Asian Investors Shop in Japan

By MARIKO SANCHANTA

Hilton Hotels

The Hilton hotel in Japan's Niseko Village was bought by Malaysia's YTL Corp. for $72.3 million. Asian investors have jumped on depressed prices.

TOKYO—As property prices in Japan head down for the 19th consecutive year, a new breed of investor has taken up some space long dominated by Western institutions.

Flush with cash and unscathed by the credit crisis, Asian investors have stepped up their purchases of Japanese real estate over the past year. Compared with the astronomical prices in Hong Kong, Singapore and parts of China, valuations are lower—and returns are less volatile.

Asian firms and individuals have made 18 real-estate acquisitions in Japan this year, valued at $372 million, up from eight last year, according to Dealogic. That compares with U.S. buyers' three deals totaling $6 million and European buyers' one deal, Dealogic reports. (These numbers exclude deals involving private companies and funds.)

Some notable 2010 Asian purchases: the Hilton in Niseko Village, a popular ski resort in Japan's northernmost island of Hokkaido, was snapped up by YTL Corp., a Malaysian infrastructure conglomerate, for six billion yen ($72.3 million); three logistics facilities on the outskirts of Tokyo were purchased by Mapletree Logistics Trust, a Singapore-based real-estate investment trust, for 13 billion yen in July; and, according to people familiar with the matter, the Hyatt Regency Hakone Resort & Spa was bought by an unnamed private investor in Hong Kong in March.

Real-estate funds run by the likes of Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. and private-equity firm Lone Star Funds did spectacularly well buying up distressed assets in the years after Japan's bubble burst 20 years ago, as the country's banks offloaded their nonperforming loans.

Prices even turned around in Tokyo in 2007; at that time, Morgan Stanley's property business was one of the firm's biggest revenue generators in Japan.

Now, many of the deals made during that Tokyo spike are dogging the U.S. investment bank as property values plummet and refinancing options remain scant.

Nationwide, according to a government survey, the average price for residential land fell 3.4% in the 12 months ended June, and the average for commercial land fell 4.6%. These overleveraged Western banks and funds have reined in their proprietary investments since the global credit crunch—and Asian investors have rushed to fill the void.

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Hyatt Hotels

Hyatt Regency Hakone Resort & Spa

"Asian investors have not suffered that much during the down cycle, and they're not overleveraged," said Raymond Wong, executive director of Saizen Reit, a Singapore-based real-estate investment trust that manages 180 residential properties throughout Japan. "The yields in Japan are attractive by any standard, and the interest rates are so low. Asian investors are so flush with cash, they have no choice but to look at Japan."

"We are taking up some of the space that used to be dominated by Western capital," said Ben Cha, the chief executive of HKR Japan, who is busy flying back and forth between Tokyo and Hong Kong to set up the local offices of HKR International Group, a Hong Kong-based real-estate development firm that is also a family-run business. "It's a trend that's going to be around for a while. We have capital to deploy."

Investors said that on residential properties in Tokyo, the yield—a property's annual expected net income as a percentage of its capital value—is 4.5% to 5%, compared with less than 3% in Hong Kong.

"The yields on residential assets in Japan is very stable—we have had a lot of highly volatile growth in China and Hong Kong," Mr. Cha said. "The relative pricing in Japan is attractive. There is a lot of volatility in the Chinese market and policy factors that no one can predict."

HKR this year bought three residential buildings in Japan for a total of nine billion yen, and Mr. Cha said the firm aims to significantly expand its Japan portfolio. Credit conditions in Japan, land of the near-zero interest rate, have started to ease as well: new lending by banks for real estate increased 6.6% in the July-September quarter compared with the same period last year, according to research by Deutsche Bank's real-estate fund, called RREEF.

Industry players said that although there are more Asian buyers, they still don't have the purchasing power to match the scale of the deals the Western institutions made before the collapse of Lehman Brothers.

In June 2007, the Morgan Stanley Real Estate Funds unit, known in the industry as Msref, completed the acquisition of 13 hotels and two property-management units known as ANA from All Nippon Airways Co. for 281.3 billion yen, $2.4 billion at the time—a record for a Japanese real-estate deal. But Asian investors tend to be longer-term buyers than Western funds, which typically focus on exiting from an investment in three to five years.

"I expect the trend to continue next year," said Michael Bowles, national director of Asia capital markets for Jones Lang LaSalle. "If you look at the dynamics of what's happening in the region, you're seeing rapid economic growth in China, a growing middle class with disposable wealth looking to diversify their assets. There is prestige in owning a good-quality residential asset in Tokyo."

Write to Mariko Sanchanta at mariko.sanchanta@wsj.com