JAPANESE INVESTMENT IN U.S. REAL ESTATE:
STATUS, TRENDS AND OUTLOOK
by
Russell C. Lindner
B.A.,
The Johns Hopkins University
1977
J.D.,
The George Washington University
1980
and
Edward L. Monahan, Jr.
B.A.,
Providence College
1974
Diploma de Estudios Hispanicos
Universidad de Navarra
1978
M.A.L.D.,
The
Fletcher School of Law
Tufts University
and Diplomacy
1981
SUBMITTED TO THE DEPARTMENT OF URBAN STUDIES & PLANNING
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF THE DEGREE
MASTER OF SCIENCE IN REAL ESTATE DEVELOPMENT AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
SEPTEMBER, 1986
(Russell
C. Lindner & Edward L. Monahan, Jr.
1986
The Authors hereby grant to M.I.T.
permission to reproduce and to distribute publicly copies
of this thesis document in whgg;e or in pa;t.
Signatures of the authors
Iup ell C. Lindner
Department of Urban Studies & Planning
A
August 15,
1986
Edwakd L. Moahan, Jr.
Department of Urban Studies & Planning
August 15,
Certified by
X
1986
F
/I
Lynne/ B. ISagalyn
Real Estate Deve opment
Asst. Professor of Urban Studies
Thesis. S
ervisor
Accepted by
James McKellar
Chairman
Interdepartmental Degree Program in Real Estate Development
eis
i. rc
SEP
o 5 1986
&1~
79)
1.1e
r Ft
ACKNOWLEDGEMENTS
thesis
This
of
the
is
effort
of two
budding students
real estate investment in the
Japanese
United
States.
Research was conducted over a period of three months, during
time the authors not only made their first visits
which
but
Japan,
for
in
time evaluated
first
the
to
the
depth
character of Japanese investors and corporations.
Given
such
importance.
We
individuals
who
limitations,
to thank the more than
wish
agreed
sessions in Tokyo,
interviews were of
to be interviewed
New York,
Washington,
critical
one
in
hundred
over
fifty
D.C. and Boston.
Our special gratitude goes out to Ken Arata, Director of the
Real
Estate
Industries
Division
of
the
Ministry
of
Construction, Hajime Suzuki, Subchief, and Makoto Taketoshi,
Assistant
behalf.
Manager,
Arthur
experience
thank
and
Osamu
Development
advisor,
of
of
Coudert
Brothers
counsel throughout our study.
Aoi,
Company,
Junichi
Kogo
of
We
Mitsui
Ken Bartells of Morgan
Real
on
our
provided
wish
to
Estate
Stanley,
and
Sumitomo Corporation for their extended
We likewise wish to express appreciation to our
Professor Lynne B.
Urban
School
their cordial assistance
Mitchell
Kunio Ohsawa of the
assistance.
for
Studies,
Sagalyn of M.I.T.'s Department
and Professors
Michael Joroff
of Architecture and Planning and James
the Center for Real Estate Development at M.I.T.
2
of
McKellar
the
of
JAPANESE INVESTMENT IN U.S. REAL ESTATE:
STATUS, TRENDS AND OUTLOOK
by
RUSSELL C. LINDNER and EDWARD L. MONAHAN, JR.
Submitted to the Department of Urban Studies & Planning
on August 15, 1986 in partial fulfillment of the requirements
of the Degree of Master of Science in Real Estate Development
ABSTRACT
The
level and diversity of Japanese investment activity
in
the U.S. real estate market was evaluated.
An historical
perspective was offered to provide a framework for analysis
of current investment activities.
Five different kinds of
sectors were independently evaluated, with emphasis given to
both intrasector similarities and differences.
Investor
characteristics typical of all sectors were enumerated, and
adaptations necessitated by U.S. market conditions were
explored.
A study of Japanese real estate investment
activity
in Washington,
D.C.
was used to illustrate
investment patterns described earlier in the thesis.
It was found that Japanese investment in U.S. real estate has
grown dramatically over the last five years and is likely to
continue such expansion in both the near- and long-term.
Large Japanese institutions and companies have begun to
establish corporate infrastructure in the U.S.,
and are
consequently well-prepared to invest capital outflow from
Japan which is resulting from a host of macroeconomic,
geopolitical and portfolio management factors. More recently,
intermediaries acting on behalf of largely
unregulated
smaller Japanese investors have begun to penetrate the
market, focusing upon investments which are largely ignored
by
large
corporations.
Consequently,
while
certain
investments appeal to almost all investors, it was found that
there is far greater diversity among Japanese investors than
popularly thought.
This presents new opportunities for many
different kinds of American real estate players, and the
authors elaborate upon a number of such opportunities.
Thesis Supervisor:
Lynne B. Sagalyn
Title: Assistant Professor of Urban Studies and
Real Estate Development
3
TABLE OF CONTENTS
.........
2
Acknowledgements ................................... *..
Abstract ................................................. 3
PART ONE: AN INTRODUCTION TO THE JAPANESE
REAL ESTATE INVESTOR ...................
Chapter I: A Broad Overview of Japanese
Activity in U.S. Real Estate ......
Chapter II: Relevant Macroeconomic and
Regulatory Factors .............. .......
PART TWO: DIFFERENT STROKES FOR DIFFERENT FOLKS:
PROFILES OF DISTINCT TYPES OF INVESTORS ......
5
9
21
38
Chapter III: Life Insurance Companies
Growing Activity, Growing
Conservatism ............................. 41
Chapter IV: Construction Companies:
Financiers in Builder's Clothing ........ 63
Chapter V: Real Estate Development
Companies and Trading Companies ......... 99
Chapter VI: Small Investors:
An Overlooked Market Coming of Age ..... 124
PART THREE: INVISIBLE LINKS --
THE TIES THAT BIND ...... 149
Chapter VII: Characteristics Common to
All Japanese Real Estate Investors .....
Chapter VIII: Washington, D.C.:
A Target City, and Why .......
..........
149
176
PART FOUR: SUMMARY ..................................... 191
Chapter IX: "So What Does This All Mean, and
How Can I Take Advantage of It ?".......191
Notes .. ................................................ 204
4
PREFACE
We have studied, we
"We are patient.
have prepared, and now, we are ready."
Tadao Toyofuku
Deputy General Manager
Headquarters of Real Estate
Department
Sumitomo Trust & Banking Co.,
Ltd.
activity in U.S.
Japanese
real estate is commanding a
estate
growing amount of attention within the American real
lacked
has
discussion of the phenomenon, however,
Most
industry.
particularly as to investor motivation and
detail,
As a result,
market segmentation.
estate
real
most U.S.
professionals whose product might be of interest to Japanese
investors
and
are unable to understand this capital source
to benefit from new investment,
development and contracting
opportunities which it might afford.
This paper will focus on two central themes. First, the
Economic conditions and
Japanese are coming.
insufficient
domestic Japanese real estate opportunities make substantial
and
sustained Japanese investment in U.S.
irreversible
Second,
trend.
real
generally
understood.
approach
towards
variation
among favored
vehicles,
project
opportunities
to
the diversity and
activities
estate
Japanese
realty an almost
are
greater
There is no singular
U.S.
sizes
real
estate
investment
and
goals
of
than
is
"Japan,
investment.
Inc."
The
products,
development
presents
significant
almost all participants in
5
depth
the
American
real estate community.
Part I primarily
thesis is organized as follows.
The
offers background information,
with Chapter I presenting
a
broad overview of current Japanese real estate investment in
Chapter II elaborating
and
macroeconomic
upon
the
U.S.,
and
geopolitical factors which have a pronounced effect
investment.
such
and
Japanese governmental regulation has upon the export
effect
capital
of
This chapter also analyzes the role
on
into
U.S.
property,
as
as
well
that
how
regulation is being relaxed to permit more liberal outflows.
--
investors
II profiles five distinct kinds of Japanese
Part
life
insurance companies,
real
construction companies,
and small
estate development companies,
trading companies,
non-institutional investors --
as a way of illustrating
diverse
Interconnections
between
realty.
U.S.
approaches to Japanese investment in
these distinct sectors
the
also
are
explored, and the implications of such cooperation analyzed.
In
Part
III,
organizational and attitudinal
similarities
among different kinds of Japanese real estate investors
reviewed
(Chapter VII),
are
together with a case study of real
estate investment activity in Washington D.C., where a surge
of
many
such activity within the last twelve months
of
the
trends analyzed in the
body
of
illustrates
the
thesis
(Chapter VIII). In Part IV, the authors elaborate upon their
conclusions and enumerate perceived areas of opportunity for
American real estate players.
6
A summary of conclusions reveals:
exchange rates and
Favorable
1.
pressure
political
imbalance,
upon
the Japanese to address a chronic trade
lack
of real estate investment opportunities in Japan,
opportunities resulting from changes to the
perceived
tax
will
code
and
U.S.
significant
Japanese
"typical" Japanese
investor
promote
to
combine
a
investment in American real estate.
nor
is neither a
There
2.
developer.
The nature of such real estate activity
the vehicles employed,
scale
the cities and regions favored,
and risk of projects --
Japanese
Certain
perceived.
sectors
presence
than others.
the
is more varied than generally
companies
different
from
are better prepared to expand their
industry
--
Joint ventures between Japanese
U.S.
and
U.S. partners will characterize many investment, development
and construction activities.
3.
largest
Japanese life insurance companies,
and most visible Japanese investors
estate over the last few
perhaps the
in
U.S.
real
years, will continue to expand the
amount and diversity of their investments.
4.
against
Japanese
construction
firms intend
domestic contractors by providing fully
construction and development services,
access to Japanese capital.
7
backed by
to
compete
integrated
financial
to
continue
will
real estate development companies
Japanese
5.
expand
activities,
development
including
rather
Alternatively,
residential and industrial projects.
process,
trading
companies will become key intermediaries for other
Japanese
than
participate
the
in
development
wishing to participate in U.S. real estate activities.
There are opportunities for smaller U.S. property
6.
tap Japanese
to
owners
capital.
Intermediation
services
and
smaller American real estate owners/developers
between
investors
Japanese
like-sized
diversification
further
of
are
Japanese
available,
investment
promoting
in
U.S.
property.
Japanese decision-making, which adheres to strict
7.
corporate hierarchy and
conditions in the U.S.
market
that
decisions
quick
is adapting to
consensus-building,
The Japanese
are often vital to
learning
are
in
success
the
American real estate business.
8. Price premiums which have been paid by the Japanese
investors
because
of inexperience are becoming a thing
of
the past.
9.
continue
Japanese investment in the Washington,
to
dramatically increase,
absolute terms.
both in
D.C. will
relative
The Washington market is likely to
remain
a favored area of investment for the foreseeable future.
8
and
PART I:
AN INTRODUCTION TO THE JAPANESE REAL ESTATE INVESTOR
A Broad Overview
Chapter I:
of Japanese Activity in U.S. Real
Estate
"We understand your way of thinking;
we've
studied your language,
we've
your
we play
watched your movies,
Such comprehension is
national sport.
our
very important when we explain
analysis and recommendations to senior
management."
Junichi Kogo
Associate Manager
International Division
Mitsui Real Estate Development
Company, Ltd.
business
estate
real
"The
combat... between particular people
particular people."
is
and
Kunio Ohsawa
Manager, Real Estate Division
Sumitomo Corporation
The Case for Japanese Investment in U.S. Real Estate
Japanese investment in U.S.
host
real estate is driven by a
of mutually reinforcing factors,
investment criteria,
including
financial
macroeconomic and geopolitical trends,
and domestic traditions.
Why real estate, rather than other kinds of assets ?
Specific interest in real estate -- as opposed to
such financial instruments as Eurobonds or U.S.
Treasuries -- is based on the fact that land in
and consequently
Japan is in short supply . . .
land and buildings are
[Also],
very expensive.
seldom sold in Japan, so the emerging appetite for
more speculative transaction-oriented investments
9
cannot be met at home.(1)
to an executive of a large Japanese
according
Furthermore,
company,
effective
investment
target
in
he
driving
such investment
growth
from
rent
by
reviews
U.S.
and
institutions:
risks
in times of economic
potential
appreciation;
property
protection against
depreciation that engenders tax savings;
currency
motives
the
do not differ greatly from
cites
reasons
The
portfolio."(2)
any
an
be
to
estate is considered
"real
insurance
fluctuations;
and
a
stable income source.(3)
But,
why U.S.
real estate,
rather than that in other
countries ?
Japanese
three reasons why many
are
There
investors have recently entered the U.S. real
First, the Japanese are here
estate market.
stable
the United States provides a
because
political and economic environment that guarantees
[Secondly,)
growth and free business conditions.
is not a
market
although the U.S. real estate
scale and
in
larger
perfectly open one, it is much
Most
markets.
open than the Japanese
more
the
in
higher
be
important, investment return may
United States than in Japan.(4)
1973
Between
and
1984,
the
U.S.
Department
of
Commerce recorded 110 cases of Japanese direct investment in
U.S.
realty.(5)
Standing alone,
offer much insight,
investments
went
however,
this information does not
for the value of many of
unreported,
and
transactions were completely unreported.
many
other
the
known
What most analysts
agree upon is that, prior to 1982, aggregate Japanese direct
investment in U.S. real estate was not great -$500 million.
10
no more than
1982,
in
Beginning
annual real estate investment
by
Estimates by analysts
on
Japanese entities began to climb.
