Japanese Banks Take Big Losses In US Real Estate
Change in law forces foreign banks to sell property in soft market. DEEP POCKETS REQUIRED
NEW YORK — WHEN the German media giant Bertelsmann Inc. bought its new Times Square skyscraper in March, the company was ecstatic. It had paid $121 million for a building which originally cost $250 million.
"Bargain of the century," says an executive.
Less excited were the sellers: a syndicate of Japanese lenders who received only 50 cents on the dollar on their loan to the original developer.
The Bertelsmann building is not unique. Japanese banks are now saddled with billions of dollars of distressed properties. In what some analysts consider a conservative estimate, William Brueggeman, author of a recent Goldman Sachs report on foreign bank exposure to commercial real estate, says Japanese banks may hold up to $60 billion in loans on commercial properties. He estimates the Japanese banks may have to write-off at least 30 percent of those loans.
"The loans the Japanese banks made were higher risk because when they made them most of the major markets were already overbuilt," Mr. Brueggeman says.
Obviously, the Japanese banks are not alone in having real estate woes - United States banks have been hobbled in the last two years by the same problem. However, while the US banks have written off many such bad loans, the Japanese banks are just now getting around to dealing with the mess.
"Most of the assets they put in the freezer, just ignoring them," says Jack Rodman, managing partner of the Los Angeles office of Kenneth Leventhal & Co., the nation's eighth largest accounting firm.
What brought the assets out of the freezer is a new US law requiring foreign branches and agencies to adhere to the same rules and regulations as domestic banks. The law was enacted after the scandal involving the Bank for Commerce and Credit International.
"It's fair to say many of those agencies and branches are becoming aware they will have to increase their reserves against the loans," Brueggeman says. But Mr. Rodman says many Japanese banks, rather than increasing their reserves in the US, are now transferring the loans to the books of their parent companies in Japan where they can negotiate their level of reserves with the Ministry of Finance.
For the Japanese banks, the real estate woes are coming at the worst possible moment.
A year-long stock market slump has severely depressed the Japanese market wiping out trillions of yen worth of equity. The prices of bank stocks have been especially hurt since Japanese analysts underestimated the size of the real estate problem. Rodman estimates Japanese banks, trusts, and other financial institutions have more than $2.263 trillion in real estate exposure.
Applying certain ratios to the real estate portfolios, Rodman figures the value of this portfolio is now off 30 to 40 percent. "It would be a staggering loan loss reserve," Rodman says.
In the US, Rodman estimates some Japanese investments may have dropped as much as 50 percent from their peak in 1987-89.
"Most buildings were purchased for $300 to $400 per square foot. Today, they are worth $175-$200 per square foot based on rents and the amount of office space available," Rodman explains. The Bertelsmann property in New York sold for about $140 per square foot. The Japanese have investments in 65 cities throughout the US.
"The banks need an exogenous buyer, a buyer from Mars," says Francis Scotland, managing editor of the Bank Credit Analyst, a Montreal-based international economics and financial markets research firm.
Short of someone with large amounts of cash, the Bank of Japan and the Ministry of Finance are expected to announce a plan today to help the country's ailing banks. Mr. Scotland says there are rumors that the Bank of Japan will actually buy assets underlying the loans on the banks' books. "The question is at what price?" Scotland says.
Rodman says the best solution for the Japanese would be to divide their banks into "good banks" and "bad banks." The good banks would go on making loans while the bad banks would try to work their way out of their troubles. Mellon Bank in Pittsburgh did this several years ago after its loan portfolio soured. "That has worked very well," Rodman says.
The Japanese banks now seem to be stunned by the potential losses.
This week the Japanese banks declined to become part of a syndicate loaning money to a company leasing airplanes. "The Japanese are spending a lot of time working on their portfolio instead of getting new business," says Andrew Levy, a lawyer with Schulty Roth & Zabel, which is active in real estate work-outs.
Rodman compares the climate in Japan to the US before the adoption of the Financial Institutions Reform and Recovery Enforcement Act in 1989 corralling the thrifts. "That legislation wiped out the US savings and loan industry," he recalls, "something the Japanese are quite aware of."
Instead, Scotland thinks the Japanese will devise their own unique strategy, most likely involving a large number of bank mergers. "We will only see half as many banks in five years as we have today," Scotland says.