Could Japanese Realty Holdings Hurt U.S.?
I spent last year working on a book about Japanese investment in the United States. I can’t count the times I heard real estate pundits say, “Sure, we’ll take their money. They can hardly take these investments back home with them.”
But while Japanese investors can’t take their office buildings, hotels, shopping centers, golf courses, homes and manufacturing plants offshore, the issue is more important and complex than that. The real issue is the trading of short-term financial gains for a long-term loss of sovereignty.
The United States is one of the few industrialized countries that does not monitor foreign investment in some manner, and as a result there are no solid numbers for foreign investment in any industry. Estimates by the private sector for Japanese real estate investments in 1988 range as high as $16.5 billion.
Like other foreign investors, the Japanese have been drawn to U.S. real estate for many reasons--relatively higher rates of return in the U.S. market because of its greater depth and sized compared to other markets throughout the world, especially Tokyo; the decline of the value of the dollar against the yen; an affinity for high-quality downtown properties, a market that has been replenished throughout the 1980s by a commercial real estate boom, and, perhaps most important, because Japanese investors view the U.S. market as a safe haven from political and economic turmoil.
Question of Meaning
The question is what does Japanese investment mean for the U.S. real estate industry? Will real estate go the route of the consumer electronics and auto industries?
Can the Japanese capture enough of this decentralized market to become a dominant force, setting rents and determining housing costs for a nation of tenants?
By using the growing power of Japanese-owned banks and influencing policy through the best lobbyists money can buy, can they affect zoning laws and wide-ranging government policies?
And will the real estate industry suffer dire consequences if the Japanese are forced to retreat suddenly because of economic difficulties at home, as the Mexicans did in the early 1980s?
Proponents of unlimited investment claim that it is a stabilizing factor in the overall market and they ignore the perils posed by allowing yet another vital segment of the domestic economy to become vulnerable to exchange-rate fluctuations and other components of a global economy.
Downtown Office Space
Already, Japanese investors control more than 25% of the office space in downtown Los Angeles. The list is impressive: Arco Plaza, with a price tag of $620 million; Broadway Plaza, $210 million; Chase Bank Plaza, $137 million; Manulife Plaza, $62 million; World Trade Center, $75 million; Union Bank Building, $87.5 million; 1000 Wilshire Building, $145 million; 800 Wilshire Building, $47.5 million. And at least 12 other major downtown office buildings.
Does this give them undue clout in downtown Los Angeles? Time will tell. Experience shows that when and where the Japanese have clout, they are willing to use it.
Two years ago it was disclosed that a subsidiary of Japan’s giant Toshiba had exported equipment that helped the Soviets build quieter, hence deadlier, submarines. U.S. congressmen were outraged and eight of them vented their anger by smashing a Toshiba radio on the steps of the capital.
There was great resolve in Congress to slap stiff sanctions on Toshiba by banning all imports from the giant electronics company. But Toshiba mustered a lobbying effort that cost an estimated $9 million and resulted in a watering down of sanctions.
Zoning Policies
If the Japanese can accomplish that in Congress, it doesn’t take too much imagination to see how effectively a handful of major Japanese property owners could affect, say, downtown zoning policy in Los Angeles.
What’s more, there are several scenarios in which I can envision the Japanese investors actually dumping their U.S. real estate, plunging the industry into an economic tailspin.
But first, let’s look at Japan’s real estate market, particularly Tokyo’s.
Japan is a tiny, island nation, about the size of Montana, into which is crammed a population half that of the United States. But the squeeze doesn’t end there. Of the limited amount of land, only 30% is habitable. And half of that habitable land is devoted to agriculture.
Business practices and government policies have added to the problem posed by the excessive demand for a limited supply of land. The price spiral, according to the Journal of Japanese Trade and Industry, stems partly from frenetic land speculation by corporations trying to invest their surplus funds.
Rising Through Charts
Although Japan’s land prices have climbed steadily for the last decade, they have careened off the charts in the last three years, particularly in the major metropolitan areas. For example, according to Japanese government figures, the cost of residential land in downtown Tokyo rose 68.9% in 1987.
And in commercial real estate, the Japanese government reported in 1988 that the choicest piece of commercial real estate in central Tokyo was worth $6.7 billion an acre.
Escalating land prices in Japan are fueling the export of capital to the United States. Japanese property owners are borrowing heavily against their holdings in Japan to make new purchases in the United States. Because of the higher yields available on commercial property in the United States, what seem to be bargain-basement prices for the Japanese, U.S. real estate has proven to be an attractive home for this borrowed money.
Now this works great, as long as property values in Tokyo keep rising.
Liberalizing Land Policy
But in an effort to solve its own problems of overcrowding and hyper-inflated land prices, the Japanese government is considering a combination of measures, including liberalization of land policy to allow more agricultural land to be used for residential purposes, that could increase the Tokyo land supply threefold.
Such a move, although beneficial to the average worker in Japan, would be devastating to the wealthy landowner.
When property values drop in Tokyo, as real estate cycles throughout the world indicate is inevitable, banks might begin calling in the loans. To pay up, the Japanese borrowers will be forced to sell off properties. It is a sure thing that the foreign holdings--from real estate to stocks--will be the first to go.
Now if you think this sounds too far-fetched, that a foreign interest could really have that much impact on this country, think back to Black Monday. For millions of Americans, Oct. 19, 1987, has come to symbolize the new vulnerability of their once-invincible nation.
Nicholas Brady, the former senator who is now secretary of the Treasury, was appointed by President Reagan to chair a commission to study the stock market crash. Despite its thoroughness, the commission’s findings were sanitized and the blame for the crash was apportioned safely among a number of culprits.
Pinpointed Cause
But six months later, Brady put aside political niceties and in a little-publicized speech to institutional investors pinpointed the cause of the crash:
“People ask me, ‘What was it that blew it off on the 19th of October? Was it the twin deficits (budget and trade)? Was it the Rostenkowski (tax) legislation? What was it?” Brady said. “I don’t think it was any of those things . . ..”
“The real trigger,” he said, “was that the Japanese came in for their own reasons and sold an enormous amount of government bonds, and drove the 30-year government (bond) up through 10%. And when it got through 10%, that got a lot of people thinking, ‘Gee, that’s four times the return you get on equity. Here we go, inflation again.’
“That to me, is what really started the 19th--a worry by the Japanese about U.S. currency.”
So what we are seeing here is a loss of sovereignty. The crash was a graphic example of what happens when a nation cedes economic control to an outside power, even a friendly one. Foreign investment evolves from benign to dangerous when decisions affecting a nation’s economic, political and military destinies are made in foreign capitals. With that loss, a nation puts itself in danger of becoming a colony of its foreign owners.
