Japanese investors, tormented by plunging real estate values at home and a prolonged domestic banking crisis, are accelerating their pullout of U.S. holdings, putting $6.4 billion of their assets on the block last year, nearly half of it in California.
Up to $10 billion more in properties are likely to be sold or offered for sale this year, mostly at a loss, as the recession-battered nation recoils from having invested $77.3 billion in U.S. real estate in the last 10 years, according to a report by E&Y Kenneth Leventhal Real Estate Group.
“The Japanese financial system is in deep trouble,” said Martin Kenney, a professor at the University of California, Davis. “They had the bubble economy, which burst in 1989, and property values. . . have dropped 50 percent in parts of Tokyo.
“Therefore, they have financial problems. They’ve lost an enormous amount of money.”
By the end of 1994, the Leventhal report states, Japanese investors had dealt since the start of the downturn with $24 billion in troubled investments, restructuring debts on nearly $13 billion in properties, selling or offering for sale another $10 billion in holdings, and foreclosing on the rest.
“The reality is that market forces have one more time sent the foreign investor home with his tail between his legs,” Bruce Miller, managing partner of Leventhal’s Northern California office, said in recollection of the turmoil that followed the Japanese investment spree of the 1980s.
“The same thing happened to the Canadians in the early ’80s, the Middle Eastern investors in the late ’70s, and now it has happened to the Japanese.”
Japanese investors had set off an outcry with their purchase of so-called trophy properties across the nation.
Among them, Japanese businessman Minoru Isutani paid $841 million for the prized Pebble Beach Golf Links, and Mitsubishi Estate Co. of Tokyo acquired an 80 percent interest in Manhattan’s Rockefeller Center in 1989 for $846 million.
The flood of investments eased after 1991, when the Japanese economy entered a deep recession and the value of U.S. real estate began declining.
Isutani sold the Pebble Beach resort at a $350 million loss in 1992 to another Japanese company, and recently Mitsubishi put its Rockefeller Center partnerships under bankruptcy protection.
“My reaction: Mitsubishi got taken to the cleaners,” said Gregory Noble, assistant professor at the University of California, Berkeley.
The Japanese investors, including construction companies, trading companies, banks, insurance companies and individuals, are taking a hammering on other fronts as well.
Last November, Sony Corp. announced that it was taking $3.2 billion in losses on the value of the Hollywood studios it acquired five years earlier.
And investors who made their original real estate-backed purchases with cash face a double-whammy. Besides declining values, they are hit with currency exchange losses as they convert their dollar proceeds into yen.
In 1990, a $100 million office building would have required 14.5 billion yen. But if the investor sold the property this year for $50 million, the weaker dollar generated only 4.25 billion yen.
Those who financed with dollar-denominated debt are suffering fewer losses as they sell their investments.
Japanese banks have more than $400 billion in U.S. assets, mostly loans to U.S. borrowers, some of which have been written off as bad debts. Sumitomo Bank of California, for example, recently said it would dispose of $500 million in problem real estate loans.
Whenever that occurs, a corresponding loss in tax revenues rebounds in the Japanese economy.
Japan’s investment focus, meanwhile, is turning south of the California border.
Kenney, a researcher on Japanese overseas investment, said that country’s firms are employing as many as 30,000 people in Baja California maquiladoras, the foreign-owned plants set up to take advantage of Mexico’s low-cost labor.