Ministry
Japanese
of
15%
between
represented
Finance
real
direct
real
although
statistics,
investment
estate
estate's
percentage
have
would
Japanese
direct
A similar
amount
and 35% of all
for that year.(8)
investment in the U.S.
to
according
these amounts,
Research Corp.)(7);
Estate
(Real
of Commerce)(6) to $1.7 billion
Department
(source:
of
million
direct real estate investment range from $630
1984
took
place
of
total
1985,
in
Japanese
estate
investment fell in light of a 60% growth in non-real
direct investment.(9)
Predictions
for
vary significantly,
will
it
point:
investment
1986 Japanese real estate
but there is consensus on one
increase rather dramatically,
critical
convergence of numerous independent factors discussed
in
this
paper.
the
due to
later
1986
Such predictions place the amount of
real estate investment at between $2 billion and
direct
$5
billion.(10)
Assuming that the Japanese will increase their activity
in U.S. real estate, the next question is:
"how will it take
place?"
Selective Investment Criteria
Location
Japanese
have
a
strong preference
11
for
very
well-
located
property.
location",
believe
than
was
that
adventurous,
of
repeated
"location,
in many of
investors.
while
a
cliche,
our
the Japanese are far more
American
less
The
We
location,
interviews.
"I
location-conscious
tend to be
a
little
more
the Japanese will sometimes settle
return in deference to
location,"
says
for
Bruce
Fowler, president of Chesshire Gibson Fowler, a Los Angelesbased
real
estate
consulting firm which acts
as
a
U.S.
representative for a large Japanese development/construction
firm.(11)
There
are
definition
which
a
number of
components
of "good location."
First,
in
the
Japanese
there are areas
in
the Japanese have been involved for a long period
of
time and about which they have developed an intuitive "feel"
from
being
local
owners.
Honolulu,
Los
American
communities
Such
areas
Angeles and San Francisco.
in
those
cities
would
Large
include
Japanese-
reinforce
their
desirability.
Second,
there
is
commercial centers.
a
general
desire
.
.
.
New
York",
years,
has
spent
institutions.(12)
Mortgage
Banking
Managing
who,
much of his time working
New
the
Boston
to
and the epicenter of that, of course,
claims Jack Shaffer,
Sonnenblick-Goldman
in
"The big money from
is interested in 'Bowash' --
Washington corridor -is
locate
Recently, this has led the Japanese to
focus more attention on the East Coast.
Japan
to
Partner
for
with
several
Japanese
York has a special appeal for
12
of
most
to purchase those skyscrapers --
result,
buildings which are
office
other prime cities.
product
on
purchasers willing to accept yields
demand for
Manhattan
find
to
"It is very difficult
buildings in Manhattan any more," said Tadao Toyofuku,
Tokyo-based Deputy General Manager of the
Department
of
Sumitomo Trust and
wants to invest there.
Furthermore,
impossible
to
find
range there."(14)
Estate
Real
"for
Banking,
everyone
while it is difficult
[to locate good buildings of almost any size],
have
Manhattan
100-200 basis points lower than
Nonetheless,
outstrips supply.
a
many
with
York is a preferred port of entry,
New
Japanese
the
dream,"
that's their
an official of Mitsubishi Trust & Banking.(13) As
claims
good
be
They think that they might
the big skyscrapers.
able
in
people have an impression
"In Japan,
American real estate.
about
and
they believe that it epitomizes America
for
Japanese,
it is almost
$5-$10
good buildings in the
million
Such tight market conditions in Manhattan
acted to enhance interest in the "Bowash" corridor
in
the last year. A further enticement is the fact that at each
end
of
the
cities
corridor are
into their
with
zoning
notable
Such
regulations.
restrictions
built
restrictions
reinforce Japanese interest because
viewed
land-use
as a mechanism to preserve property
values
they
are
through
limitation of supply.
Product and Area
The
vast majority of Japanese
13
income-producing
real
estate
acquisitions has been in large-scale downtown office
buildings.
There are exceptions,
and
Hotel
office
in
House
Manhattan.
buildings almost certainly represent well
the portfolio value of Japanese investment
50% of
property
in
which exceeds the percentage which
income-producing realty,
such
The Essex
Madison Square Garden condominia
Overall,
over
such as
in the aggregate
represents
portfolios
of
other foreign investors.(15)
To some degree, Japanese construction companies and real
estate
development
companies represent
exceptions to
While such
general preference for downtown office product.
property
comprises
the
respective
a large percentage of their
investment activities, they are also building and developing
a variety of product across the U.S.
and
regional markets.
direct
in second-tier
Japanese contractors are
cities
following
investments of Japanese manufacturers and automakers
Illinois, and Washington. Japanese real estate
in Michigan,
companies,
development
which
began
building
residential
subdivisions in Southern California in the early 1970s, have
expanded to markets such as Houston,
In
Phoenix.
outside
major
both cases,
Dallas,
Atlanta,
major activity has been
metropolitan
downtown
areas.
and
located
Construction
companies, for one, are hesitant to commit more resources to
office
tower
construction for they rightly
overbuilt.
many
metropolitan areas are currently
they
want to establish competitive advantage
integrated
perceive
by
Instead,
providing
real estate services to high-growth sunbelt
14
that
and
western
locations.
Meanwhile,
firms
development
the motives of real
partially
are
estate
their
to
attributable
accumulated expertise in suburban and residential markets.
investment
Concentrated
in
large,
several factors.
buildings is explained by
office
downtown
First, Japanese
investors have been influenced by their experiences at home.
There,
are
and particularly those in
office buildings,
considered
estate
the
extraordinarily
factor
to
due
has
real
extended
periods
of
high demand resulting in a current
of between 0.2% and 2%.
experience
of
most stable and secure forms
investments,
offered
less
Tokyo,
vacancy
On the other hand,
The
choice.
the home
segmentation
between American downtown and suburban office markets is not
as
where investment-grade real estate
mature in Japan,
located exclusively in
investing in the already alien
Japanese
U.S.
Consequently,
urban centers.
market
those
idiosyncratic
and
are often reluctant to look at suburban office
buildings because they have no domestic point of
"Besides",
is
notes
one
representative,
"
we
reference.
prefer
the
commercial center."(16)
Second,
"first
the
wave"
large
Japanese
institutions,
been
very
investing
upwards
of
preference
for large investments is,
principally
efficiency:
complex
to
smaller
$100
investors
per
million
capable
project.
in part,
those
of
The
a matter of
projects are not necessarily any
evaluate and negotiate than
have
costing
less
$5
million-$15 million, and they do not allow for the effective
15
Also,
smaller
asset
base
projects
smaller
into
prominently
many
decision for
for the large
particularly
investors,
prestige
the
institutions.
The
with
the
also
Name-recognition
Japanese.
facilitates the approval process back in Tokyo,
many
where
be real estate men
the decision-makers may neither
familiar with the American market.
realty
Japanese
carries great weight
of such Americans
reputation-conscious
figures
"Name"
developers.
or
major
by
developed
or
are owned
institutions
it is less likely
Furthermore,
established back in Tokyo.
American
important
an
when budgets and staffing decisions are being
consideration
that
is
size
portfolio
and
estate
real
U.S.
institution's
large
a
of
the
expand
significantly
do not
projects
--
portfolio
of
scale.
of a large institution's clout and economies of
use
nor
Japanese investors,
For
such American institutions and developers embody a wealth of
experience
and
market acceptance --
qualities
which,
by
riding coattails, the Japanese hope to assimilate.
Finally,
easily
managed
downtown
annuity.
office buildings are viewed
The
Japanese focus
upon
as
an
asset-
management criteria for two key reasons. First, they want to
maintain a high-quality physical plant,
culture
emphasizes
Investor
perspective.
city,
due
quality
to
the large
and
a
long-term
representatives
number of
for their corporate
investment
believe that in
professional
a
building
management firms offering their services, one is more likely
to find a company whose management standards match those
16
of
(particularly
facilities
retail
percentage
hotels and certain types of
Second,
the Japanese owners.
are
sales)
products
already
particular
largest
(Japan's
has had considerable
towards
a
much
Unless the Japanese
retailing company) with
the
in
experience
Daiei
and
JAL with hotels
as
such
business,
as
deemed to be
"business" as a real estate investment.
investor
oriented
those
centers,
retail
they believe it wise to shy away from such investment.
Yield and Return Requirements
the
than
executive
Welch,
No longer,
market?
Equitable's
J.
Timothy
according to
vice president of Equitable
Estate
Real
and one who has worked directly
Investment Management, Inc.,
with
higher
willing to pay prices
investors
Japanese
Are
the
Japanese joint venture partners over
last five years.
been a lot of
paying more for
There's
investors
investors
.
.
.
Japanese
talk about
properties than U.S.
But what was missed was the fact
that the Japanese were willing to pay a premium to
get top-quality, relatively low-risk buildings. If
that period isn't over, it is approaching an end.
(17)
Japanese
investors target investment criteria within
relatively narrow band:
of
going-in yields on office buildings
8%-9% (except in Manhattan,
where 5.5%-7% is the norm),
and IRR's of 11%-13% (assuming a 3%-4% inflation
and
a
10-year hold).
assumption
These investors can accept a
lower
provided that the property
initial cash-on-cash yield,
well-located
a
and that a significant portion of the
17
is
current
leases
are
both
under-market and up for
renewal
or
re-
leasing in the next two-to-three years.
The
Japanese do not place much reliance upon IRR as
measure of a project's investment quality.
Granted,
method of currently valuing project flows,
healthy
skepticism
estate
too --
community,
assumptions
about
the
many within
American
reinvestment
rate,
and
but it
In
would
This is not
of
other
has
Americans
"[the]
Japanese
than
their
American
counterparts about the IRR as a measure of return.
wary
about
the
of
number
well-
similar;
enthusiastic
less
are
investors
been
the
The experience
nor founded upon clear assumptions.
defined
would be
it was neither
if he did,
specific IRR targeted or,
be
the investor had no
interviews,
many
for
given their propensity
quite favorably disposed towards its use.
however.
the
need
view real estate with a long-term perspective,
case,
a
real
particularly with respect to
logical to assume that the Japanese,
to
as a
IRR generates
the
future-sale assumptions --
and
inflation
among
a
They are
assumptions
required
and
distrustful of the reliance on residual value."(18)
Investment Vehicles
the
Given
great
investors active in the U.S.
come
as
no
surprise
similarly diverse.
of
Japanese
real estate market,
it should
growing
and
that the
variety
forms
of
investment
are
Nonetheless, most Americans are unaware
of such variety among Japanese investment mechanisms.
18
have employed many forms of real
Japanese
The
estate
investment, such as:
All equity purchases (from 50%-100%)
Credit enhancement/ letters of credit
Convertible loans
Mini-permanent loans
Participating loans
Hybrid debt/equity development financing
Below-market financing associated with deals in
which Japanese construction companies hold a
construction-related
perform
and
position
services.
1.
2.
3.
4.
5.
6.
7.
a
Moreover,
preference
a
showing
to
response
while
rebound
investments
in
in
values
existing
increase.
and
should
rights
equity conversion
property
development
is
investors
Japanese
Straight
well-established
buildings are still favored by many,
in
This
a
in
certain
can enjoy the security of a priority lienor
retaining
and
loans.
the temporary oversupply of space
They
markets.
for convertible
taken by many
approach
cautionary
are
growing number of Japanese investors
markets
equity
office
but equity investments
deals are losing popularity --
for
reasons
which will be elaborated upon in Part II later in the paper.
Summary
In summary,
"activity
if one were to choose a single
profile"
for Japanese investors,
generalized
developers
or
contractors, the choice would be:
-a well-located, fully-leased downtown office
building on which the Japanese investor has
placed
a convertible loan which currently yields 8%-9% and
19
shows an internal rate of return of 11%-13%;
-a
western
medium-sized
or
construction project
south-central
city
in
in
which
a
the
contractor can co-venture with an established local
developer
and
contribute
a
portion
of
project
financing; or,
-an
in
attractive suburban development proposal
a sunbelt area in which the Japanese
developer
can invest while learning the essential elements of
the
development and
Japanese
investors
intermediation
of
brokerage
may
a
businesses.
participate
trading
Other
through
company
the
or
the
development company itself.
However, such a profile would not do justice to the true
diversity
of
Japanese
to
nor
investors,
sophistication.
As will be demonstrated later,
strategies
greatly.
factor
in
vary
"Shadow"
an investment decision.
themselves
is
company's
prior
often
a goal in
experience,
itself;
a
investment
goals often
The desire
desire
their
to
play
educate
depending
to
a
on
explore
a
new
markets and new products may underpin investment decisions.
One thing is for certain: there is no "Japan, Inc."
20
Chapter II
Relevant Macroeconomic and Regulatory Factors
A. Economic Overview: Surplus-driven Investment
"The exchange rate is like the
for
rocket
booster
Challenger
Japanese real estate activity in
the U.S...it keeps pushing up, up,
up.. .and then, what?"
Kunio Ohsawa
Manager, Real Estate
Sumitomo Corporation
the U.S.
in
activity
construction
investment,
estate
real
Japanese
factors which collectively boost
real
and
securities
estate
volatile
four
in
Japan
are
financial
U.S.
on
U.S.
government
higher
than
comparable
Returns
are
in
trade
First,
savings
and the U.S.
in Japan,
investments
by
are affected
investment
and real estate.
instruments
and
investment.
domestics
levels of
record
fueling
Second,
enormous
and
surpluses
development
is politically stable.
increasing
exchange rates are driving an
real
proportion of such investment into hard assets such as
estate, which will conserve value and generate capital gains
when
develop
real
Japanese
present,
and
dollars,
against
falls
eventually
yen
the
estate
participants
construct in the U.S.
it
and
with
dollar.
the
borrowing
inexpensive
very
is less risky to hedge capital with
Third,
and
invest,
can
estate assets than with interest differentials on
instruments.
pending
U.S.
tax reform
encourages equity financing of
At
real
financial
discourages
real
estate
This favors Japanese developers
investment and development.
