Thursday, September 27, 2007

Subprime tsunami hits Japan's shores: Banks tighten RE credit and foreigners sell

The following is from NikkeiNet. This is the first I have heard of foreign investors selling Japanese RE and I'm not aware of any specific examples. Appears to be a sort of global credit crunch.

Subprime tsunami hits Japan's shores

Senior staff writer

The recent problems in the U.S. mortgage market have cast a pall over real estate investments in metropolitan business districts, with signs emerging that the uptrend in land prices in certain areas is beginning to slow.

In the wake of an overseas credit crunch, banks are increasingly wary about extending financing for commercial real estate deals. In fact, banks have turned down a string of development projects proposed by small and midsize real estate firms.

Down the road, this cautiousness will likely spread to nonrecourse loans, in which funds are repaid solely with the project's future cash flow. This type of financing is often used in real estate development deals.

To date, banks have extended funds at extremely low rates if they judge that developers can generate sufficient rental income. But if rental income slackens, interest rates on commercial development loans will rise.

Foreign investment in Japanese real estate is also contracting. Last year, overseas investors, including many from the U.S., spent as much as 1.5 trillion yen on Japanese real estate. But tumbling U.S. property prices have saddled investors there with massive paper losses, and there seems to be no end to their attempts to unload Japanese investments to lock in profits.

Real estate investment trusts, also popular among foreign investors, have seen their market capitalization fall to 5 trillion yen, down 30% from their peak.

Investors are growing increasingly selective about their targets. While Tokyo remains a top pick, investors have started to rethink their actions even in regions that have logged impressive price growth.

And adding to these pressures is an apparent oversupply of condominiums.

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