darling of Japanese investors for several years, and the Leventhal report provides dramatic documentation of the escalation of Japanese real estate investment in the last three years.
Beginning with $1.86 billion in 1985, the figure rose to $7.53 billion in 1986 and soared to $12.7 billion last year, the report said. In 1988, the firm estimated that the Japanese will add $16 billion to $19 billion to their U.S. real estate holdings, which now total $26.34 billion.
Hawaii led the way last year, with $3.3 billion in new real estate purchases by the Japanese, the report said. California followed, with $2.98 billion, and New York was third, with $2.34 billion.
Traditionally, the Japanese have preferred real estate in Honolulu, Los Angeles, San Francisco and New York. Those four primary markets accounted for 81% of the Japanese purchases in 1985 and 67% in 1986.
But the report found that the Japanese are diversifying into areas around those cities and into other major cities. Last year marked the first time the Japanese invested more money in secondary markets than in the four primary cities--56% in the secondary markets, compared to 44% in the four principal cities, the report said.
New magnets for Japanese investment listed in the report included Orange County, San Diego, Boston, Chicago, Miami, Phoenix and Seattle.
“Clearly, the Japanese strategy of coming into the major markets is expanding into the secondary markets as they gain familiarity with the United States,” Rodman said.
Office buildings and resorts still accounted for the bulk of the investments in 1987. But the report found that the Japanese are investing heavily in retail, industrial and residential property. Many of these deals are joint ventures between giant Japanese construction companies and U.S. developers.
Rodman said the next wave of Japanese investment will include major investments in management and leasing firms in the United States to manage their bulging portfolio of real estate.
A Japanese firm recently bought a 20% stake in Arthur Rubloff & Co., a Chicago-based real estate management firm. Rodman said a similar deal is in the works involving a major Los Angeles firm, which he declined to identify.
The Leventhal report is not a complete survey of Japanese real estate investments in the United States. The firm, however, specializes in real estate transactions and monitors Japanese investments through a database with broad sources of information. The figures include many joint venture construction projects with American firms, an increasingly popular Japanese investment vehicle.
The report said the figures do not include real estate transactions of less than $1 million or Japanese investments in manufacturing facilities, such as Midwestern plants of Japanese auto makers, or other industries.
U.S. government figures, which also are viewed as incomplete, have not been released for 1987. But Rodman speculated that, with their enormous investments during the past two years, the Japanese may have surpassed the British and the Dutch to become the leading foreign investors in the United States.
In a breakdown of total Japanese real estate holdings, the report said office buildings account for $13.72 billion, slightly more than half of the total. The Japanese own such prestige buildings as the Arco-Bank of America complex in Los Angeles, more than half the beachfront hotels in Honolulu and the ABC building in New York. The Japanese spent $5.19 billion on office buildings last year.
Hotels are second overall, at $7.22 billion. Japanese investors spent $4.57 billion on U.S. hotels in 1987 alone, the report said, including $310 million for the Mauna Kea resort on the big island of Hawaii.
Residential developments, both condominiums and subdivisions, made up $1.3 billion in 1987 investments, a big jump over previous years, when annual totals were much less than half that amount.
The report listed 10 reasons for the rising Japanese investment in the United States, including such familiar ones as the appreciation of the yen in relation to the dollar and Japan’s trade surplus and high per-capita savings rate.
It also pointed out that U.S. real estate is attractive because yields on Japanese real estate are a fraction of what they are for comparable U.S. properties, such as 2% to 3% a year in Tokyo, compared to 6% to 9% for prime U.S. commercial properties.
Further, the report said the Japanese are turning to the United States because they are being priced out of real estate in their own country. Japan’s National Land Agency said last week that residential real estate prices rose 68.9% last year.
The choicest piece of commercial real estate in Tokyo sold for the astounding rate of $6.7 billion per acre last year, according to the land agency.
EXPLORING NEW TERRITORY
Japanese investors are increasingly fanning out across the country. This is a breakdown of investment over the past three years in what Kenneth Leventhal & Co. calls “primary” markets (such as Los Angeles, San Francisco and New York) and “secondary” markets (including Orange County, Phoenix, Miami and Seattle).
Source: Kenneth Leventhal & Co.