21
who
contractors
and
in
cash-rich
or
banks.
real
estate
estate
owners
Since Japanese real
Japan.
fund
and
Japanese
is more available capital than
there
opportunity
rarely
investments
with powerful
relationships
close
Fourth,
finance
projects because they are either
development
enjoy
can
sell property and land is scarce for new development
projects,
real estate investors, developers and contractors
must look overseas for business opportunities.
Japanese activity in U.S. real estate markets occurs in
the context of profound economic disequilibrium between
two nations.
A recent spate of trade negotiations involving
Japanese semiconductor exports and U.S.
of
and
textile
the
import restrictions
manufactured goods aims
to
projected 1986 trade deficit of $66 billion.
decelerate
U.S.
a
pressure
on Japanese authorities to adopt market-opening measures and
stimulate
domestic demand is occuring against a backdrop of
massive capital export to the U.S.,
billion this year.
projected to reach
$77
as the U.S. became the world's
In 1986,
largest debtor nation, Japan assumed the role of the world's
largest creditor.
Japan's predominant role is the consequence of historic
measures
post-war
to
war-ravaged
reconstruct a
economic
competitiveness
as
policy
the
conceived
key to national
economy.
of
survival
Japanese
economic
without
military power. Japan became a savings-intensive economy and
a
major exporter of capital.
22
Japan's economic miracle
and
goods
industrial reconversion expanded Japanese
subsequent
and structured economic power on
and services worldwide,
foundation
three-fold
of
manufacturing
in
revolution"
industrial
concentration on service sectors,
"new
the
advantage:
extended
a
technology,
and expansion of research
and development activities.(19) By 1980, Japan had surpassed
the U.S. as the leading global producer of autos, and a year
later
it instituted a ten-year government plan to
fifth
generation
Japanese
systems.(20)
technological
productivity.
become
firms developed skills for
and
change
the
managing
improvements
achieving
a
computer
advanced
of
producer
number-one
world's
in order to
computer system
build
in
In the service sector, companies concentrated
financial resources into fast growing areas such as fashion,
publishing, tourism, construction, and real estate. Research
and development of commercial technologies by large
private
sector companies led to rapid applications in such fields as
microelectronics and biotechnology. Japanese human resources
rivaled those of capital,
and
high
companies
of
standards
successfully
for managers excelled at planning
quality,
completed
and
Japanese
world-wide
trading
projects
of
great complexity.
Public discussion of Japan's competitive advantage
unfortunately
exchange
been
rates,
limited to economists' narrow views
interest differentials and savings
has
of
rates.
However, there is much to suggest that measures for reducing
chronic
trade
imbalance must
23
attack
structural
problems
than focus on cyclical patterns of Japanese external
rather
surpluses, such as those which occured in 1972 and 1978.(21)
For
example,
the
the cost of
policies help keep savings rates high,
the
low,
trade
"neomercantilist
government's
Japanese
and
rapid,
of new inventions
commercialization
capital
barriers in line with national strategy."(22) Despite
the recent call by the Nakasone administration for increased
domestic
spending,
will
adjustment
economic
a
be
long
process, because manufacturing productivity improvements can
price
lower
on
increases
Japanese
internal
Japanese
government
domestic
policies
to
deficits
stimulate
public
and
products
export
will
constrain
works
spending.
History shows that, as in the case of Britain and the United
States,
surpluses
Japanese
profits
the
to
as
have
outflows
capital
economic
over the last three years and this
current-account
surplus
dynamism.
offset
than
more
account
current
growing
long-term
the result of
Japanese
billion,
accumulate
countries
year,
will
trade
although
reach
US$66
the long-term capital-account balance is projected
register
a
US$77
billion
exports play many roles,
deficit.(23)
capital
Such
such as restraining U.S.
interest
rates and moderating inflation through the finance of
imports.
one-third
increase
sharply
forcing
cheap
Japanese capital exports account for approximately
the U.S.
of
in
present adjustment
the
weaker
current account
dollar.
Ministry
of
deficit,
period
following
Lower interest rates at
Finance
24
(MOF)
may
and
officials
home
to
a
are
allow
abroad
investors to access better investments
Japanese
options
securities,
which
outflows,
capital
impact
will
Massive
estate.
real
estate
real
U.S.
likely to continue at very high levels for a
are
activity,
and
markets,
in
foreseeable future.
The yen's 40% appreciation against the dollar, from 260
in
rate
exchange
Yen-financed
huge
for
stage
U.S.
of
had
conversion
market.
Japanese
level.
long-term
in
Some
recent
60% of these
yen-
the
in
financed
been
foreign
of
purchases
Japanese
historically
securities
the
short-term rates dropped during the
year.
last
once
investments
future
stabilizes at some
dollar bonds since U.S.
heightened
has
have greatly increased investments
investors
spring
1986,
government securities and set the
purchases of U.S.
dollar
August
1985 to 154 in
February
purchases,
however,
were funded with short-term dollar borrowings from
foreign
branches
of
Japanese
uncertainty over the exchange outlook.
has
As a result, the yen
stayed high because of a lesser amount
financed
with
decreased and
converted-yen funds.
U.S.
pressure
purchases
investments
rates
long-term
on
long-term
because
securities
put
on short-term rates and reverse downward
on long-term rates.
between
of
short-term rates remained stable, in spite of
discount rate cuts by the Federal Reserve,
financed
investor
to
due
banks
dollarupward
pressure
In turn, this has caused the difference
short- and long-term rates on U.S.
25
securities
to
narrow and plateau further financings of bonds with dollars.
In
generally targeted for savings.
for bond purchases,
savings in dollars.
the
When these dollars are used
corporations cannot borrow as
however,
and the net effect is to generate
usual
and are not
other obligations of corporations,
and
wages,
taxes,
pay
short-term dollar funds are used to
Japan,
Japanese
domestic
When the yen finally stabilizes against
Japanese investments in dollar bonds will once
dollar,
again be financed with yen-converted funds. Because Japanese
low,
this
seeking
good
domestic yields on investment will likely remain
should
another sizable pool of funds
create
investment opportunities overseas.
Three factors indicate an increase in the popularity of
transactions and,
futures
these
for
outlet
importantly,
floating
First,
funds.
real estate as
an
exchange-rate
systems
have not worked well since countries began to relax
capital
movement restrictions in the early 1980s.
capital
international
rates
exchange
compelled
are
governments
to
more
transactions
in
As such,
manage
actively
to balance current accounts.
allow
to
order
For
example,
recent initiatives by the Japanese Ministry of Finance (MOF)
to
permit trust banks to invest abroad and life
companies
estate
are
to
purchase
driven
against the dollar.
banks
more foreign
securities
by the rapid appreciation
In particular,
of
and
the
yen
foreign
MOF deregulation should become a flexible
26
real
as of August 1986 trust
will be allowed to operate trust accounts in
currencies.
insurance
tool
for
increasing
the
ability
government's
manipulate
to
exchange rates.
Second, Japanese institutional investors are restricted
from
participating in overseas futures and options
markets.
rate
trading
In an increasingly volatile international interest
environment,
Japanese
investors have bought
return
to stabilize and improve the rate of
securities
foreign
on
their assets. In effect, they must run considerable risks to
take
advantage of a difference between domestic and foreign
interest
rates
in order to hedge against
Since Japan is a huge exporter of
exchange
capital,
risks.
the MOF will be
compelled to permit Japanese investors to take advantage
risk management products.
to
long-term
Just as Japanese investors desire
products,
short-term exposures with futures
hedge
positions with
of
options,
and
institutions
similarly
will desire to invest in hard real estate assets to maintain
extended
returns
and
security
on
investments.
overseas
Surplus funds and a keen desire to limit precarious exchange
environments
and
will drive Japanese institutional,
corporate,
individuals buyers to invest in a diversified range
of
U.S. real estate products.
Third,
a stronger yen and cheaper oil have combined to
increase Japanese current account surpluses.
MOF
Therefore, the
is likely to place emphasis on implementing
measures
investment
to remedy the current
imbalance.
structural
Foreign
direct
in U.S.-based manufacturing facilities will be a
27
key
reduce exports
to
means
promote
and
trade
gradual
companies
construction
balance
and
will benefit Japanese
abroad.
Tax
incentives to the private sector should hasten
overseas,
movement
industrial
particularly
U.S.
the
to
Internal expansion of the economy will be limited,
however,
because Japanese government debt to GNP is among the highest
of
of the industrialized nations and the anticipated burden
programs for Japan's aging population is expected to
social
grow. In essence, these measures suggest a forceful argument
for
as
such
assets
options,
futures,
foreign
risk-hedging
increased Japanese investment in
and
real
In
estate.
Japanese investment in U.S. real
addition to these factors,
U.S.
estate is further boosted by favorable exchange rates,
tax reform measures and domestic Japanese land scarcity.
overseas
into
diversification
Japanese
estate.
real
investors anticipate substantial capital gain from
on dollar denominated assets,
shifts
rush into dollar bonds and,
when
investors
further.
asset
rates provide additional incentive for
Exchange
feel
that
This explains,
exchange
hence there will be a
real
to lesser extent,
the dollar will
estate
fall
not
any
in part, the reluctance of Federal
Reserve and Bank of Japan officials to intervene in currency
markets
of
late,
even when the exchange rate
has
become
unruly. Support of the dollar will send signals to investors
that
the slide of the dollar has ended,
undertaken
and will
only
when a weaker dollar threatens to drive up
28
be
U.S.
interest rates.
Taxes
whereas
such,
in
Japan have traditionally
promoted
they have incentivized
in the U.S.
savings,
borrowing.
As
tax reform measures in both nations are attempting to
Japanese tax incentives
correct opposite economic extremes.
aim to increase new investment in housing and infrastructure
of
and relieve exchange rate and trade pressures by the use
to
They serve
home.
at
capital
more
artificial
reduce
incentives to save and disincentives to invest. In the U.S.,
the opposite is true: tax law changes will attempt to reduce
In
save.
incentives to borrow and disincentives to
artificial
is
the real estate sector
Japan and the United States,
particularly impacted by these changes.
to
investors
require
overseas.
for
Annual
development.
lease
turnover rates average under .2%, and leasehold
favor
existing
tenants.
is
Evicting
considered
increase
rents
Japanese
business practice.
long
leases
pay
less
than
a tenant
unacceptable
in
estate
new
behavior
to
in
Many tenants with interminably
half
current
developments in commercial
companies
laws
order
rates.
market
Existing office space is nearly full and demand far
projected
both
of
an acute shortage
from
and available land
space
office
suffers
Tokyo
investments
productive
for
search
positively
conditions
real estate
Japanese
Domestic
exceeds
locations.
estimate that 43 million square
feet
Real
of
office space is required for the future to satisfy the needs
29
of
domestic
real
and foreign corporations in
debt
and
low
expenses.
Major
with
assets
companies' own fully depreciated
estate
little
Tokyo.(24)
Nevertheless,
yields
on
leasing operations average barely 1-2%, less than one-fourth
the comparable return on commercial properties in Manhattan.
giants such as
estate
Real
Japan's
largest
developable
commercial
landlord,
which
desperately
land in order to be able to
relocate
is
seek
existing
Investors
profitable office space.
and build new,
tenants
Estate,
Mitsubishi
are thwarted by leases which neither turn nor produce market
returns,
and
extension
of
and
encourages
credit.
major
property
Market
conditions
An apparent solution is
space.
justify
to
invest,
in the United States where tax
develop
rather than strictly debt
equity
of
but have no projects which
can borrow,
Developers
build,
contractors cannot build for lack
and
acquisitions
at
home
and
financing
development
tax
reform
reforms
of
projects.
abroad
channeling real estate opportunities from Japan to the
are
U.S.
for an entire spectrum of Japanese institutional, corporate,
and individual real estate participants.
Against
the
of
backdrop
these
economic
factors,
Japanese
measures have an objective of stimulating domestic
demand
and
maintaining a high yen/dollar rate.
surpluses and
moderate
current
account
external
assets,
which
billion,
the world's largest.
maintenance
of
increase
will
Japan's
reached
$120
Economic history shows
that
as of last year had
external assets depends on free
30
This
trade
and
partner
trading
power
military
seeking
to
exchange
leverage,
to
invest
preserve
risk
external
overseas to:
hedging,
credits.
diffuse
trading
Japan
and
is
partner
anxiety and finance debtor country obligations; increase the
use of yen-denominated capital; and, take a direct role (via
MOF)
in
capital
adjustment
international monetary system.
31
policies
throughout
the
B. The Japanese Ministry of Finance:
A Force To Be Contended With
The Ministry of Finance (MOF) is an enormously powerful
It combines
governmental agency.
and
ministerial
regulatory,
functions in such a way as to
discretionary
influence
Japan's economy far more comprehensively than any comparable
It
body.
U.S.
is
a
kind
of
Department
of
Treasury,
Department of Commerce and Federal Reserve Board, all rolled
More relevantly, the role and effect of the MOF
into one.
on
Japanese investment in U.S.
indeed,
and
Americans
real estate is
planning
to
significant
Japanese
with
work
investors should be aware of its impact.
real
Currently,
Japanese
estate
investments
undertaken
trust banks and pension
life insurance companies,
funds are strictly regulated by the MOF.
