Japanese Investors’ Go-Go Days Are Gone : Drop in U.S. real estate values sends a hard lesson

Buy low, sell high: the universal rule of investing. Many Japanese investors seem to have forgotten the first half of it when they went on a buying binge in the 1980s, paying top dollar for some of the choicest pieces of American real estate. The alarmist bells began ringing: “The Japanese are taking over.”

So much for those specious claims. The stunning decision by Mitsubishi Estate Co. of Japan to walk away from its nearly $2-billion investment in Rockefeller Center in New York is the latest example of a Japanese investor dumping a troubled U.S. property.

Fear that the Japanese were buying up America exploded when the cash-flush investors captured trophy properties across the nation. Their portfolio once included the Pebble Beach Golf Links, the Bel-Air Hotel and Hawaii’s Hyatt Regency Waikoloa Resort. Since those go-go days, Japan’s so-called bubble economy has burst. The nation is mired in a stubborn recession and its banks are suffering under a mountain of bad debt. Meanwhile, U.S. property values have slumped.

This has put the squeeze on the big investors. Last year, Japanese investors sold or offered for sale $6.36 billion in U.S. real estate, nearly double the amount of the year before. Sales of properties in California--the leading state for Japanese investments--accounted for nearly half of that total. The Japanese are expected to unload even more--as much as $10 billion--this year, according to the latest annual survey by E&Y; Kenneth Leventhal Real Estate Group.

In the case of Rockefeller Center, the problem was big mortgage payments and insufficient rental income in a glutted market. Mitsubishi, which held a majority interest, cited the center’s loss of more than $600 million when it filed for bankruptcy.

Luckily for the Japanese sellers, there are buyers--some American, some from other foreign nations. The Los Angeles County Employees Retirement Assn., for example, paid $42 million for the Ritz Carlton Huntington after Dai-Ichi Kangyo Bank defaulted on a $114-million loan on the Pasadena hotel.

The Japanese investors’ position over the last decade has fluctuated along with the rise and fall of the yen against the dollar. Presently the yen is declining against the U.S. currency.

Although the disinvestment may appear enormous, only about 10% of the Japanese investment in U.S. real estate since 1985 had been sold or put up for sale by the end of 1994. And while worries about the yen continue, the Japanese appear to be carefully returning to the United States, especially for non-real-estate investments.

The Bank of Japan reported last month that Japanese investors had purchased a net $18.4 billion in dollar-denominated securities in the first six months of 1995. That brought the buying pace to levels not seen since the late 1980s. The news pleased and surprised American analysts. It indicates Japan’s growing interest in investing abroad, where the returns look better than the 3% on Japanese bonds. The big question is whether the United States will attract as much of that investment as in the past. Foreign investments are to be welcomed here.

Real estate, like almost any investment, can be risky. Unfortunately for the Japanese, that lesson has been enormously expensive.

The Fever Seems Cured

Japanese investment in U.S. real estate from 1985 through 1994. (see newspaper for chart)

Source: E&Y; Kenneth Leventhal Real Estate Group