Japanese stand alone among foreign players in US real estate
The Japanese could teach the most aggressive Monopoly player a lesson. Take Shuwa Realty, a family-owned Japanese real estate developer. When BankAmerica and Atlantic Richfield decided to sell their jointly owned building (Arco Plaza) here, it was Shuwa that wrote the check. And when American Broadcasting Companies put its New York headquarters on the block? Shuwa again.
The company paid cash -- $620 million for Arco Plaza, $165 million for the ABC building. If you are like most Americans, you've probably never heard of Shuwa. Nor had the people working on the Arco Plaza sale.
``I got a call from one of the agents instrumental in bringing about the sale,'' recalls Arthur Mitchell, a lawyer specializing in Japanese real estate at the law firm Coudert Brothers. The agent had never heard of Shuwa and wanted to know if they were ``real people.''
``A few days later, I heard they sent a check for $620 million,'' he says. ``They're real people.''
And increasingly visible people. In the past 12 months, Shuwa has bought about $1.8 billion worth of United States real estate and plans to buy $1 billion to $2 billion more in the near future.
As in manufacturing and banking, the Japanese have become the major foreign players in the American real estate market. Last year they bought $1.5 billion worth of property. This year they will likely top $5 billion. At that amount, they would unseat the British as the biggest foreign investors in US property. No cause for alarm seen
Unlike banking and manufacturing, Japan's foray into real estate has few people worried. Real estate does not give Japanese investors the political power that investment in manufacturing gives to the likes of Honda and Mazda, says Ronald Teeples, a real estate economist at Claremont McKenna College.
In fact, it puts the foreign investors at the mercy of local planning commissions and zoning boards. In contrast, local and state governments are eager for the jobs and (eventual) tax revenues a local Japanese plant would bring to their area; that gives the investor clout.
A little foreign capital, moreover, might be just what the US real estate industry needs, shellshocked as it is by the tax law President Reagan signed last week.
``Next year, certain sources of financing will be greatly reduced,'' Dr. Teeples says. The law tightens loopholes on tax shelters, which in the past have financed a good deal of commercial real estate development. ``To the extent there's an alternative source of financing from Japan, that will help take up the slack.''
Japan's interest in US real estate is nothing new. The first wave came in the early 1970s, when Japanese real estate companies bought up land, resort projects, housing, and industrial facilities. Some of it was highly speculative, and some Japanese investors got burned.
The next wave started in 1981, after the Japanese government loosened restrictions on foreign investment. Billions of yen, piled up in pension funds and life insurance policies by the thrifty Japanese, were free to roam the world in search of a safe investment.
Life insurance companies and trust banks, which manage these pension funds, began to buy prime office buildings in major cities like New York and Los Angeles.
At the same time, Japanese auto, electronic, and other companies were manufacturing within US borders in a big way and began to buy property for their factories. The makings of a buying spree
The third wave is actually a swelling of the second. Today general contractors, real estate companies, trading firms, securities firms, industrial companies, and individual tycoons, among others, are coming ashore. The goals of these investors differ from insurance companies: They want to develop property from the ground up, build plants for manufacturing companies and their Japanese suppliers, go into second-tier cities, and engage in riskier ventures. Even before this year, the stage was set for a buying spree. By investing in US property, Japan could funnel some of its trade surplus back to the US and counter protectionism. But the real trigger was the 40 percent fall in the dollar, making US real estate a bargain.
A prime commercial building in Los Angeles, for example, costs $500 to $600 a square foot to buy. In Tokyo, a comparable building would go for $15,000 to $20,000 a square foot.
About the size of California, Japan has almost no land left to develop in major urban areas. That has sent land prices soaring. In some prime Tokyo locations, prices increased more than 60 percent last year. And few properties change hands. In the Marunouchi banking district not one building has been sold in 20 years.
The upshot: Investors have money but nowhere -- in Japan -- to spend it. That makes the US, politically stable and the biggest market in the world, the country of choice. And the return is better here: 6 to 8 percent annually vs. 2 to 4 percent in Japan.
Then there are the tax advantages to buying American. In Japan, land constitutes about 80 percent of a property's purchase price; the building, 20 percent. The reverse is true in the US. Since an investor can depreciate buildings but not land for tax purposes, the US gives greater tax advantages. US depreciation schedules are being lengthened under the new tax law, but they are still shorter than the 65-year period in Japan. A new set of rules in place
Because the way the real estate market works in Japan is so different from that in the US, Japanese investors haven't been the best bargainers.
``In evaluating investments . . . they were impressed with the comparative cheapness of the property,'' explains Edwin Reeser III, a real estate lawyer at Graham & James in Los Angeles. ``They were not attuned to the fact that property value would not appreciate at anywhere close to what it would in Japan, because of the abundance of land [in the US]. Many initial investments and forays were overpriced.''
The price of Arco Plaza, some $30 million above the next bid, took many a developer's breath away.
Mr. Reeser says the Japanese are not as interested in bargains, since they tend to hold properties longer than American investors.
Americans generally go to contract quickly, write in conditions, and then investigate details. The Japanese want to pin down all details before signing. This can take 30 to 60 days. If the Ministry of Finance has to approve a deal (as it often does when a life insurance company or trust bank is involved), the delay can be several months.
``It's taken quite a while for Japanese to understand how we do business here,'' says Mr. Mitchell at Coudert Brothers. But Japanese companies now realize ``if they don't make decisions quickly enough, they lose the deal.''
Just as in every other market they've entered, the Japanese are learning quickly, he says. Just as they've established joint ventures to learn how to distribute video recorders and cars, the Japanese are hooking up with American developers to learn the finer points of real estate finance.
Last in a three-part series. Other stories appeared Oct. 27 and 28.