They're not scrambling to sell yet, but Japanese ardor for U.S. real estate has definitely cooled amid fears of an economic recession, Mideast war and the plunge in the Tokyo stock market, a new report concludes.
In an interim report released Tuesday, Kenneth Leventhal & Co. has reduced its estimate of 1990 Japanese investment in the United States to a range of $10 billion to $13 billion, from a previous forecast of $13 billion to $16 billion. The new figure is below the 1989 spending of $14.8 billion and is projected to dip as low as $7 billion next year, which would be the lowest level since the certified public accounting firm began tracking Japanese investments in 1985.
In the first eight months of 1990, Japanese firms bought $9.1 billion worth of U.S. property. California increased its share of total Japanese investment in the United States to 45.8% from 35.9% last year. The biggest drop was in New York, whose share fell to 3.4% from 15.6% last year.
"I'd call it a dampening of enthusiasm," said Jack Rodman, managing partner of the Los Angeles office. "Last year, we predicted $13 billion to $16 billion if no major economic world cataclysmic event occurred. We believe the credit crunch in the U.S., the Japanese stock market crash and the potential for war in the Mideast is such a cataclysmic event."
Rodman and others emphasized, however, that the Japanese are not bailing out en masse, as recent news reports have suggested. Two firms that reportedly have put properties on the market are Shuwa Investments Corp. and Kumagai Gumi Co., a construction firm. But a Shuwa spokesman said the firm is not currently selling properties, including the Taco Bell building in Irvine, although it might do so in the future.
This year, Shuwa has bought a $60-million office building in San Francisco, a $22-million, 8,000-square feet plot of land on Wilshire Boulevard in Westwood--where an apartment complex is planned-- and the Sierra La Verne golf course in Los Angeles. It also bought a 20-story office building in Philadelphia for $71 million.
"We're seeing very few instances of actual sales, but we are seeing a number of situations where Japanese investors are sitting on the sidelines waiting to see some positive signs," Rodman said.
In Orange County last week, Nippon Shinpan Co. committed itself to development of the 232-acre Monarch Beach resort property. The company, which was a lender to the former owner, has invested about $150 million in the choice coastal parcel.
Several factors have instilled new caution among Japanese investors. Interest rates in Japan have jumped to as high as 8.9% from 4% last year. As a result, it no longer pays for Japanese to invest in projects that offer 8% returns.
"Now they are asking for 9% returns, and there are not too many properties like that," said Saburo Oto, a co-managing partner of Deloitte & Touche's Japanese practice.
In addition, the Tokyo stock market has lost 38% of its value since the end of 1989. That plunge has thrown Japanese banks into disarray, significantly curtailing their ability to make loans for U.S. real estate at their previous pace.
"The decline in value of the stock market has wiped out enormous wealth," said Randal Howard, senior vice president of Eastdil Realty Inc., which is 50% owned by Nomura Securities.
Closer to home, Japanese investors have been hit by the same slowdown in the U.S. real estate market as Americans. Much of their heavy investment in office buildings hasn't paid off. In Los Angeles, for instance, office rents have declined by about 15% in the last year, Howard said. In Orange County, rates have dropped by 25% while the vacancy rates have increased to 22% from 16%, he added.
Japan's Ministry of Finance has discouraged purchases of U.S. trophy properties. And Oto said that after Iraq invaded Kuwait and set off fears of war in the Mideast, "things got real quiet" among Japanese investors.
But analysts said the slowdown in investment was likely to bring overall benefits. Fewer projects will be built, allowing the U.S. market to absorb excess capacity. And without Japanese investors bidding prices up, as they have notably done in such places as Hawaii's residential market, Americans should be able to be more competitive buyers.
"There will be a few painful years, but ultimately it will lead to a strengthening of the U.S. real estate market," Howard said.
The Leventhal study projected that hotels and resorts would continue to dominate Japanese interest, increasing their share to 36.2% this year from 28.2% last year. Office buildings are expected to dive to 13% from 22.6% last year.
Oto said his clients have become more selective and are employing schemes to realize returns more quickly. One client recently bought properties in several states to spread the risks, set up a portfolio and then sold ownership of it under syndication in Japan.
Cooling Trend Source: Kenneth Leventhal & Co.