At present, due to
many of the macroeconomic factors noted earlier,
of
its
restrictions
upon
the
the MOF is
export
relaxing
some
Japanese
capital into foreign currency denominated
including
real estate.
companies
and
life
In March of 1986,
trust banks were permitted to
of
percentage
their
assets
instruments from 10 % to 25%.
by
held
in
assets,
insurance
increase
foreign
of
the
currency
Five months later, on August
6, the MOF increased the percentage again, this time to 30%;
furthermore,
with
which
it removed regulations which limited the speed
a company could increase the
holdings
in
its
foreign asset portfolio up to the 30% benchmark.
One
should
not
interpret
32
such
relaxations
as
an
of
abdication
power,
however.
First
of
all
there
,
is
MOF
permanent.
nothing
to suggest that these actions are
policy,
and regulations related thereto, may change rapidly
and almost without warning.
For instance, in 1975, in order
to stem a superheated domestic land boom, the MOF prohibited
almost all investors in U.S.
Prior to 1980,
just life insurance companies,
not
funds --
estate.
real
in
companies from investing
insurance
life
real estate --
trust banks and pension
were subject to strict regulation by the
And
MOF.
prior to 1981, life insurance companies were prohibited from
real
overseas
in
investing
the
than
Other
estate.
constraints of current governmental policy, there is nothing
to
prohibit
the
reinstatement
such
of
all
or
of some
regulatory restraints.
The Investment Approval Process
Even
of
Ministry
the
real
which
Simply
said,
MOF.
real
estate
are
lightly
and receive little more than perfunctory
review.
certain
by
development
companies
regulated
the
scrutiny
such investment must be approved by the
every
Investments
such
sectors,
or trading
played
by
however;
companies,
trust
because of the fiduciary
such organizations,
33
as
companies,
is not the case with life insurance
banks and pension funds,
role
understand
real estate investments are given.
overseas
This
to
American
for
it is important
Finance,
professionals
estate
almost
than the broad policies established by
more
MOF feels
a
special
Real
to the manager of the International
According
investment.
of Nippon
Division
Estate
prospective
each
scrutinize
closely
to
obligation
Insurance
Life
Company,
Japan's largest,
The Ministry [of Finance] checks the submitted
application to determine whether the project is
especially whether the
and
stable,
healthy,
investment risks are minimized and a reasonable
expected.
amount of investment return can be
Sometimes, the Ministry requires the applicant to
provide explanations of the U.S. market, results of
the
about
information
studies,
feasibility
and
reliability and creditability of partners
whatever other information it deems pertinent.(24)
standards
and
of
absence
the
Furthermore,
articulated
clearly
any
prospective
procedures to which a
Japanese
investor must adhere further complicates the process.
The
that
it
decision,
consequence
to
may take up to six months for the MOF
may
which
is
of such a rigorous review process
veto.
very well be a
a
make
Knowledgeable
industry executives, however, claim that the time period has
generally shortened as the MOF has become more familiar with
the
real
American
restrictions
on
Furthermore,
the
departments
investments
overseas
policy
their
relaxed.
have
larger Japanese institutions have special
to
whose sole function is to work with the MOF
that
all
information
expeditiously
and
that
immediately.
To
institutions
will
negotiation
stage
ensure
as
and
market
estate
any
further
apply
in
questions
expedite
to the MOF
the
34
U.S.,
honored
are
requests
answered
are
the
process,
while
still
attempting
to
such
in
the
work
a
parallel track in an effort to avoid disadvantageous delays.
such
have
to
enough
large
institutions
Consequently,
departments enjoy a comparative advantage over those that do
not.
The Mystery of MOF, and How Americans Can Deal With It
American
most
To
Ministry
the
investors,
on
fashion,
Federal Reserve Board,
As with our own
actions
effective dates for
date
the
generally
are
guidelines
discreet
most
policy changes and tangible
but rarely ensured;
are often rumored,
new
a
not under a veil of secrecy.
if
Furthermore,
and anxiety.
the MOF operates in
larger scale,
a
and
process
ad hoc review
the
injects an element of mystery --
Japanese
cryptic
a
is
Finance
Certainly,
agency.
byzantine
of
many
to
and
observers,
the
of
public
announcement, not some future date.
There are a number of steps which Americans can take to
enhance
position
their
--
vicariously
the
dealing
when
Ministry
of
Finance.
--
with
The
albeit
first
is
attitudinal; be prepared for contracts submitted by Japanese
institutions to include the clause,
approval
by the Ministry of Finance."
negotiations,
venture
an
of
approval
unfair
"subject to review
to
one
At an early stage in
should ask the prospective
investor
to
gain
MOF
While it would be unrealistic
and
individual,
the
opinion on how long it might take to
the deal.
and
expect a guarantee
35
from
said
be helpful,
should
information
and could be
critical
of
importance.
Secondly,
the
the more information one can provide to
the better.
prospective Japanese investor,
Expect that the
investor will be required to submit detailed information and
sophisticated
and the earlier it is submitted
quality of the information,
to
MOF,
The better the
project analyses to the MOF.
favorable
the better one's chances of a quick and
approval.
Finally,
quick
extremely
the
if
prospective investment
or
decision,
is
one would do better
venture which is unfamiliar to the MOF,
to
regulated
rigorously
sophisticated
thereby
Japanese
those
to
look
investors
by the ministry.
arcane
particularly
a
who
as
not
are
a
Even if
highly
one,
investment is an extremely conservative
satisfying the "prudent investor" standard to which
must
corporate fiduciaries such as life insurance companies
comply,
an
requires
can
one
be
assured that the MOF
spend
will
an
inordinately long time getting into the details of the deal.
This
is
not
officials
to in any
way
suggest,
MOF
that
however,
would have difficulty in comprehending the
deal;
indeed, almost all parties familiar with such officials have
a
very high regard for their sophistication and competence.
Instead,
it
is
meant
deal,
and
takes longer to comprehend
the
suggest
to
particularly a complex one,
that
any
first time through.
Thus,
in conclusion,
Americans dealing with
36
Japanese
investors
should always be attentive to the role played
the Ministry of Finance.
37
by
PART II:
DIFFERENT STROKES FOR DIFFERENT FOLKS:
PROFILES OF DISTINCT TYPES OF INVESTORS
this section the authors evaluate various "sectors"
In
or
categories of Japanese real estate investors
the
U.S.
that
market.
active
Understanding the traits and
in
standards
are characteristic of each sector provides a base-line
profile,
while idiosyncracies which differentiate companies
within each sector demonstrate the dynamism and diversity of
investors wishing to place their money in U.S.
Further,
examples of cooperation between Japanese companies
from different sectors are portrayed,
eye
real estate.
toward
understanding
and reviewed with
how such interconnections
an
would
affect U.S. investment strategies.
At least nine distinct sectors of real estate investors
exist within Japan.
a.
b.
c.
d.
e.
f.
g.
h.
i.
In
addition,
Among
these
bankers.
have
They are:
Life insurance companies
Construction companies
Development companies
Trading companies
Trust banks
Securities firms
Individuals
Commercial banks
Leasing companies
many
and
merchant
such as manufacturing,
likewise
firms,
are consulting
Other
sectors,
significant positions in real
ownership
exist.
related or hybrid organizations
brokers
estate,
although
such
is typically ancillary to the principal corporate
38
activity and is not investment-oriented.
--
them
of
Four
--
companies
reviewed individually,
are
as examples
of
smaller
non-institutional
by
made
being
securities
while
firms and individuals are analyzed together
investments
trading
companies, and
real estate development
companies,
construction
companies,
insurance
life
sectors.
aforementioned
six of the
of
activities
estate
real
U.S.
we evaluate the
In the following chapters,
investors.
has
estate
market.
large
and
very
by
resources
permit
estate;
the
U.S.
The staffs of trust banks
are
relatively
Many
trained.
well
real-estate
American
trust banks to invest their own funds in
Accordingly,
clients on such investment.
profile"
trust
of
and
strategies
insurance
banks is functionally
goals
companies,
U.S.
not
real
may only represent and advise their
they
instead,
these
supplement
Ministry of Finance does
the
Yet,
an
with
affiliating
firm.
consulting
real
been quite active in
actually
banks,
trust
sectors,
these
One of
in detail.
evaluated
not
few words on two sectors which are
a
however,
First,
their
of
defined
clients,
pension funds,
"investment
the
to
by
wit,
the
life
corporations and high
net-worth individuals.
The other sector,
to
directly
prohibiting
investments
invest
Japanese
are
pension funds,
in
U.S.
pension
real
funds
is not yet permitted
estate.
from
to those suffered
analogous
39
Restrictions
making
by
such
American
funds prior to passage of ERISA in
pension
banks,
trust
and
is
each
regulated
department of the Ministry of Finance.
by
Pensioncompanies
assets are managed either by life insurance
fund
or
1974.
a
separate
Currently, a small,
almost insignificant amount of that pension-fund money which
is
managed by life insurance companies in commingled
funds
has been invested in U.S. real estate; to date, however, the
MOF
has not permitted trust banks to make such
investments
on behalf of their pension fund clients.
While Japanese pension funds are not currently a
factor in American real estate,
U.S.
would
realty.
such
permit pension-fund capital to flow
into
Nonetheless, in view of the fact that Japan's
four largest trust banks -Yasuda
more
assets
--
regulatory relaxations are
It is unknown to what degree
reportedly imminent.(25)
relaxation
major
manage
aggregate pension fund
than $40 billion,
exceed
Mitsubishi, Mitsui, Sumitomo and
$250
assets
while total Japanese
billion,
even
a
totaling
pension
relatively
fund
small
percentage allocated to American real estate would amount to
a significant gross capital inflow.
40
Chapter III:
Life Insurance Companies:
Growing Activity, Growing Conservatism
"
Our
dream
is
to
everything
do
ourselves."
Moribe
Takahide
Manager
International Real Estate
Investment Division
Nippon Life Insurance Company
life
Japanese
behind Japanese investment in U.S.
major
capital
offshore
realty,
market source
force
major
insurance companies are a
and represent a
American
for
In the pages which follow, we
estate owners and developers.
market
evaluate not only the size and scale of this capital
diversity
First,
we
insurance
in
intra-sector
identify and highlight the
also
but
sector,
and
goals
investment strategies,
criteria.
present a brief synopsis of the status
company
real
in
investment
Japanese
real
of
life
estate,
followed by an overview of life insurance company investment
patterns.
realty,
insurance
industry
Third,
Nippon
a case study of a major investor in
U.S.
the
life
Life,
company
is
used
approach
and
A
characteristics.
to
to
illustrate
section
detailing
investmerts made by other Japanese life insurance
follows,
with
salient
illuminate
emphasis upon lessons learned.
The
U.S.
companies
chapter
ends with a summary profile of investment characteristics of
Japanese life insurance companies.
41
Overview
Japanese life insurance companies are not newcomers
There
investment.
estate
real
life
twenty-three
are
to
insurance companies in Japan with aggregate assets in excess
of $275 billion, and collectively they own approximately $13
of
billion
product.(26)
office
commercial
although
the 20% permitted by
below
is
represents
amount
This
a percentage
approximately 6.5% of their total book assets,
which,
which
almost all of
Japanese real estate,
MOF,
the
is
understated in light of the fact that real estate assets are
Two of the four largest owners
reported at book value.
commercial
Japanese
Nippon
companies:
real
estate
(second largest,
are
of
insurance
life
with 17 million square
feet of leasable space book valued at $2.75 billion in
real
with
12.5
estate
assets)
and
largest,
Sumitomo (fourth
million square feet book valued at $1.75 billion).
are
Japanese life insurance companies
collectively,
Taken
in
among the largest investors
of any of the aforementioned "sectors," holding in
property
of $1.2 billion of American real estate.
excess
however,
only
six
invested in the U.S.:
Asahi
income-producing
U.S.
and
Mitsui.
investing in the U.S.
insurance
industry,
companies
are
also
of
Japan's
Nippon,
a
Such
Sumitomo,
number
small
have
lifes
twenty-three
Dai-ichi,
date,
To
of
Meiji,
companies
life
suggests a hierarchy within the
and
one
indeed
the six of the
42
exists:
seven
these
largest
six
within
Japanese life insurance companies.
As it relates to U.S.
in
to the
attributable
part
large
such a hierarchy is
investment,
asset
As of December 31,
respective companies.
bases
the
of
1985, the total
corporate assets of these six companies were as follows:
$42,498,000,000
$27,906,000,000
$23,129,000,000
$15,313,000,000
$13,793,000,000
$10,446,000,000
Nippon Life:
Dai-Ichi Life:
Sumitomo Life:
Meiji Mutual Life:
Asahi Mutual Life:
Mitsui Mutual Life:
By
--
companies
Prudential,
largest
three
America's
comparison,
life
(27)
insurance
Metropolitan and Equitable --
had
year-end 1985 assets of $91,139,140,000, $76,494,165,000 and
while
respectively,(28)
$47,989,964,000
Aetna
&
Life
Casualty had year-end 1985 assets of $58,294,000,000.(29)
assets
those
Of
held in real estate,
twenty percent is allocated to U.S. realty.
function
a
is
--
As a consequence,
This allocation
Finance
investment
Japan's sixth largest life insurance company, with assets
New England Mutual and
MONY
is
limited to $200 million-to-$250 million of U.S.
real
estate within its portfolio;
$50
than
even a company of Meiji's size
exceeding those of MassMutual,
--
of
Ministry
more
together with in-house standards of portfolio
restrictions,
prudence.
of
no
-
$100 million.
establishing
an
its annual investment range is
Therefore,
organizational
given the entry costs
structure
direct investments in U.S. real estate --
to
of
coordinate
capitalization and
formation of a U.S. subsidiary, establishment of offices and
staffing
up --
only a suitably large insurance company
43
can
Admittedly,
easily afford to set up shop.
one way to help
cover such overhead costs would be to increase the amount of
in the form of commingled funds, made on behalf
investment,
of
clients and beneficiaries;
together with a
MOF regulations,
goal.
