Responding in part to increasing criticism of their U.S. real estate purchases, Japanese investors cut back on their 1989 investments, causing the first drop in their explosive rate of spending in five years, according to a report released Monday.
The study by Kenneth Leventhal & Co., an accounting firm that specializes in real estate, also revealed a big increase in residential development projects, mostly in the Southern California area. Investments in hotel and resort properties exceeded office buildings, where investment showed a sharp drop.
Japanese investment in U.S. real estate in 1989, which included Mitsubishi Estate Co.'s purchase of a 51% stake in Rockefeller Center in New York City, declined 11% to $14.77 billion from a record $16.54 billion in 1988, according to the Leventhal study. Cumulative Japanese real estate interests reached $57.65 billion by year's end, up from $42.88 billion in 1988 and the equivalent of about 2% of the U.S. commercial real estate market.
"This is the first year in five years we see a decrease in the amount of investment by the Japanese," said Jack Rodman, managing partner of the Los Angeles office. He attributed the slowdown to a number of factors.
Those factors included increasing Japanese investment in Western Europe in preparation for 1992, when trade barriers within Europe are expected to end. Investment in the Japanese economy also rose, while the number of available U.S. "trophy properties" has declined.
"I think to a certain extent, the slowdown reflects their sensitivity to the acquisition of symbolic or national assets like the Sears Tower or Rockefeller Center," Rodman said. "One of the largest groups to reduce their investments were Japanese life insurance companies, which are closely regulated by the Ministry of Finance, which had advised Japanese companies to be cautious."
As a result, Japanese investment in office buildings fell to $3.33 billion in 1989 from $8.31 billion the year before. Aside from "the Japanese concern about negative publicity," added Jack Barthell, a Leventhal partner, "U.S. institutions also have been outbidding Japanese investors for many properties that have been available." However, on a cumulative basis, 44% of all Japanese real estate investments are in office properties.
Investments in U.S. hotels and resorts totaled $4.16 billion in 1989, up from $3.58 billion.
The greatest shift in preference, however, was to residential development properties, which totaled $2.22 billion. That was triple the amount invested in 1988 and accounted for 15% of total Japanese investment in U.S. real estate in 1989 compared to only 4% in 1988. The study tracked residential projects but does not include purchases of single homes by individual Japanese investors.
Nearly two-thirds of the residential investment was concentrated in California. "There has been a huge increase in residential development, mostly in joint venture with U.S. development companies. . . . We believe that Japanese equity may make up for the loss of equity due to the problems with the savings and loans," Rodman said. "It is estimated 50% to 60% of housing development in Southern California was financed by the savings and loan industry. With savings and loans in crisis and new regulations limiting their investment, there will be a huge shortfall."
The study showed that Japanese purchases of raw land jumped by $1 billion in 1989, with more than two-thirds of these acquisitions in Hawaii for planned hotels and resort developments.
Leventhal is projecting Japanese real estate investment in 1990 to range between $13 billion and $16 billion. With the first wave of investment by Japanese life insurance and other large companies peaking, Rodman said, "we are seeing a decisive shift in the type of Japanese investor--a second wave created by swelling numbers of development firms, smaller investors and non-real estate companies."
He added that investments from Taiwan, Hong Kong, South Korea and Australia and some European countries such as Sweden will account for a continued flow of foreign capital into the United States.
The study also revealed that the size of the Japanese deals declined to an average of $50 million, although the actual number of transactions was up.
JAPANESE INVESTMENT IN U.S. REAL ESTATE
INVESTMENT BY PROPERTY TYPE
1987 total in 1987 % 1988 total in 1988 % Property type millions of $ of total millions of $ of total Office $ 5,190 41 % $ 8,310 50 % Hotel/resort 4,570 36 3,577 22 Mixed use 740 6 2,416 15 Residential 1,300 10 702 4 Retail 460 4 644 4 Industrial 30 - 310 2 Land 470 4 302 2 Golf course 10 - 202 1 Other - - 81 - TOTAL $12,770 100 % $16,544 100 %
1989 total in 1989 % Property type $ in millions of total Office $3,331 23 % Hotel/resort 4,158 28 Mixed use 2,184 15 Residential 2,216 15 Retail 350 2 Industrial 305 2 Land 1,321 9 Golf course 394 3 Other 517 4 TOTAL $14,775 100 %
Source: Kenneth Leventhal & Co.
Note: Totals may not add up to 100% due to rounding
Total new annual investment in billions of dollars. 1989: $14.77 billion, down 11% from 1988.