Research into problem companies has found that the bulk were concentrated in the construction, real estate and retail businesses - all sectors whose value is partly wrapped up with the price of land

By Ken Hijino and David Pilling
 
Minoru Mori, the king of Tokyo's property business, is jabbing his finger at some brightly coloured charts, but his message is anything but cheerful.

According to his reckoning, the total value of land and property in Japan is about Y2,000,000bn ($16,022bn), or roughly four times the country's entire gross domestic product. In the US, the ratio is about 1.7 times, he says.

By implication, the bursting of Japan's property bubble a decade ago, one of the biggest collapses in land prices the modern world has ever seen, could have some way to go.

That is worrying. Japan's banking system is still reeling from the collapse in the price of land collateral taken against the multitude of loans made in the 1980s.

Companies are clinging on to their portfolios of property bought at the height of the boom in the desperate hope that prices will recover before they have to book huge losses.

For some, the wait is over. Last year, about 10,000 properties were auctioned off by the Tokyo District Court after banks foreclosed on loans or companies went bankrupt.

A recent inspection by the Financial Services Agency into problem companies found that the bulk were concentrated in the construction, real estate and retail businesses - all sectors whose value is partly wrapped up with the price of land.

The regulatory agency's trawl through banks' loan books uncovered no fewer than 34 companies - as yet unnamed - considered close to bankruptcy.

This month Daikyo, Japan's largest developer of condominiums, became the latest casualty of the property fall-out, when it was forced to seek Y470bn in debt forgiveness.

'The majority of our debts come from purchasing real estate for mansion [condominium] development,' says a Daikyo official, who admits the company also got caught up in the golf course buying craze that swept Japan in the 1980s.

As far back as the 1960s, there had been an oversupply of condominiums, says Toshihiko Okino, analyst at UBS Warburg. In 1999, the average number of unsold condo spaces in the Tokyo metropolitan area was below 8,000 lots, but by April 2002 this had increased to 9,314.

This is pushing smaller condominium developers under and capping demand for their larger competitors.

The situation is likely to get worse with the planned scrapping of the government's Housing Loan Corporation, which provides families with cheap housing loans.

Daikyo's request follows the recent bankruptcy of two construction companies - Sato Kogyo, which collapsed with Y500bn in debt, and Aoki, with consolidated liabilities of Y522bn.

Others are likely to follow, particularly as the government is squeezing the lavish public works budgets on which many construction companies have depended.

During the past decade, more concrete has been poured annually in Japan, the size of Montana, than in the whole of the US.

But those good times - for construction companies, if not for Japan's rapidly receding countryside - are coming to an end.

Last year, the government reduced the public works budget by a whopping 10 per cent, and more cuts are promised.

Not that this appears to be having any effect in Tokyo, where private companies, such as Mori Building, are dotting the skyline with giant construction cranes.

Next year, according to Mr Mori, new Tokyo offices - most of them grade A buildings - will cover an area the equivalent of all the prime office space in Shanghai.

Partly coincidence and partly the result of developments of property built on land sold by Japan Railways, the huge amount of office space coming on stream in 2003 is fuelling fears of a glut - and a further slide in rents and prices.

Mr Mori says such concerns are overdone. There is demand for grade A property, he insists, especially from international companies, for which buildings constructed in the 1980s have become inadequate.

And while land and property prices continue to fall at an annual rate of about 4-6 per cent in much of Tokyo, in sought-after areas such as Minato-ku, prices are actually rising, he says.

Mr Mori's vision for Tokyo, to build vertically rather than horizontally, is most evident in the 53-storey Roppongi Hills development taking shape over Tokyo's mainly low-rise skyline. In that building, says Mr Mori, the upper floors still attract premium rent.

Yet the success of his project depends in good part on the deal he strikes with Goldman Sachs, the investment bank that is due to become the anchor tenant. Mr Mori says Goldman has all-but signed up and will pay a higher rent, on average, than currently. But Goldman appears in no hurry to commit.

Suzanna Nakano, a real estate expert in Tokyo, says she does expect a flight to quality as tenants flee older buildings for A-grade buildings such as Roppongi Hills.

But although she sees a 'decline in the rate of decline' of property prices, she is not prepared to call the bottom just yet. For some time to come, it seems, Japanese property will remain a buyers' market.

Financial Times