However,
desire
to learn more about the U.S.
limit
money,
clients'
the
this is a long-term
indeed,
prudent
market prior to
using
of
life
ability
current
insurance companies to do so.
Investment Patterns and Parameters
investment,
" For equity
investment is our motto"
long-term
Nippon Life Annual Report, 1985
life
Japanese
with
credited
of
the
companies
are
being the most conservative of the
investors in U.S.
Arthur
insurance
Mitchell,
Japanese
"Typically," according
real estate.
to
an lawyer with the international law firm
Coudert Brothers and one who will be profiled
later
in
"Japanese life insurance companies prefer joint
paper,
ventures
generally
with
developers
large
typically,
companies;
they
look
or
to
American
insurance
long
investment
a
they do not readily entertain the thought
horizon,
for
selling;
typically,
they accept a lower return,
seek an income guarantee in the early years."(30)
but
of
they
Most life
insurance company representatives are quick to emphasize the
underwriting
limitations
to
44
which
they
must
adhere:
fiduciaries
as
obligations
their
for
holders;
policy
matching of assets against liabilities; and strict review by
the Ministry of Finance.
"real
report,
of
operations
estate investments are ideally suited to the
life insurance companies in
to yield long-term income."(31)
potential
risks,"
notes Akira Yashiro,
for
cuts,
short
long
very
view.
of
view
their
"We cannot take
Dai-
chief representative of
Japan's second largest.
Life Company,
Ichi
As noted in Sumitomo's 1985 annual
take
"We
we are a life insurance company having
It may take a long time,
we
but
no
a
don't
care."(32)
the
In
Life's
summer of 1984,
international
which
representative
real estate section wrote
manifesto" for those
"investment
companies
a
invest
Japanese
in U.S.
of
a sort
of
insurance
life
The author's
Nippon
words
are
applicable to the industry as a whole:
Nippon Life seeks long-term, stable real estate
investment in the United States that is compatible
life
the nature of funds available to
with
speculative
avoids
It
companies.
insurance
investments such as those that promise short-term
An insurance company like Nippon
capital gain.
Life has to make sure that every effort to minimize
the investment risks that accompany high-return
This investment policy means
ventures is taken.
that the company has focused on existing prime
buildings in financial districts in major cities
.. It is reluctant to invest in growing cities,
suburban areas and development projects because it
believes that such investments are speculative and
vulnerable to changes in the state of the economy.
(emphasis added) (33)
Furthermore,
life
unlike their American
insurance
companies
45
cannot
counterparts,
make
Japanese
unsubordinated
loans on U.S.
permanent
The Ministry of Finance
even
investments;
such
prohibits
property.
are
companies
insurance
debt,
convertible
obligated to
outright purchase,
in
however,
straight
invest
by
way
latter,
the
loans are often permitted
permanent
of
co-
or as an equity
in the case of
a joint venture;
venturer
that
The result is
do not satisfy its scrutiny.
vehicles
debt
participating
if
used as leverage to acquire the equity stake.
Given such limited investment options,
and in light of
the
putative conservatism of the life insurance
one
might
Japanese
investor
would
opt for the relatively conservative convertible loan
likely
or
expect that a nascent
companies,
outright purchase vehicles,
provided adequate
ratios and yield protections were put in place.
coverage
As will
be
shown,
however, this is not necessarily the case, for while
there
is
uniform
the
conservatism,
of
the
respective
insurance
suggest that they have chosen investment paths of
companies
varying
actions
of
gospel
the
to
adherence
verbal
risk.
One
man's conservatism
is
another
man's
"speculative and vulnerable" investment.
Case study: Nippon Life Insurance Company
It
is
generally acknowledged that Nippon Life is
leader among Japanese life insurance companies investing
U.S.
years,
real
estate.
ahead
of
"They are substantially,
contemporaries
their
46
in
the
in
if not light
terms
of
sophistication and experience," according to a knowledgeable
institutional representative.(34)
1889,
are
they
they
total
Metropolitan
Prudential,
company.
assets in excess of $40
billion,
million owned by their U.S. subsidiary,
they
Of that
and Equitable.
$2.75 billion is in Japanese real estate,
Because
topped
largest,
fourth
world's
the
are
insurance
life
Japan's largest
with
Furthermore,
in
Founded
advantage.
size allows them an
Nippon's
by
only
amount,
with another $500
Nissei Realty, Inc.
are not licensed in the U.S.,
Japanese
life
insurance companies are not permitted to directly invest
the
in their own name,
U.S.
through wholly-owned U.S.
and as a result,
subsidiaries.
was invested by Nissei in U.S. realty in
in
must invest
Over $300 million
1985, alone.
investment goals are not materially different
Nissei's
from those of other Japanese life insurance companies:
investment
exploring
has been
Life
Nippon
opportunities giving the highest priorities to high
quality buildings located in the business districts
Our major concern is to realize
of major cities.
the highest possible income gain from long-term
Company
The
such buildings.
of
possession
accordingly has adopted a basic policy of working
in partnership with major developers, insurance
companies, pension funds or other concerns in the
U.S. that have a similar objective.(35)
While this statement appears to be quite consistent with the
investment parameters of the industry , it is interesting to
in the short period from the summer of
note that,
December
1985,
investments
Nippon's
strictly
goals
stated
limited
47
to
had
existing
1984
evolved
buildings
to
from
to
ventures
(
projects because .
.
a
of
reflection
confidence;
Such
economy").
it
Nissei's
corporate
is
more than goals which seem to set Nissei at the
methodology
forefront
growing
and
dynamism
seen as
be
may
evolution
development
. such investments are speculative and
vulnerable to changes in the state of the
an
in]
are reluctant to invest
"[we
joint
development
those in previously unpalatable
include
life
Japanese
those
of
companies
insurance
investing in U.S. realty.
The Organization
antedates
companies.
by
It
companies.
U.S.
the
real
estate
market
life
insurance
began evaluating the market as a
potential
that of other
far
target in 1978 -permitted
in
presence
Nippon's
Japanese
three years before the Ministry of Finance
direct
investment
by
This
evaluation
was
whose
Japanese
largely
life
insurance
coordinated
decade of experience
in
by
Nippon's
Takahide
Moribe,
domestic
real estate division in Osaka prepared him for the
expansion abroad.
1979,
In
deregulation,
named
two
Nippon
years
Ministry
Moribe as its vice president and office
absorb information
day
when
they
of
Finance
formed Nissei Realty in New York
staff of Nissei (currently,
the
before
chief.
four professionals) set out
and
The
to
about the U.S. market in anticipation of
would be at
strategic plan was formulated,
48
liberty
to
invest.
A
calling essentially for four
institutional
without
properties
investments
direct
third,
institutions;
partners;
such
with
projects
development
second,
properties;
existing
in
investor
institutional
U.S.
respected
a
with
investment
cautious
first,
stages:
separate
in
existing
and
finally,
directly and independently negotiated development deals.
Then, as now, Nissei underook its own research in-house
to develop its own information base,
and
solely upon consultants and other advisors.
a
local
notes
business,"
information."(36) Thus ,
"Real estate is
we
fresh
like
and
with the structure in place
expertise
of
level
their
"and
Moribe,
Nissei
growing,
rely
rather than
the
awaited
opportunity to invest.
The Deals
As
as
soon
the Ministry of
Finance
permitted
life
insurance companies to invest in U.S. realty in 1981, Nissei
charted
the
a cautious course of investment in accordance
plan.
strategic
stage of its
first
in
July
1981,
Equitable's
acquired
Nissei
interest
in 645
Furthermore,
scale.
wanted to start on a relatively small
a fifty
Madison
it
Accordingly,
of
percent
Avenue,
square-foot Manhattan office building.
with
the
145,000-
a
It was a landmark
acquisition as well, for it was the first such purchase by a
Japanese
life
insurance company.
subsequent) investments,
the
project;
"we
like
In this (and
with
all
Nissei became a general partner in
to
49
be
deeply
involved
in
the
so that we can acquire the know-
management of the project,
how
Equitable
A spokesman for the
to do everything."(37)
"They
confirms such involvement by Nissei, and welcomes it.
are
by
and
prepared,
well
very
different
a
bringing
perspective to the process, can be very helpful."(38)
Almost two years passed before Nissei acquired its next
property interest. The time in between purchases was used to
as
analyze the operations of 645 Madison Avenue thoroughly,
In April 1983, Nissei acquired
well as the market at large.
in
leased,
a
Center,
Resources
425,000-square-foot
of
the
This was followed in August 1984 with
stake.(39)
purchase
office
$40 million for
building in Houston; Nissei reportedly paid
the
Continental
Hine's
fifty percent of Gerald
of
excess
fifty percent interest in
a
Bank
Union
the
Square project, a 606,000-square-foot office building in the
Like 645 Madison Avenue, this interest
CBD of Los Angeles.
acquired
was
from
fifty
remaining
which
Equitable,
the
Nissei's investment
percent.
the
retained
them
cost
approximately $85 million.(40)
the
interest in an existing office building in a
partial
downtown,
with a large,
of
a
major
sophisticated institution as their
Their portfolio was diversified only in a regional
partner.
product
diversification.
plan,
shared
acquisition
the
character:
fundamental
same
sense;
all of Nissei's investments
to this point,
Up
was
type
investment
and
Nissei,
By 1985,
prepared
to
embark
50
on
vehicle
lacked
any
in accordance with its
its
second
stage
of
investment.
The first investment in 1985 was the financing of Japan
Line's
Air
of
purchase
Marriott.
from
House
the Essex
Nissei issued a convertible loan against the property, which
reportedly cost
to
This vehicle enabled Nissei
$175 million.
learn about American (or more
operations
hotel
without
the
York)
specifically,
New
accompanying
managerial
debt
concerns, while retaining the ability to convert their
into
an
for
scheduled
project:
completion,
1987
a
and
is
and
the Equitable is
and
Nissei
to
the
venture,
the
will
they
together with
a
stake in the project on which they receive
a
non-preferred return.
acquisition
development
which
in exchange for
receive annual debt service on their loan,
equity
Together,
co-financier.
are lending all of
Equitable
large
blue-blood
a
Trammell Crow is the developer, Johnson/Burgee the
architect,
costs
is
This 53-story tower
Ross Avenue in Dallas.
Tower/2200
Commerce
Texas
Nissei's first developmental joint venture,
by
followed
This transaction was
equity stake.
a
of
The final transaction in 1985 was the
forward purchase option
building in Washington, D.C.
for
an
office
When purchased, this building
will represent Nissei's first U.S. real estate investment in
which it acquired one hundred percent of the
any
partners
characteristic
or
of
co-venturers --
the
an
third stage of
deal,
investment
Nissei's
without
which
is
strategic
plan.
Thus,
by the end of 1985,
51
Nissei had undertaken
many
advancements
strategic
in a year's time:
their
(2)
regionally
remained
portfolio
of
to in excess of $500
their portfolio had more than doubled,
million;
(1) the size
diversified, while adding a little diversity in product type
relationships were established,
partner
giving it greater
exposure
important
expand
the real estate community and enabling it to
within
educational
its
new
(3)
vehicles;
investment
and
base;
and (4) it had committed itself
to
going it alone on a project.
view to the future seems to be well
Nissei's
as noted in the introduction to this chapter, they
Clearly,
at
ourselves,"
point hope to "do everything
one
their
investment
portfolio
evolution
of
systematic
approach towards this goal.
--
charted.
and
suggests
the
a
A likely next step
and one consistent with the fourth stage of the strategic
will be a joint venture in which they are the
--
plan
sole
partner of an American developer.
Yet,
there does not appear to be a firm timetable
of the strategic plan,
fulfillment
Nippon
exude
investing
in
oversaturated,
in
patience.
the
and representatives
of
risks
of
asked about
at a time when
many
the
markets
Moribe is philosophically sanguine.
are
"People
the United States sometimes forget that real estate is a
cyclical business.
&
U.S.
When
for
York's
I recall when people laughed at Olympia
Manhattan acquisitions in the
late
'70s.
Houston will recover within our investment cycle."(41)
52
Even
Divergent Paths and Lessons Learned
Nippon
Thus,
insurance
company,
office in the U.S.,
and
is
but
that
the
it was the first to
establish
an
closely,
the first to study the market
Given this,
one might
naturally
other Japanese life
insurance
companies
the first to invest.
expect
life
Japanese
not only the largest
which followed Nippon into U.S. real estate investment would
largely pattern their investment strategies after
Such
parallels have been surprisingly infrequent,
both
as to investment characteristics and
Nippon's.
however,
plans
strategic
(or lack thereof).
A
large condominium project in a midwest city was
the
investment for one of the "gang of six.".
The
initial U.S.
company, according to one of its representatives, would have
preferred
to
office
U.S.
building.
