It’s been an ugly few months for the Japanese real estate market, and in particular, for condo developers who had become so used to easy, low-interest money that when the Lehman shock hit last year, they were collectively caught with their pants half down.

In October, the first of many funds, developers and operators went belly up, in the form of New City Residence Investment Corporation. Since then, at least a dozen or more major firms have turned the lights out, leaving about 400 billion yen of bad debts behind—and some very unhappy banks and empty-handed investors.

The Japanese government is obviously very worried about this ongoing rout in the real estate market, and given that the sector is such a major employer and source of taxes, it is an area that they have decided needs “saving”. The opening shot in their turn-around efforts came with the April announcement of an 800 billion yen public-private fund to be established by the Development Bank of Japan (DBJ), to fund REIT projects, back residential mortgages, and to directly purchase REIT assets.

Since April, other government pronouncements have been flowing on a regular basis, leading to the passing just week of a bill allowing the so-called Banks’ Shareholdings Purchase Corp to buy listed REIT shares both in the marketplace and also from the banks. Although the Financial Services Agency (FSA) is fighting a rearguard action to slow down the purchases by this organization by controlling at which level of creditworthiness REITs can benefit from its largesse, it is clear that the politicians intend to dump some serious cash into the sector, by hook or by crook. As a result, as of this week, real estate companies’ stock prices were starting to bounce back.

As mentioned, the bureaucrats don’t like this unbridled bail-out effort, preferring the markets to work themselves out. But global sentiment is such that they can’t stem the flow of tax-payer cash going out to those who are “too big to fail”, and instead their efforts are only slowing things down a little. While I’m reluctant to say it, I agree with the bureaucrats. The government has no place bolstering the property market. The REITs were built on speculation and cheap money, and it’s no one’s fault in particular that that era is over. The current actions just prolong the inevitable—which is that there is going to be a further major market correction in Japanese property.

Against this background there are some property companies that have decided to not wait for a government rescue, which in any case could take months. Instead, they are dumping any tangible assets they might own, so as to generate badly needed cash, then going to creditors with innovative work-out plans that encourage the creditors to let them recover, rather than forcing them into bankruptcy.

One such company is Cosmos Initia, a leading condo developer that used to be part of the Recruit Group. Cosmos got badly beaten up in the financial downturn last year and in April announced a loss of 11 billion yen on consolidated revenues of 191.6 billion yen. Their losses primarily came from a sudden slump on condo inventory valuations, which have caused a huge cash crunch and a resulting panic by their lenders. The normal situation would be that Cosmos Initia would now be forced into bankruptcy and either go out of business or get taken over by a “sponsor.” Either way, the assets would be sold off at low prices, the investors would get nothing, and the banks would rack up another slate of bad loans.

But something unusual is going on with Cosmos Initia. They have approached an organization called the Japan Association of Turnaround Professionals (JATP), a government certified “alternative dispute resolution” (ADR) organization, and have asked JATP to help negotiate with their creditors to give the company time to rehabilitate and thus repay its loans. This is the first time in the property market that such an approach has been tried, and many are watching the process with interest.

If it works, and so far creditors seem to be supportive of the company’s actions, then Cosmos Initia will be able to continue trading, borrow more money, and get back on track. No doubt the creditors are noticing that the market is picking up and that investors are returning to property stocks—so they have every reason to wait for Cosmos Initia, an otherwise well-run company, to recover.

While Cosmos Initia tries out its experiment in creditor reasoning/communication, the bankruptcies in the sector continue apace. On June 12, property developer/leasing firm Sea Capital filed for bankruptcy, with debts of 15.52 billion yen. On June 11, Hokkaido-based condominium developer Miyakawa Construction filed for bankruptcy with debts of 10.4 billion yen. And on May 29, condo developer Joint Corp filed for bankruptcy with debts of 168 billion yen.

It’s quite a blood bath out there at the moment.

Terrie Lloyd writes a weekly newsletter for entrepreneurs and business people about business and political opportunities in Japan.

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10 Comments

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  stirfry at 09:47 AM JST - 5th July

  better get used to it, there's another 5 years of it

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  cnc at 11:04 AM JST - 5th July

  half a million dollars for decent living space in tokyo will keep a lot of prospective buyers out of the market. And the funny thing is...you still dont get parking space.

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  deadhippo at 01:20 PM JST - 5th July

  And you still have to pay what amounts to rent every month if you live in a condo.

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  GW at 11:48 PM JST - 5th July

  cant say that I feel sorry for all those speculating developers or all the fools who rushed to buy when each building went on sale, talk about low value for money

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  Kwaabish at 01:58 AM JST - 6th July

  And you still have to pay what amounts to rent every month if you live in a condo.

  But you get equity in the property as opposed to when you rent...

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  Samuraiiki at 07:29 AM JST - 6th July

  Let it not be few ugly months, but ugly years.

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  Samuraiiki at 07:32 AM JST - 6th July

  A lot of court litigations is about problems dealing with real estate. How some greedy people want to develop land that is no for sale and force people into selling or killing them. Others befriend elderly people and trick them into signing "care agreement" which later on is actuallya deed of sale. But Japanese will not tell anything about this to foreigners because they are so honorable.

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  GW at 10:40 AM JST - 6th July

  anybody who owns a condo that is over 10yrs old had better have some serious yen saved for when the inevitable "refurbishing" needs to be done & you get hit for at least several million yen & what happens is some residents are for it, some against it & it gets messy & expensive.

  Unless yr seriously loaded & wont miss the $$ condos are mostly not money well spent

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  yokomoc at 01:51 PM JST - 6th July

  If this group's info is sound then the property market could be set to seriously tank in the next year

  http://business.timesonline.co.uk/tol/business/industrysectors/bankingand_finance/article6578368.ece

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  Osakadaz at 04:34 PM JST - 6th July

  I do know of a family who refused to move to allow a big development project.Their house was burned down by the Yakuza.

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