COLUMN ONE : Japanese Investors Say ‘Aloha’ : Their Hawaiian real estate buying boom has gone bust. As they retreat, the shell-shocked state hopes to attract other Asian suitors and U.S. bargain hunters.


It wasn’t long ago that the Japan Airlines flight from Tokyo to Honolulu was a virtual commuter shuttle for cash-rich Japanese businessmen shopping for resorts and mansions. And residents were holding rallies to protest the flood of Japanese money into their tropical islands.

Today, the Boeing 747s landing at Honolulu International Airport are disgorging somber bankers, accountants and lawyers assigned the messy task of cleaning up a disastrous Hawaiian real-estate binge that has cost Japanese investors, by one estimate, a staggering $6 billion.

And local folks are lamenting a dramatic Japanese retreat that has sent hotel and luxury home prices plummeting, pushed vacancy rates for prime office space in downtown Honolulu to 17%, and confronted local governments with a shrinking property tax base.


“There’s a great deal of anguish in this town about how people will survive without Japanese investment,” said a Honolulu attorney who represents several prominent Japanese companies. “Hawaii is in tough economic shape.”

For Hawaii, which fed from the trough of Japan’s economic success in the 1980s, it’s pay-back time. As such, it is a striking illustration of the international implications of the crisis in Japan’s mammoth banking network.

Japan’s Ministry of Finance, which is in charge of shoring up the nation’s crippled banking system, is pressuring its financial institutions to clean up more than $400 billion in bad loans accumulated during the bubble years, when Japanese land and stock prices went through the roof.

The banks and other lenders, in turn, are foreclosing or taking back troubled properties and putting more heat on Japanese owners and investors to get rid of problem assets in places like Honolulu, Los Angeles and New York.

One of the more spectacular examples: the recent decision by Mitsubishi Estates Co. to walk away from its $2-billion investment in New York’s Rockefeller Center.

But the phenomenon is particularly keen in Hawaii, whose relatively tiny economy received a whopping one-fourth of Japanese investment in the United States from 1985 to 1990. At the end of their buying spree, Japanese investors owned more than 60% of the state’s hotel rooms, 28 of its 46 private golf courses and many of its most lavish private homes.


Today, Hawaii’s courts are backlogged with cases of Japanese real estate projects gone sour.

A group of Hawaii economists, real estate executives and major landowners recently estimated that the drop in real estate values in Hawaii has cost Japanese investors one-third of the $14 billion to $18 billion they invested from 1985 to 1990, according to a report by Hastings, Conboy, Braig & Assn. Ltd., a Honolulu real estate consulting firm.

“The question is not if they’ll sell, but when,” said Alwyn Chikamoto, a senior vice president at Honolulu’s Central Pacific Bank, which is partially owned by Tokyo-based Sumitomo Bank.

For all the anguish, many are betting that Hawaii’s future remains bright--at the right price.

Following the Japanese accountants through the Honolulu airport is a small army of bargain hunters in the form of U.S. hotel groups, pension funds and investors from Korea, Hong Kong and other parts of Asia. Among the shoppers: Walt Disney Co. and Marriott International Inc., looking to turn distressed properties into time-share resorts.

“They’re really going to bottom-fish with a vengeance,” said Andrew Friedlander, chief executive officer of Monroe & Friedlander, one of the state’s largest real estate firms.

Problems Multiply

Hawaii is no stranger to boom-and-bust cycles, having weathered roller-coaster rides with earlier waves of Mainland and Canadian investment. But the economic troubles of Japan, which remains the state’s top investor and a leading tourism market, have been especially problematic.

The disappearance of Japanese capital comes at a time when the state’s economy is already reeling from cutbacks in defense and the continued shrinkage of the traditional plantation crops, sugar and pineapple. Several of the largest plantations shut down in the last two years, victims of global competition.

For the first time in history, the state government is cutting back, because of a budget shortfall. Gov. Benjamin Cayetano ordered layoffs for nearly 1,300 people, or 11.3% of the work force. And local governments are bracing for further reductions in property tax revenues as the islands’ tax base is reviewed in light of the sharply reduced sales prices.