Nevertheless,
proceed as an equity co-venturer was made,
by
their
partner, a Japanese construction company.
the
the
an
decision
to
prompted in part
preexisting relationship with the
have sagged,
in
"get its feet wet" with an investment
other
venture
Condominium sales
due in part to a glut of product.
Currently,
units are being leased pending the return of a stronger
market.
"and
"[I]t was a test," said a company spokesman,
we paid the tuition."(42)
Another company's initial entry in to the
enjoyed
similarly mixed success.
U.S.
market
Relying in part upon
the
development expertise of the American developer, and gaining
53
comfort
the life insurance company --
co-venturer,
of six" --
"gang
also one of
the
office
in a 300,000-square-foot
invested
a project which "represents
on the West Coast,
development
institutional
an association with a Japanese
from
the first investment by a Japanese life insurance company in
the construction of a landmark office building in the United
position in the project,
project
and
companies.(44)
deal,
optimism
"It
about
make sense," opined an investor knowledgeable
goals
the
the
outside observers are not as sanguine.
about the deal,
didn't
and
various degrees of pleasure
express
limitations
"
of
insurance
life
Japanese
It may well end up being
a
a
years
two
While all of the parties involved in
delivery.
after
debt
which has leased very slowly in
is only 85% leased over
and
market
depressed
and
company enjoys both an equity
The
States."(43)
solid,
good
but we would not have recommended such a project to a
first-time investor,
under almost any circumstances. It was
a development deal, not an existing property. The market was
soft,
its
the local economy weak.
headquarters
to
A major employer was moving
the Sunbelt.
The risk
higher than we would have recommended."
is
the
(45)
profile
was
An advisor who
questions
whether
they were aware of the market dynamics and the
planned
familiar with the Japanese investor
headquarters move.(46)
Both
of
these investment experiences
exhibited
some
common qualities:
they were to-be-built projects located in
relatively small,
but major,
54
cities (neither is among
the
their well-
ten largest in the U.S.) that are not known for
developers.
institutional
Japanese
institutional
pre-existing
but
experienced,
by
developed
addition,
In
economies.
diversified
Both projects
included
investor which not only
enjoyed
--
a
relationships
ventures.
been galvanized by earlier successful
had
another
but also had a pre-existing relationship
the respective American participants
which
non-
small,
relatively
relationship with the respective Japanese life
insurance company,
with
were
both projects
And perhaps most importantly, neither company had formulated
a
U.S.
well-developed strategic plan towards investment in
real estate.
Not surprisingly,
and
criteria
investment
their
both of these investors have altered
in
strategies
subsequent
The second U.S. project for the latter company is
projects.
a joint venture with the Equitable. Together, they own fifty
of a well-located
percent
office project,
to
in addition
enjoying a first position as the project's permanent lender.
This deal varies dramatically from the investor's West Coast
It
is
located in a large city with a well-diversified economy;
it
project,
was
introduced
Equitable,
by
a
some
despite
an
to
superficial
the project by and is
laying off
partner
a
with
investment relationship which was not swayed
pre-existing Japanese
Equitable's
similarities.
clout
risk,
and
relationship.
Reliance
expertise is viewed as
a
upon
form
of
and even though the market has shown some
signs of oversupply, the company's representative notes that
55
he
"not
is
nervous,
investment
long
a
because we have
window, and I trust Equitable."(47)
Notwithstanding such confidence,
away from development deals in
the
"Our [current] strategy of investment is
one
to shy away from
plans
near future.
primarily
that
however, this company
emphasizes cash flow --
capital
not
gain.
Given this, we favor existing properties."(48)
Similarly,
senior representative of the first
a
insurance company is charting a more cautious,
life
wait-and-see
course in keeping with a strategic plan:
The first was the
We are in our second stage.
existing office
The second:
"tuition stage."
American
[with
co-ventures
and
buildings
The third will come, but we're not
institutions].
exactly sure what it will be.(49)
purchases
Subsequent
are
them
Among
have been consistent with this
large,
in San Francisco and Dallas.
buildings
office
downtown
fully-tenanted
plan.
In both instances,
an American institution is a co-venturer.
companies should
which
have
life
number
of
vehicles,
of
insurance
not suggest, however, that those companies
opted instead
for all-equity investments
enjoyed thoroughly satisfying experiences.
six"
life
experiences of these two Japanese
The
insurance company,
markets
Another "gang of
which has been active
and which has
have
invested
via
in
a
different
acquired an existing office building in a
suburb
a major city within the Boston-to-Washington corridor in
1985.
In addition to watching the value of the dollar slide
thirty percent against the yen almost immediately
56
following
this company paid a price which many knowledgeable
closing,
of
individuals believe incorporated an unwarranted premium.
course, opinions about price often vary widely, and often do
not
incorporate
the
purchaser.
some
according
assessment;
in
Nonetheless,
be
to
appears
verification
objective
to
there
instance,
this
Japanese
in contravention
real
of a cultural and institutional disinclination to sell
is quietly seeking
(elaborated upon in Chapter VI),
estate
an
such
of
another
a employee of
this life insurance company,
institution,
to
considerations which are idiosyncratic
to unload the property in Tokyo.
earlier,
Unlike the two life insurance companies noted
this
however,
has attempted to spread
strategic plan for investment,
risk
a new office building currently in the
itself
approximately
ten
its
it acquired a fifty-percent interest
In New York,
protecting
a
different
investing through different vehicles in
by
cities.
in
in keeping with
insurance company,
life
with
a three-year
percent,
together
lease-up
yield
with
stage,
guarantee
a
of
bifurcated
funding schedule; the developer, depending on the success of
efforts twenty-four months after building delivery,
leasing
will "either get a bonus or suffer a penalty."(50)
management
claims
of
the venture is left to
the
that "the arrangement is a splendid
Active
developer,
one.
who
Although
[his Japanese partners) are very well informed and very well
am
the
partner and
managing
prepared,
I
sleeping
partner."(51)
In
57
a
similarly
they
are
the
sophisticated
venture, the company made the construction loan and issued a
in
convertible
The loan is
in downtown Chicago.
project
mixed-use
million
on an $80
commitment
loan
convertible
"between five and fifteen years"(52), and the project, forty
pre-leased
percent
a major
to
every
gives
corporation,
indication of being a rather successful venture.
comfort:
"They
desired
Such a status is
--
enhanced
is
ensure that the educational process
to
instead
but
richly
all
Japanese
investment
stumble,
important goal emphasized by
an
to
position
so much to exert greater control over the project,
not
the
institution
know that I'm not in a
the cash and run"[53]).
pocket
a fact which
developer believes gives the Japanese
American
a
is
it
technically,
subscriber in the former case,
corporate
great
(although
partner
general
a
is
life insurance company
the
In both of these projects,
institutional investors.
its initial and arguable
Despite
this
expand its scale of investment in the U.S.
employees
York,
and
strategic
rather
in
is
comfortable
with the
has been formulated,
plan
about
its
American
and
components,
it
company
comfortable
feel
systematically
"We --
monitor
with
such
a
in
New
A
market.
while
regional and product diversification.
investment strategy ?
--
One of its chief
Tokyo apprenticed with the Equitable
secretive
emphasize
this
to
life insurance company appears to be well-prepared
they
are
to
appears
Why
does
diversified
both in Tokyo and in New York
our selected thirty cities on
58
a
quarterly basis, and on a monthly basis go into great detail
fresh,
stay
This process ensures that we
four or five cities.
on
So,
stay current."(54)
while they may in fact be
the "sleeping partner" in a particular deal,
they certainly
are not sleepy in their evaluation of the markets.
SUMMARY
The disparity between investment patterns of
Japanese
different
life insurance companies is likely to continue for
at least a number of years.
Such disparities are not just a
function of size, staffing and experience; just as important
is a company's structural preparedness, often in the form of
a
"we
no concrete idea on how to invest in
have
States"
well
may
(55)
that
A company whose office head notes
strategic plan.
is
enjoy
probably
great
success
less likely to
the
United
with
be
on
its
the
investments,
but
cutting edge
of new programs or to show high responsiveness
to new opportunities.
Of course, higher risk often attends
novel investment programs and vehicles,
investment
so such a "go slow"
strategy may be not be inappropriate for a
life
insurance company, after all.
Notwithstanding
generalizations
such
differences,
certain
can be made with some confidence about
Japanese life insurance companies as investors in U.S.
the
real
estate:
1)
Existing
office
59
buildings
will
remain
the
favored
product.
placed
on
within
cities
"Bowash"(Boston-
the
Interest in suburban areas
corridor.
Washington)
being
is
emphasis
Particular
is slow to develop, as most companies are still not
look
to
beginning
are
companies
advanced
more
some of the
this,
notwithstanding
markets;
such
of
dynamics
the
with
familiar
at
seriously
different kinds of product, including suburban.
while upside potential takes
paramount importance,
via
enhancements,
Yield
seat.
back
decided
a
of
are
yields
cash-on-cash
Satisfactory
2)
income guarantees, are a growing standard, with two
or
yields
where
with
range,
buildings currently in the lease-up stage run
300
basis
10.5%-13%
points higher.
IRRs fall
on
Yields
bought.
are
the
in
Manhattan,
the exception of
6%-7%
of
yield
Current
norm.
the
on existing propoerties fall
requirements
7.5%-9%
as
years
three
100the
within
using a ten-year schedule and
range,
a
3.5%-4.5% inflation assumption.
3)
Affiliations
affiliations
only
not
name"
"big
give
American
preferred.
and institutions are
developers
oriented
with
the
Japanese greater comfort,
Such
relationshipbut they
also
make a prospective investment easier to sell to the
bosses
back
in Tokyo.
60
Such
an
affiliation
is
on a
important
particularly
joint
developmental
venture.
expressed an interest in
4) None of the companies
while $100
an investment of less than $10 million,
million
current
Some
limit.
to be the effective upper
appears
investment
annual
are
ranges
approximately as follows:
- Nissei: $200-400 million
- Sumitomo: $100-300 million
$50-100 million (1-2
- Meiji:
deals per year)
the traditional long-term view
towards
real estate investment still predominates,
certain
5)
While
experts
growing tendency to adopt a more "American-like"
hence,
a
frequently
commodity-like
---
tendencies are apparently seen
Such
perspective.
more
more
shorter-term,
a
see
who work closely with the Japanese
the
in
and
experienced
more
advanced companies, such as Nissei and Sumitomo.
All U.S.
6)
staffs
in
offices are trying to beef up their
order to cover more
territory
and
enhance their ability to make quick decisions.
home offices in Tokyo,
quite
as
anxious
to
to
The
however, are apparently not
increase
staff
size
and
overhead.
7)
According
to Gordon Clagett,
61
Executive
Vice
President of Equitable Real Estate Group, Inc.,
There are two opposing trends, but they balance out
a better informed,
-conservatism
to greater
rather than reactionary, conservatism.
of
On the one hand, the Japanese have spent a lot
time learning about the market in a short period of
They are now better educated, and may be
time.
For instance,
more inclined to take greater risks.
some who used to look exclusively at downtown
office buildings are now looking at retail and
industrial.
On the other hand, as they view the current
oversaturation within the market, they are becoming
more conservative.(56)
manifestation
One
growing
rather
appetite
than
such
of
for
conservatism
Whenever
possible,
instruments are structured to allow for
an
into
equity
stake,
so
most
a
investments,
debt-oriented
equity.
is
of
such
conversion
the
same
underwriting standards are being employed.
In
sum,
positioning
Japanese
life
insurance
companies
themselves to play an even greater role in
U.S. real estate industry.
62
are
the
Chapter IV:
Construction Companies: Financiers in Builder's
Clothing
"There are peaks and valleys. The peaks
the
been to follow
always
have
you find valleys
Japanese investor;
before
alone
it
go
to
trying
understanding the market."
Fujio Suzuki
Asst. to the President
Kajima Corporation
construction companies generated $1.7 billion
Japanese
in
revenues
1985
which
in the U.S.,
projected
construction
Yet,
companies
U.S.
domestic
to capture a 4% share of the
market.(57)
doubled
than
This year these
earnings from the previous year.
are
more
large-
the role of these
scale construction concerns remains relatively obscure.
The
labor,
of
primarily
and
materials,
industries in automobiles,
and
is
industry
construction
domestic
competitive,
regional,
inputs
U.S.
supplied
local
by
Unlike
management.
consumer electronics, and steel,
success in the construction industry is not wholly dependent
on
low-cost
efficiencies.
quality,
production,
and
distributive
Some success factors are intangible,
knowledge of local customs and work
habits,
such as
politics,
and
regulatory environments. "You can't just walk into this city
and
doing
start
President
recently
of
projects,"
notes
John
Tishman Construction in New
Johnson,
York
which
collaborated with a Japanese developer on a
Vice
has
high-
rise condominium project. "You have to deal with so, so many
63
different sectors:
It takes years,
management companies.
folks
research
our
however,
in certain
are preparing and,
contractors
implementing a long-term,
obstacles,
Japanese
major
that
indicates
most
and even then,
In spite of apparent
don't make it."(58)
building
and
contractors
all the
of
least
not
agents,
the unions, the suppliers, the city, the
already
cases,
methodical entry strategy for the
U.S. marketplace.
