Goldman makes ¥200 billion bet on property boom here

by Kathleen Chu and Mariko Yasu

Bloomberg

Goldman Sachs Group Inc. will add to its ¥2 trillion in Japanese properties acquired since 1998, betting real estate is short of its peak after a two-year rally.

Goldman, Wall Street’s most profitable securities firm, plans to invest about ¥200 billion this year in Japanese property, said Toshinobu Kasai, a managing director who oversees the firm’s real estate investments in the country.

“Capital inflows will likely increase as various funds continue to be attracted to the Japanese property market,” Kasai said in an interview. “As competition intensifies for these funds, some will enter and some will have to retreat.”

Japanese commercial land prices are advancing for the first time since the property bubble burst in 1991, crippling the world’s second-biggest economy with three recessions in the following 15 years. Goldman in August spent more than ¥47 billion buying two buildings in Ginza, the central Tokyo district with Japan’s priciest real estate.

Goldman in August won an auction for the flagship Japanese store of Tiffany & Co., the world’s second-largest seller of luxury jewelry, for ¥38 billion, more than twice what Tiffany had paid for the Ginza store in 2003. A unit of Goldman Sachs bought an office building in the same month from confectioner Fujiya Co. for ¥9.33 billion.

Takeo Higuchi, chairman of Daiwa House Industry Co., Japan’s second-biggest home builder by market value, on Sept. 3 raised concerns the nation could be headed for another property boom and bust by saying the real estate market has become “dangerous.”

“As the market recovers, we see price hikes of some assets,” Kasai said. “We need to be more selective in terms of future growth potential, location and quality of tenants when we assess investing targets.”

Commercial land prices rose 1 percent in the 12 months that ended June 30, the first advance in 16 years, the Land, Infrastructure and Transport Ministry said Sept. 19. Land in Ginza costs as much as ¥25.3 million per sq. meter. That is still 31 percent lower than in 1991, when land prices peaked.

“Land values in prime locations in Tokyo and the other major metropolitan areas have been enjoying very, very strong appreciation over the last one to two years,” said Jack Chandler, chief executive of LaSalle Investment Management’s Asia-Pacific operations.

Commercial land prices surged in central Tokyo, up 24 percent, in Osaka, up 14 percent, and Nagoya, up 18 percent, for the year to June 30, the land ministry said Sept. 19.

Goldman, with more than half of its portfolio in office buildings, will focus on properties in Japan’s three biggest cities, Kasai said.

Goldman’s Whitehall unit, which acquires real estate assets, mortgages, stocks and operating companies, has raised about $20 billion for real estate acquisitions since 1991. The Whitehall funds concentrate on distressed assets and fast-growing businesses, including hotels, parking and storage companies.

As for the Japanese market, Goldman has invested in office buildings, commercial facilities, golf courses and hotels. The firm’s latest purchase in Japan was a 993-sq.-meter site in Osaka, previously used as a movie theater, acquired for ¥6.46 billion in September from Toei Co., Japan’s third-largest movie company.

Competitor Morgan Stanley has also been on an acquisition spree spanning offices, hotels and residential developers. In April, Morgan Stanley agreed to buy 13 hotels in Japan from All Nippon Airways Co. for ¥281.3 billion in what was Japan’s largest real estate purchase by an overseas investor.

Real estate investment trusts and private funds, including Goldman Sachs and Morgan Stanley, have been the driving force for a rebound in property prices in Japan.