But Hawaii’s biggest losers are the Japanese, whose 1980s buying spree was spurred by the dramatic spike in Japanese stocks and land values, the easy availability of low-cost loans and a sharp decline of the dollar that slashed the price of U.S. real estate by half for Japanese buyers.

In those days, the Hawaiian real estate market was governed by the “bigger fool theory,” which held that there would always be someone willing to pay more than the last guy. At the peak of the madness, property prices doubled, sometimes tripled, in a day.

The disappearance of the well-heeled Japanese investor has been felt the most in high-end residential neighborhoods and resort areas, where half-cleared lots, gaping foundations and clubhouses with no golf courses pay homage to the more than $5-billion worth of projects caught in midstream. In Kahala, the swanky residential neighborhood that hugs the ocean near the base of Diamondhead, average prices have dropped by 38% in five years.

This corner of the tropics oozes tales of economic Icaruses who flew too close to the sun.

Last year, Gensiro Kawamoto, the flamboyant billionaire who purchased many of his 186 Hawaiian homes and condominiums from the back seat of his limousine, walked away from the lease on his 7.3-acre Hawaii Kai waterfront estate in Honolulu after the rent for the land jumped to more than $1 million a year. He had paid $42.5 million for the estate in 1988.

Chris Hemmeter, a developer who teamed with the Japanese to build some of Hawaii’s most expensive resorts, started trying to sell a luxurious waterfront mansion in Honolulu’s prestigious Black Point neighborhood in the late 1980s for $70 million--and finally unloaded it last year for $12.5 million.

His original price tag was “a $58-million inflation of value based on optimism and false expectations,” says Nicholas Ordway, principal investigator for the Hawaii Real Estate Research Center.

Buyers’ Market

Since 1993, seven hotels valued at $1.1 billion in the late 1980s have been sold for a paltry $197 million, according to Robert Hastings, president of Hastings, Conboy, Braig & Assn. Ltd.

The best-known sale involved the luxurious Hyatt Regency Waikoloa, a Japanese-financed project that was sold in November, 1993, for $55 million, minus the land. That 1,270-room Big Island property, since renamed the Hilton Waikoloa Village, cost about $360 million to build and was reportedly losing more than a million dollars a month, according to local real estate experts.

The brutal economics have made litigants out of normally lawsuit-averse Japanese.

Azabu Building Co., one of Japan’s high-flying real estate speculators, is embroiled in a bitter lawsuit with its major lender, Mitsui Trust & Banking Co., over the Hyatt Regency Waikiki Hotel. Mitsui foreclosed on the hotel in an effort to recoup some of the hundreds of millions it loaned Azabu to buy the Hyatt and other hotels. Azabu has countersued to keep the property.

Mitsui is also being sued by the limited partnership that developed the $108-million Harbor Court, a 28-story luxury condominium project that sits largely empty in a prime downtown spot overlooking Honolulu harbor. Harbor Court Developers claims Mitsui and seven other defendants, largely U.S. subsidiaries of Japanese corporations, have obstructed its efforts to sell the condominiums and operate the building profitably. A Mitsui representative denied those claims.

Properties reportedly close to sale, on the market or under review include the Hotel Hana-Maui, the Ritz Carlton Mauna Lani, the Ritz Carlton Kapalua, the Kapalua Bay Hotel & Villas and the Turtle Bay Hilton.

Trouble in Golfdom

Dozens of golf course projects are in trouble, including Oahu’s Royal Kunia course, the Royal Hawaiian course and the Koolau course, reputedly one of the toughest in the world.

In most cases, these transactions are being handled so quietly that it is nearly impossible to find out whether a property is actually up for sale. Japanese lenders are working behind the scenes to move the properties toward profitability and improve their sales appeal by cutting costs and writing down loans. Foreclosure by these major Japanese banks is a last resort, particularly when the debtor is a major customer back home.

One Honolulu-based representative of a major Japanese corporation, who asked not to be named, said he plans to sell all but three of his company’s office buildings, resorts and other properties in Hawaii. At best, he hopes to retrieve 25 cents for every dollar his firm invested into the islands.