The
pursuing
Japanese
ago
in
a
which began offshore activities over
response
to
of
decline
the
largest
are some of Japan's
business in the U.S.
contractors
actively
are
firms which
construction
decade
Japanese
domestic
These firms are staking their future,
construction markets.
on technological innovation and
both overseas and in Japan,
Japanese contractors view
advanced construction techniques.
industry,
construction
several facets of the domestic U.S.
quality controls, and building-
such as project scheduling,
systems innovation, as inefficient and ripe for improvement.
products
Japanese
a
reputation
contractors
construction
for
want to
quality
and
extend
that
Furthermore,
industry.
contractors will attempt to transfer a vertically-
Japanese
integrated
States.
the
to
impression
these
and
performance,
have
The
integration
construction
construction
combined
is
service
effect
the comparative
of
approach
to
technology
advantage
United
the
and
which
service
Japanese
firms are intent on bringing to the U.S.
They
do not believe that there is a sustainable niche for foreign
64
contractors in the pure "build and sell" business.
want to create a new dimension in
contractors
and
services
construction
compete
quality rather than copy or
Japanese
against
existing market mechanisms.
Joint ventures with U.S. developers are a prevalent
means
which
by
of
details
construction
U.S.
the
the
absorbing
are
contractors
Japanese
essential
day-to-day
business.
These companies can bring substantial capital
to
form
of
U.S.
construction
the
in
frequently
projects,
limited-partner equity contribution. In return, they want to
in
participate
and
practices
contractors,
they
earn
a
As Japanese construction firms learn the
reasonable return.
business
and
process
construction
the
methodology
U.S.
of
general
likewise plan for future application
of
new technologies and service concepts. In Middle Eastern and
Asian
Southeast
successfully
countries,
introduced
the
In
Japanese
contractors
expertise not available
the
U.S.
markets.
construction
these
situation
learn
must
the
is
companies
those
in
different,
U.S.
for
construction
business first before attempting to revolutionize it.
An anticipated increase in foreign direct investment in
the
U.S.
by
construction
market.
integrated
contracts
Japanese
manufacturing
firms
will
provide
firms with a transitional foothold to the U.S.
Because
project
Japanese
clients
planning
and
are
accustomed
construction
to
services,
for manufacturing facilities throughout the
U.S.
will offer Japanese construction companies an opportunity to
65
test
new
methods and technologies as they learn
the
U.S.
market through joint ventures on purely U.S. projects.
The
scale
of
projects
contractors vary considerably.
underlying
and
the
Yet,
expertise
of
such
little is known of the
motives for rapid expansion into the
U.S.,
the
world's largest construction market. Equally obscure are the
critical relationships which link large Japanese contractors
to other Japanese firms currently investing, developing, and
throughout
brokering
Although
Japanese
barriers
that
key metropolitan areas
the
development, trading, and financial sectors,
success
traditionally
has
government
of key industries,
their
Because
construction
the
Japanese
promote
analysis
economy,
construction
intends,
construction
their eventual
these
overseas
the
and
such as autos and steel,
of
national
priority.
industry health is very important
to
expected
to
the government can be
industry activity
from
in
a
broad
U.S.
perspective
includes:
Objectives and Strategy;
Comparative Industry Characteristics;
Construction Industry Background;
Movement to Offshore Markets;
Recent experience;
Case Study: Hasegawa Komuten Ltd.;
Conclusions
66
the
Our
to explore the objectives of
therefore,
companies
entry
Moreover, the Japanese
supported
success as a matter
regards
U.S.
investment,
is closely tied to the related activities of
Japanese firms operating in the U.S.
expansion
the
confront
construction firms will
are distinct from those of
of
which
Objectives and Strategies
Japanese
construction
companies
moved
overseas business when domestic markets,
by
economic
to
generate
adversely affected
adjustments and oil shocks,
could
no
longer
promise sustained periods of new construction projects. Most
were immediately successful in transferring proven expertise
for large infrastructure projects,
high-rise
residential
environments.
that
could
Japanese
plant construction,
facilities
to
developing
construction firms
built
country
projects
not be delivered by domestic Middle Eastern
Southeast
Asian
succeeded
by providing differentiated services in terms
scale
and
contractors.
complexity.
As
Entry into
domestic Japanese construction activity,
was
foreign
a reaction to
the
of
reinforced
existing business
to
new
or
markets
decline
of
of
overseas expansion
less a clearly articulated plan than an urgent,
extension
and
markets.
a commitment of these big companies to
ad hoc
Success
vertical
integration, which combined with financial strength, allowed
contractors
markets.
to adapt to differing conditions of
Japanese
responsibility
which
contractors
competitors in the U.S.
Competitive
offered expertise based
for all aspects of a
characterizes
Strategy
the
way
market.
they
project,
view
67
an
on
approach
themselves
as
Michael Porter observes in
that previous business
determine competitive strategy:
individual
patterns
may
Every
firm operates on a set of assumptions about
its own situation ...
These assumptions about its
own situation will guide the way the firm behaves
...
Companies
and the way it reacts to events
develop perceptions or images of themselves and
their relative capabilities, which are reflected
in the implicit assumptions that form the basis of
their strategies.(59)
Major Japanese
construction companies which operate in
the U.S. today have adopted a strategy based on acknowledged
of
areas
of
most
development
in
expertise
construction
and
technology
objective
estate
in
in financing ability and potential advantages
strengths
companies is to build
operations
wide-ranging,
The
profitable
real
existing
utilize
which
fully
management.
project
integrated
services. Few are interested in simply building and selling,
because
they believe that the breadth of U.S.
activity offers profit opportunity in
design,
real
estate
engineering,
research, and property management businesses, in addition to
building
They recognize that large-scale
and construction.
infrastructure
such
projects,
as the ones they
built
in
developing countries, will not be a stable source of revenue
While Japanese contractors earned success
in the U.S.
the
Middle
East
and
conventional expertise,
Southeast
work
methods
"Development
to
by
transferring
penetration of the U.S. market will
implementing new technologies
require a different strategy:
and
Asia
in
overall
the
development
allows for general contracting work,
business.
but
not
the reverse," says Shimizu America's Naoshi Oinuma.(60) Most
companies
believe that it will be difficult,
68
at
best,
to
a
on
compete
contractors and builders.
the
basis
head-to-head
U.S.
"We want to emphasize the sum
rather than each individual
parts
established
with
of
observes
element,"
Keisuke Mine of Kajima Corporation's Real Estate Development
Division in Tokyo. "Our idea is that there is more profit in
(61)
development than pure construction in the U.S."
objectives for the U.S.
Their
more
expansive
therefore,
market are,
experience
and ambitious than previous
in
other countries might suggest. These goals reflect long-term
diversification strategies which have changed large, familymulti-national
sophisticated
into
contractors
held
construction engineers and developers. Japanese construction
market as both testing ground and long-
firms view the U.S.
term
expensive R&D
for
payoff
in the U.S.
implemented
successfully
adaptive
and
and
technology
can be
subsequently
expertise
Construction
innovations.
investments
transferred to other countries. Sustainable advantage in the
U.S.
to
withstand
swings of narrowly-focused construction
activity,
will
market
cyclical
firms'
broaden
capacity
such as those which many suffered in Middle Eastern markets.
These
through
nonetheless,
strategies.
objectives
common
Top-ten
a
are
variety of short- and
firms such
as
pursued,
being
Kajima,
Ohbayashi
plan to gain a foothold in the U.S.
contracts
on
medium-term
Shimizu,
by
and
securing
Japanese direct investment in automotive
and
electronics manufacturing facilities, but meanwhile have coventured
several
medium-sized
69
development
projects
in
For example, second-ranked Kumagai-Gumi is
regional cities.
a
venture
joint
with the Zeckendorf Company in New York
developments
and
range
activities
Corporation
Aoki
of
billion
$1.2
over
in
partner
City,
residential
from
development in Dallas to a hotel project for Japan Air Lines
in Chicago's Riverfront Park.
in,
Hasegawa Komuten has invested
sold smaller-scale condominium projects
developed, and
in Manhattan. Each strategy is a beginning step toward total
involvement in the U.S. development business.
exchange for market access and experience,
in
business
realities
approval
procedures,
over
negotiations
participations
cautions
to
order
frequent
cost-plus
contracts.
on-going
and
equity
Formerly,
"dequity",
were debt disguised as equity or
Jack Shaffer of Sonnenblick Goldman,
who
Kumagai-Gumi together with the Zeckendorf Company,
brought
"because
(Japanese) contractors really didn't do anything other
contribute
Now,
funds
to a
similar
non-involved
and
complicated
with
litigation,
not
intensive
relationships,
cope
in
passive
mere
temporary,
regulations,
in local
apprenticeships
seek
They
investment.
equity
but they do
role in projects as limited to
their
regard
capital
seek
developers
that
understand
contractors
Japanese
States.
United
the
in
business
doing
and
familiar
are a common strategic means to become
developers
with
relationships with contractors
venture
Joint
than
lender."(62)
however, cautions Cushman & Wakefield's Jim Montanari,
construction
companies
are
70
taking more
active
roles
in
that "developers who are
so
projects
looking
purely
for
passive partners aren't necessarily going to find them."(63)
"It
me five years to build land location
took
says
a condominium builder,
Komuten,
Hasegawa
Chief New York Officer at
Kiuchi,
Katsu K.
expertise,"
"to the point where we are
now known and acknowledged in the local marketplace. We have
the ability to serve as genuine general partners."(64) Joint
allow Japanese
venture
agreements
project
risk to American partners.
firms
to the U.S.
unaccustomed
and subsequently implemented.
identified
period,
development
Over an
delays
to which newcomers
business are particularly susceptible.
utilizing
to
and
the
development
Japanese contractors
comparative
joint ventures to transform the
long-term
of financing ability into a
advantage
entry
an industry,(65) such as expense overruns
to
scheduling
first
extended
joint ventures help overcome subtle costs of
barriers
are
Japanese
of which competitive advantages can be
out
process,
They instruct
market on the
spread
to
contractors
strategic
weapon.
Comparative Industry Characteristics
construction activity overseas is limited
Japanese
the top 20-30 ranked,
engineering
comparable
giants,
firms.
to
some
dependence
very large,
Although
these
to
integrated constructionfirms are of
a
scale
U.S.
construction
on overseas contracts has
historically
of
the
71
principal
been less than for major U.S. firms:
Table 1: Comparison of U.S. & Japanese
Construction Firms (1984)
Total Contracts
Firm
Rank
Percent Overseas
(US$ MM)
U.S. FIRMS:
1
2
Kellog Rust
Fluor
10,855
8,353
80
18
3
Bechtel
8,220
60
4
Parsons
7,514
40
5
6
Stearn
Brown & Root
4,932
3,884
11
33
4,192
4,034
3,998
3,317
2,972
2,660
7
7
9
5
7
21
-------------------------------------------
JAPANESE FIRMS:
Taisei
Kajima
Shimizu
Ohbayashi
Takenaka
Kumagai
1
2
3
4
5
6
Source: (66)
Japanese
firms
revenues
generate stable annual
whereas U.S.
many small and medium-sized projects in Japan,
firms
from
experience wide year-to-year fluctuations because
the variability of huge overseas
projects.
of
Japanese
Also,
firms are not differentiated from each other in terms of the
integrated services they provide.
by
comparison,
tend
to specialize in specific
industrial project capabilities.
possess the
either
country
varied
know-how,
and
U.S. construction majors,
Only the largest firms
qualified
financial
technical-
staff,
strength to
of
experience,
be
able
to
venture into international markets. In Japan, executives and
engineers
with requisite language skills and
72
international
from prestigious universities are recruited almost
training
largest
the
for
exclusively
have
firms
Smaller
firms.
to
neither an appetite for overseas activity nor an ability
the costs of overcoming unfamiliar competitive entry
absorb
construction
well-known
limited to a review of large scale,
necessarily
is
States
operating in the United
companies
Japanese
of
these reasons an understanding
For
barriers.
firms.
succeed
The ability of construction firms to adapt and
in
they
unfamilar environment depends not only on
an
able to transfer advantages,
are
how
well
skill
but also the
with which they adjust to different competitive ground rules
and
Japanese
The
relations.
work
domestic
construction
industry is more stable and regulated than that of the
Japanese
Therefore,
firms bring to the
U.S.
expectations
U.S.
formed from a different kind of competitive environment.
The
notable
Japanese domestic construction industry differs in
from
respects
the
U.S.
industry.
construction
Although labor and material costs have risen steadily in the
U.S. and Japanese construction industries, cost structure in
domestic
Japanese construction depends on
a
multi-layered
subcontracting system. General contractors provide engineers
to
coordinate
lump-sum
neither
of
and
contract
manage subcontractors under
Japanese
system.
general
uniform
a
contractors
employ large staffs nor maintain a permanent
force
contractors.
U.S.
workers
contractors
as
do
some
negotiate
large
U.S.
and bid with labor unions
73
and
open
shop workers when staffing a project, and maintain a payroll
which
have long-term
they
deal
contractors
with
selected major subcontracting firms
with
exclusively
Japanese
completion.
project
until
labor
Although
relationships.
costs are similar for both large and small-scale contractors
in the U.S., in Japan larger firms extract lower labor costs
due to bargaining power over subcontractors with which
they
have steady relationships.
standard bidding system used in private and public
The
a
restricted
of
form
group
of
determined by size and relationship to the public
or
private
client,
particularly
will be selected to bid on projects.
of
to
according
This
Open
system
is
important on contracts awarded by the Ministry
Construction for domestic
Ministry
A small
bidding is uncommon in Japan.
competitive
of
constitutes
similar sized firms.
among
competition
firms
Japan
in
projects
public-sector
firms
Construction annually ranks and selects
a "pointing system" based
The
projects.
size,
on
capital
sufficiency, total project volume (i.e. billings worldwide),
strength,
research
and development
previous
project experience.
contracts
depends
staff
expertise,
and
Eligibility for public sector
very much on
position
in
ranking,
so
contractors
must be particularly attentive to maintaining a
consistent,
year-to-year volume of work. An example of 1985
rankings is:
74
Table 2: Japanese Construction Company Ranking (1985)
Points Awarded
Company
Rating
1985
1984
Change
1
Shimizu Construction
466
462
4
2
2
2
Kumagai Gumi
Toda Construction
Maeda Construction
462
462
462
466
462
462
-4
0
0
5
Kajima
459
456
3
5
Ohbayashi
459
459
0
Source:(67)
Japanese construction firms are,
therefore, unfamiliar
to
with an open competitive bidding process and must adjust
the cyclical nature of the U.S. construction industry.
