As Japan reels, investors may look to HK

Wary global property investors could turn their attention to Hong Kong and the mainland as they steer away from the real estate market in Japan in the wake of last week's devastating earthquake and tsunami.

Until last week's tragic events and the nuclear crisis that now looms over the country, Japan was a favourite target of global real estate funds and wealthy mainland investors who were betting on a rebound in its property market after it had slumped during the global financial crisis.

'Now people in general would be very nervous,' said Tim Murphy, managing director of property investment group IP Global. 'The reality is, if you look at history, economic downturns after natural disasters do not tend to last for very long. But in the short term people will look at other overseas markets such as Hong Kong, China, and Singapore.'

Low interest rates in Hong Kong and Singapore would provide an added attraction to wary investors looking for safer havens for their money, Murphy said. 'Lots of money will stay in Asia,' he said.

IP Global's luxury ski chalets in Niseko on Hokkaido island, an hour's flight from Tokyo, were not affected by the disasters, Murphy said. Half of the investors who bought 30 houses and 50 flats in the resort development last year were from Hong Kong.

The properties were sold at between US$500,000 and US$1.5 million each at the launch, but Murphy said discounts could now be offered on the 10 houses and 12 apartments that remain available for sale.

Goodwin Gaw, the founder of Gaw Capital, which oversees private equity funds of more than US$1 billion, believes some investors in Japan would now be considering a withdrawal. 'For one, those who have leveraged positions in Japan right now are probably trying to get out. But a disaster like this will require a lot of rebuilding effort, which tends to stimulate the economy; so in the medium term it may not be a bad thing to stay,' he said.

James Fink, head of Colliers International for Japan, said the primary motivating factor in the sale of assets recently has been driven by the pressure on equity created by financing structures. 'This pressure, if anything, will remain, and perhaps become more severe, as megabanks reallocate lending to support rebuilding. Some fund managers may spin a story to their investors, for whom they have lost plenty of money, that now is a good time to get out and cut further losses. We think they will be in the minority.

'I believe more fund managers will market the potential for getting in at a good price now. That being said, we have already seen a sell-off early this week in real-estate-related securities,' he said.

Specifically, he said greater Sendai probably represents no more than 1 to 2 per cent of all institutional investment in Japan, by value.

Institutional assets in Sendai will have suffered far less damage on average than private homes and factories. Japan Residential Investment Co, managed by a Colliers International related entity, Halifax Asset Management, in Japan appears not to have sustained any material damage to its lone Sendai asset, Fink said.

Jason Lail, an analyst of real estate investment trusts at US information service provider SNL Financial expected investors would try to gauge the long-term impact of the quake on regions of interest - and the possible impact of further issues with the troubled nuclear reactors.

'The companies selling assets in Japan will most likely be focused, in the short term, on repairing damage incurred by the earthquake. So I think that asset transactions will pause in the short term,' Lail said.

The epicentre of the 8.9-magnitude earthquake that struck Japan on Friday and could have killed at least 10,000 was near the city of Sendai in Miyagi prefecture, and its severe effects were felt in several prefectures, or jurisdictions, along Japan's eastern coast.

SNL, providing analysis and in-depth data for the banking, financial services and insurance industries, covers real estate companies based in Europe, Asia and emerging markets and owns 174 properties in the Japanese coastal prefectures of Miyagi, Iwate, Fukushima, Ibaraki and Chiba.

US companies Starwood Hotels & Resorts Worldwide, ProLogis, Simon Property Group, and AMB Property all own properties in these prefectures.

Starwood has the largest exposure as a percentage of its total owned portfolio; the hotel company has one property in the area, or 1.15 per cent of its real estate, Lail said.

Institutional funds such as Phoenix Property Investors and Macquarie Real Estate Asia have exposure in Japan. Neither company was available for comment.

Panic swept Tokyo yesterday after a rise in radioactive levels around a quake-hit nuclear power plant at the Fukushima station in the north of the city, causing some residents to leave the capital and others to stock up on food and supplies. Several embassies advised staff and residents to leave affected areas, tourists cut short vacations and multinational companies either urged staff to leave or said they were considering plans to move outside the city.

A spokeswoman at Jones Lang LaSalle said its office in Tokyo had closed and might reopen tomorrow.

Global serviced apartment operator Frasers Hospitality, which manages the serviced apartment Fraser Suites in Wan Chai, said it had more than 117 cancelled room nights as of Monday at its 115-unit Fraser Residence Nankai Osaka.

The project, which opened in October last year, is not affected by this catastrophic disaster.

'And we expect more cancellations to come through as long as the situation does not stabilise,' according to a spokeswoman at the Singapore-listed company.

The property's occupancy is still holding at a very healthy 60 per cent, she said.

Rebecca Shum, executive director of investment and project marketing services at CB Richard Ellis Hong Kong, said two potential buyers asked to postpone their trip to Tokyo for one or two weeks after the earthquake.

Japanese developer Mitsui Fudosan Residential launched three residential projects in Tokyo at a selling price of as much as HK$17,000 per square foot last month, targeting wealthy Hong Kong and mainland investors through CBRE. Shum would not say what the response had been to those developments but said no sales had been cancelled.

Limited exposure

The estimated proportion of all institutional property investment in Japan of the greater Sendai area is up to: 2%