Hawai'i firm says invest in Japan real estate
By Tomoko Yamazaki
Bloomberg News Service
Hawai'i's Curtis Freeze, a New Yorker who went to Japan 20 years ago as a Mormon missionary and became one of the top managers of a Japan small-company fund, has a new message: It's time to invest in real estate.
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"Property prices have bottomed in Tokyo, and nobody seems to notice," said the president of Prospect Asset Management Inc., who is starting a 40 billion yen ($300 million) real estate investment trust.
Hawai'i resident Curtis Freeze, president of Prospect Asset Management Inc., seen here with his staff, say that Japan's property prices have bottomed and the time is ripe for investment.
That message may be hard to spread even after property prices halved from their peak during the 1980s bubble economy. Japan is mired in its third recession in 10 years and the first three REITs to go public are trading below their offer prices. Goldman Sachs Group Inc. scrapped its REIT in November because of the slumping stock market.
Freeze, 40, shrugs off that negative outlook because his plan is to focus on condominiums with high rental demand rather than sluggish commercial property. Japanese office rents declined 2.2 percent in the year ended September, while apartment rents fell just 1.1 percent, according to Japan Real Estate Institute.
"Properties in certain parts of Japan are already bottoming out, so the faster you get into the market, the more successful you're going to be," said Hisanori Gondo, who manages $81 million in Japanese equities at ING Investment Management Ltd. in Sydney.
Some of Tokyo's upmarket areas are even starting to pick up. Average land prices in Minato, a middle to upper-class district, rose for a second year last year, and prices in Shibuya halted a 14-year slump, the Ministry of Land said.
Freeze says foreign institutions' holdings in Japanese property companies are underweight relative to the stocks' value on benchmark indexes.
Unless they raise their stakes, they risk underperforming once the market rebounds, he said.
Property stocks have risen 21 percent as a group, and banks have climbed 16 percent in the two months since the Nikkei 225 stock average slumped to an 18-year low.
"The reason banks and real estate shares performed well is that investors have written them off for 12 years, and now they are being forced to take a look," said Freeze. "Foreign institutions feel the risk of being left behind is bigger than losing money."
Freeze wants to attract some of that foreign money with REITs, property portfolios that pay dividends from rental income. He intends to buy 1,000 condominiums and list the trust in December 2003.
Japan's three existing REITs have a market value of $3 billion, about one third the size of the U.S. market a decade ago. Japan's market might grow to $38 billion in five years once the government makes good on promises to provide tax incentives, estimates Toshihiko Okino, an analyst at UBS Warburg Japan Ltd.
Yesterday, the ruling parties' policy chiefs submitted proposals that include a cut in the capital gains tax on property sales as part of its effort to fight deflation.
Mitsui Fudosan Co. and Mitsubishi Estate Co. listed REITs in September, the first to act after the government legalized them 17 months ago. They offer a 4 percent return. Freeze expects his REIT will yield 6 percent.
That's better than bank deposits and postal savings accounts, which offer less than 0.05 percent. Japanese government bonds maturing in three to five years returned 1.1 percent in the year ended March.
"Anyone who is buying bonds should buy J-REITs," said Richard Mak, who manages $500 million in Japanese stocks at Lombard Odier Asia Ltd. in Hong Kong. He expects REITs to help attract more fund inflows.
Yet some investors remain skeptical, citing the lack of government efforts to boost the economy. And despite signs that the property market may be bottoming, Tokyo residential land prices have declined every quarter since September 1987, said JREI.
"Deflation is the huge question," said David Scott, a fellow small-cap fund manager at J.P. Morgan Fleming Asset Management Co. who used to work for Freeze.
Although Scott isn't buying REITs at the moment, he, like Freeze, expects that market to grow.
Freeze, now based in Hawai'i, witnessed Japan's property-market meltdown first-hand when he lived in Tokyo during the 1980s to mid-1990s.
The property market "got us into trouble, and it's going to help us get out of it," he said.
Freeze started out at Nikko Salomon Smith Barney Ltd. and Shearson Lehman Brothers Holdings Inc. before moving to DB Morgan Grenfell Asset Management Ltd. in 1990, where he handled some $1.4 billion investing in Japan's smaller companies.
He now manages the Prospect Japan Fund, focusing on companies with a market value of less than $1 billion. It outperformed the Topix index by 57 percent in the past five years and was the second-best performing, U.K.-based small-cap fund in 2001.
He bought his first property for the REIT from Fuso Lexel Inc., a mid-sized developer whose shares Prospect owns.
Freeze also got New York-based Permal Investment Management Services Ltd., which has a stake in the Prospect fund, to invest in his REIT.
"The water is safe," said Freeze, who travels between Japan and Honolulu at least once a month, visiting companies. "I'd rather be too early than late."
