ThatÆs the logic which has pushed Citi Japan to offload its Citibank Centre head office (the land and the building) to Morgan Stanley. Details of the transaction were not disclosed by either party, but according to the Nikkei Business Daily, the acquisition price was $445 million. Neither side would comment - but the cash will be welcome as a contribution to Citi's balance sheet, hurt by subprime losses.
The building is in Shinagawa, a prime real estate area where the headquarters of Sony, Mitsubishi and Canon are also located. The building houses Citi JapanÆs retail and corporate banking divisions. Aside from the head office, Citi has 25 branches and nine sub-branches in Japan. The US bank will lease the building back from Morgan Stanley.
According to the Japan Real Estate Institute, real estate prices in the six largest Japanese cities have emerged from a trough of 67 points on the index in 2004 to 96 in September 2007. The index was at 500 points in 1990, the peak of JapanÆs economic bubble. Citibank Centre was built in 1992.
Based on the Nikkei data, the price paid represents a yield of 3.5%-4%, estimates Otani. ôItÆs not a very exciting yield, itÆs very much average for the market,ö he comments.
The Morgan Stanley fund (Morgan Stanley Real Estate Investment) that bought the building is not a high-risk, high-return fund, but tends to invest in low-yielding, stable investments, making the yield appropriate. ôThe deal was done at fair value,ö says Otani.
The fact that the fund is based in Germany could be a reflection of the difficult state of the European real estate market, say observers. European funds could have large amounts of money on their books which they need to spend, even if the projects are far away in Asia.
A securitisation expert who preferred to speak off the record, says that the market for commercial mortgage-backed securities (CMBS) is pretty robust in Japan, and that investors are not requiring the "irrational yields" being demanded in Western markets. A functioning securitisation market is an important precondition for a rising real estate market.
ôThe evidence is that investors have plenty of cash to spend next fiscal year, and Japanese government bond (JGB) yields keep trending down. So, once the markets stabilises, I would not be surprised if the CMBS market performed reasonably this year as investors look to maximise yields,ö he says.
The Tokyo real estate market could see more such deals as cash-strapped foreign institutions, hammered by the subprime crisis, seek to strengthen their balance sheets. But Credit SuisseÆs Otani believes that prices will have to fall and yields rise as the Japanese economy slows and the credit contraction starts to bite.
The broader macro situation is not conducive to optimism on the real estate market. In the third quarter, the economy grew at 0.9% in real terms. Exports have increasingly been driving the economy as domestic consumption weakens on slow wage growth. A weak performance from Japan ex-Tokyo in the small company sector is a huge concern for the government.
CitiÆs woes represent an opportunity for Morgan Stanley, which has built a position in real estate over the past decade and has become one of the biggest hotel operators in Japan. Last year the bank bought a chain of 13 hotels from All Nippon Airlines for $2.4 billion, which it manages through its Panorama subsidiary. Panorama often works closely with existing hotel managers to increase the value of the hotels ahead of a sale. Morgan Stanley now has 10,000 rooms in Japan, putting it among the top 10 hotel operators nationwide. Over the past 10 years, Morgan Stanley has invested $20 billion in Japanese real estate.
Earlier this month, Morgan Stanley offloaded the Westin Tokyo to the Government of Singapore Investment Corporation for around $770 million. Other notable deals in the past six months include Goldman SachsÆs acquisition of the Tiffany flagship store for $305 million in August last year. Somewhat ironically, the Tiffany building in New York was once owned by Japanese investors, but they sold out after the bubble burst.
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