“It’s all a matter of timing,” he said. “The question is, when should we write this off?”

Some investors hope to turn their money-losing hotels into upscale time-share operations, a concept gaining popularity in resort areas on the mainland. But Ron Gilligan, a Honolulu-based hotel broker, said many of the hotel properties are not suitable for conversion.

Still, it is hard to imagine a bleak future for these still-exquisite isles.

Paul Brewbaker, a vice president and chief economist with the Bank of Hawaii, is convinced the state’s economy will rebound because its natural attractions and location continue to draw a steady stream of visitors from the East and West.

The phone calls Brewbaker and others are receiving from interested investors are testaments to this brighter future. U.S. institutional investors, such as the Los Angeles-based Oak Tree Capital Management, a pension fund manager, are competing for the Japanese properties against groups from the developing economies of Asia, which have begun sending tourists to Hawaii in much larger numbers.

Visits from Koreans have jumped dramatically in the last five years to more than 112,000 last year. Following in the footsteps of their more prosperous neighbors, Korean travel agents are bringing in groups who stay in the Waikiki Resort Hotel, a Korean-owned property, eat in Korean restaurants and shop in Korean-owned stores. The numbers from Hong Kong, Taiwan, Singapore, China and Indonesia are also on the rise.

“These are the markets of the future,” said Brewbaker.

Nor does anyone expect the Japanese to disappear, given the historical and cultural ties between Hawaii and Japan. More than 1.7 million Japanese visited the islands last year, and even with the latest round of sales the Japanese still own more than half of the state’s hotel rooms.

Plus Side to Selloff

Many Hawaiian residents have also benefited from the Japanese selloff, as the new owners pump money into properties that were falling into disrepair. Locals travel to neighbor islands for weekend getaways at “kamaaina” (local resident) rates and rave about the wide selection of top-ranked golf courses.

“One aspect that sometimes gets overlooked is we’ve got some real world-class, upscale and luxury hotels and they’re here to stay,” explained Eric Kloninger, a senior consultant with PKF Hawaii, an accounting and management firm specializing in the hospitality industry.

Presumably some of them will reopen and hire people like the Siligas, a Samoan family living a few miles down the Waianae coast from the now-shuttered Sheraton Makaha, the Japanese-owned resort that sits in a lush valley on the edge of the Waianae mountains.

About 170 Hawaiians--including Faaleiila Siliga, 58, and her daughter, Sina, 29--lost their jobs this month when ANA Hotels, a subsidiary of All Nippon Airways Enterprise Co. Ltd., opted to close its money-losing Sheraton.

Faaleiila, a housekeeper at the hotel for 15 years under several owners, has already begun applying for jobs at other places, the nearest of which is more than an hour’s ride away by bus. Sina plans to enroll in a computer course, one of several free education programs offered by ANA Hotels, which is also providing severance pay and career counseling.

The Siligas aren’t optimistic about getting new jobs soon, particularly given the shrinking opportunities here on the poorer side of Oahu. But they express no bitterness toward the hotel’s Japanese owners, who they said paid a fair wage and provided medical benefits and paid vacation.

“This is the first company where I’ve worked that they give severance pay,” the elder Siliga said. “I’m happy. I’m going to get money to pay my loans.”

Special correspondent Susan Essoyan in Honolulu contributed to this story.


Hawaii’s Hotel Hangover

The collapse of Hawaii’s real estate market since the “bubble” economy of the late 1980s has been especially dramatic for the islands’ hotels, many of them bought by Japanese investors. A comparison of recent Hawaii hotel purchase and sale prices:


Value during Recent 1985-90 boom Sale price Kahala Hilton $350 million $50 million Hyatt Regency Waikaloa $370 million $55 million Westin Kauai $281 million $51 million Kauai Resort $27 million $4.5 million Royal Waikaloan $55 million $19 million Continental Surf $7.6 million $4.6 million Maui Sun $39 million $13 million Total: $1.1 billion $197.5 million


Note: Bubble value determined by purchase price or completion cost

Source: Hastings, Conboy, Braig & Associates, Ltd., of Honolulu