Japanese
The
ensures
process
projects
large
have
contractors
of
Taketoshi
buffers
The
the
enjoyed
large
this
Ministry of
competitive
construction
restrictions
industry
further
"Large
firms.
notes
system,"
general
Makoto
it
business."(68)
the
the
underlying
emphasize
firms,
"because
Construction,
them against cyclical risks of
small
channeling
by
medium projects to medium
to
this
whole,
a
Taken as
stability
earnings
to small firms,
projects
and
bidding process.
the
underscore
which
relationships
and personal
professional
long-term
of
context
system functions in the
the
Japanese
differing
expectations and problems which contractors may encounter in
the United States.
Japanese firms are integrated to provide a complete
range
of
construction services and
in-house
construction
management. Major firms which have recently entered the U.S.
market
are
planning to offer services
75
from
initial
site
integrated
construction companies view this fully
Japanese
construction
participants
feasibility
->
planning
->
operation -> maintenance process.
construction firms view
->
design
the
of
stages
separate
at
together
bring
frequently
projects
independent
construction
->
Japanese
In this sense,
U.S. construction methods as poorly
require
so much so that owners
and inefficient,
organized
U.S.,
as their key advantage for success in the
capability
where
services.
building maintenance and brokerage
to
selection
construction managers to supervise all elements of a project
from start to finish.
Japanese construction executives
are
convinced that they can deliver U.S. projects at cost and on
time,
as
and
some
Yet,
quality.
of the U.S.
traditions
service
such differentiate their product by
Japanese
that
admit
marketplace,
established
such as union
power,
local regulations, and accepted ways of doing business could
or
reduce
eliminate
quality
this
and,
advantage
by
extension, profits. Others doubt that much money can be made
the
over
medium
term
the
in
U.S.
marketplace.
"Until
Japanese construction companies have been able, over several
years time, to learn the day-to-day aspects of U.S. business
methods,
noted
there
is no money to be made at
game,"(69)
this
Tsuneyoshi Shimizu of the Kajima Corporation,
who is
an intern with a well-known Boston developer/broker.
The
resources
largest
Japanese contractors
to
research and development.
follow a consistent pattern of
76
devote
significant
In doing so
process-oriented,
they
long-term
planning characteristic of Japanese industry in general. The
of
significance
process
McMillan
System,
In The Japanese Industrial
that
advantage
efficiency will translate to competitive
in the U.S.
explain
executives
held by Japanese construction
belief
the
research and development helps to
observes that for research and development activities:
The emphasis is on the long term, not the short
term. The emphasis is on learning and know-how, or
process, rather than end product. The rationale is
to develop sunrise sectors.. .Technological policies
and practices go hand in hand with many micro and
firm,
strategies at the level of the
macro
industry, and society. For example, Japan's R & D
policies help explain the strong emphasis and
skills at process development and enviable record
in quality control.(70)
development of
and
Research
construction
technology
intelligent
structures is a key long-term goal of
contractors
operating
attention
paid by U.S.
oversight
which
in
the U.S.
They
view
Japanese
the
contractors to R & D as a
will work to their competitive
and
scant
critical
advantage.
"We have techniques," says Shinzo Matsumiya, General Manager
of international planning at Shimizu Construction, "for land
reclamation,
high-tech ventures, and anti-seismic buildings
which keep us ahead ...
annual
the
report
for the moment."
Shimizu
of the
(71) As an example,
Construction
Company,
ranked first by the Ministry of Construction in 1985, states
that
"On
the
basis of abundant
experience
and
results,
Shimizu has risen above being a systems organizer and
a
new
step forward as an 'engineering constructor'."
Japanese contractors view themselves as technology
77
taken
(72)
leaders,
and
become
to
that this advantage will help them
believe
winners in the U.S. construction business.
and
Family
most major Japanese
characterize
contruction
Some
firms.
are
as number-five ranked Kajima Corporation,
such
firms,
ownership
institution
financial
controlled and operated by founding family
Others,
groups.
such as number-two ranked Kumagai-Gumi and Takanaka Komuten,
Large
same
shares.
private companies which have not issued public
are
banks are principal shareholders
Japanese
and are,
firms
borrowing.
A
by extension,
principal
these
of
sources
of
Annual
page from the 1985 Kajima Corporation
Report illustrates these relationships:
Table 3: Principal Shareholders of Kajima Corporation (1985)
% Shares
Name
Company Stock:
(at 11/30/85)
The Sumitomo Bank, Ltd.
Shoichi Kajima
The Kyowa Bank, Ltd.
The Mitsui Bank, Ltd.
The Sumitomo Trust and Banking Co., Ltd.
The Mitsui Trust and Banking Co., Ltd.
Sumitomo Life Insurance Company
Nippon Life Insurance Co.
4.7
3.4
3.4
3.3
3.3
2.4
2.2
2.0
Principal Borrowing Sources:
The
The
The
The
The
Source:
The
Sumitomo Bank, Ltd.
Kyowa Bank, Ltd.
Mitsui Bank, Ltd.
Mitsui Trust and Banking Co., Ltd.
Sumitomo Trust and Banking Co., Ltd.
(73)
closely-held
nature
78
of
these
firms
and
their
interlocking relationships with banks provide major Japanese
contractors
with
sources
and
techniques.
Japanese contractors' entry strategies for
the
financial
Although U.S. lenders may frequently reserve the
strength.
choice of a
of approval over the
right
financing
of
be facilitated by significant
will
market
U.S.
a wide range
general
project's
contractor, the relationship of financing source and builder
is
a developer.
contingent
often
sophisticated
number-one
however,
In Japan,
upon
Japanese
Moreover,
rather
is
it
general contractor to arrange financing
uncommon for a U.S.
for
Furthermore,
arms-length.
at
usually
of
use
ranked
contractor.
designated
a
contractors are
capital-market
project financing is
developing
themselves
example,
For
operations.
which
in
Shimizu Construction Company,
financial giant Dai-ichi Kangyo Bank is a major shareholder,
1979
financial subsidiary in Amsterdam in
a
organized
traditional
"Our
raise funding for international projects.
to
in projects is expanding quite rapidly," states Naoshi
role
Vice President of Shimizu America Corporation.
Oinuma,
becoming
are
investors
developers
to
fiduciaries
U.S.
expect
of
a
development
sort,
Japanese
bringing
projects."(74)
low-cost financing in order
"We
"American
for
us
to
become involved in a project," notes Mikio Ishikawa, Manager
of
International Planning at Shimizu headquarters in Tokyo,
"and
rates
we can raise money,
in
Euromarkets.
our own
money,
However," he adds,
at
below-market
"where we
take
risks, currency risks above all, we will want to become very
79
involved."(75)
endows
projects
to deliver financing to
ability
The
Japanese contractors with a potent competitive advantage for
winning contracts in the U.S.
A recent article
market.
in
Institutional Investor notes that "Japanese equity investors
act
a magnet for other Japanese
as
banks
construction
making
loans to American developers."(76)
making
Japanese
their
and some have also been involved more directly,
colleagues,
will
to
bridge loans
and
are
Bank
Fuji Bank and Sumitomo
Bank of Tokyo,
as
Japanese
Such
money.
capital and find
for
search
linked to loans.
developers
U.S.
contracts
construction
Japanese
Many future projects financed by
banks will be built by Japanese construction firms. For this
Shinzo
clarifies
reason,
Matsumiya,
Manager
General
of
"we are
International Planning at Shimizu Construction Co.,
studying your development process from beginning to end."
(77)
understanding of these facets of
An
construction
evaluate
key
industry suggests a perspective from which
strengths
strategies in the U.S.
and
weaknesses
competition,
long-term relationships,
where
partnerships,
methods
of
restricted
and fully integrated
the
not advantages transferable to
hoc subcontracting,
ad
and
segmented
operation.
firms'
major
such as cost structure,
industry,
are
of
to
market. Some aspects of the Japanese
construction
capability,
Japanese
the
Other
80
open
bidding,
business
U.S.,
deal-by-deal
units
characteristics,
are
common
such
as
intensive
research and development efforts of major
should yield benefits in the long term,
firms,
especially in areas
such as quality control and intelligent-building technolgy.
The
outstanding
construction
financial
companies
strength.
advantage
bring
at
attractive
instruments
in
national
firms
operate
operations.
the
rates,
and
major
United
Most are capable of
themselves,
largest
to
which
a
international
in-house
States
funding
through
money
Japanese
projects
variety
markets.
market
of
The
trading
Relationships with financial institutions, some
of which are major construction company shareholders,
additional
observes
is
source of capital.
Hasegawa
Komuten's
"Developers have
Kiuchi,
"and
no
we
is an
cash,"
fill
the
bill."(78)
Construction Industry Background
Governmental
influence
over
agencies
Japanese
have
exerted
considerable
economic development
since
the
period immediately preceding World War II. The Ministries of
Trade and Industry (MITI) and
International
set
policy
for industrial development,
textile manufacturing to heavy
of
which
moved
(MOF)
from
industry during the build-up
under
industries
munitions
Finance
a
series
of
military
governments prior to 1945. Industry was destroyed at the end
of
the war,
heavy,
and
post-war administrations understood
export-oriented
manufacturing was essential to
81
that
the
a
of
survival
nation.
resource-poor
of
task
The
reconstructing plants, ports, transportation, and homes fell
squarely on the shoulders of the construction industry.
The construction industry was viewed by government,
most
Japanese people,
business,
a
supporter
industrialization.
firms
The
and firms as an essentially domestic
market
for
Japanese
construction
and was deep enough to
was wholly domestic,
rapid
of
of the national priority
provide
prosperity for the industry until the first energy crisis of
1973.
In
divided roughly between 40%
grew 20% annually,
60%
investment;
private-sector
activity
investment
from 1960 to 1973 construction
fact,
amounted
to
less
overseas
than .25%
of
public- and
construction
total
industry
revenues. (79)
1980 the Japanese domestic construction market
By
had
become second only in size to the U.S. However, it accounted
for slightly more than 20% of Japanese GNP, fully double the
comparable impact of U.S.
domestic market.
and
wood,
construction activity on its
own
Moreover, industries such as steel, glass,
mining
construction industry,
half
sold
of
production
to
which in 1984 employed almost 9%
the
of
the total domestic workforce.
The
construction industry was harshly affected by
the
oil shock of 1973. Year-to-year construction industry growth
had
which
often outpaced a phenomenal 10% annual increase in
lasted almost 20 years.
private-sector
Costlier oil acted to reduce
curtail public
investment,
82
GNP
spending,
make
construction
for
inputs
by
stimulated
both
the
private
and
public
investment
recovery
construction
the
contracts,
government
Since
1980.
was jolted by a second oil crisis in
industry
Japan.
of
Bank
Following a brief
time since World War II.
first
the
investment in Japan decreased in 1974 for
Construction
then
by
restrictions
credit
provoke
and
expensive,
more
materials
shifted
have
downward, and the value of real and nominal construction has
Furthermore,
decreased.
the character of Japanese industry
shifting to accomodate new energy
began
away from heavy
companies
These
industries such as steel, shipbuilding, and
to high-tech,
chemicals
construction
of
moving
realities,
less capital-intensive businesses.
rather
than
practice
in
chose to invest in R & D
plants
as had been the
in
the
declining industries. Manufacturing businesses began to make
direct
investments
overseas
in
order
to
and
allay
protectionist
foreign
governments.
Japan
itself,
States,
was
competitiveness
moving
sentiments
much like the
toward a service-oriented
which major capital investment declined.
new
of
United
economy
in
Decreasing returns
on investment property and scarcity of available urban
for
cost
maintain
development projects reduced the number of
land
large-
scale domestic construction projects. These combined factors
lessened
and
opportunities for sustained construction
pushed Japanese contractors to search for
overseas.
83
new
activity
markets
Movement to Offshore Markets
Large
on
activities
foreign
volumes
the late
As subsequent declines
1980.
by
--
project
overseas
which had been the major arena for
Asian market,
United States,
single
by 1984 became their largest
which,
the
to
important portion of work
an
shifted
Japanese
activity.
construction
international
contractors
in
activity
international contractors invaded the
oil-producing states,
Southeast
prices
oil
in
plans and construction
development
curtailed
80s,
early
and
70s
which accounted for 84% of total Japanese
activity
Japanese
in
in Southeast Asia and the Middle East
primarily
focus
construction firms began to
Japanese
market for overseas activity.
Table 4: Geographical Spread of Japanese Contractors
1981
1980
1984
1983
1982
SE Asia
45%
61%
76%
67%
54%
Middle East
United States
Australia
Other
39%
3%
1%
12%
27%
3%
1%
8%
13%
4%
1%
6%
16%
8%
6%
3%
8%
22%
12%
4%
100%
100%
100%
100%
100%
TOTAL
Source:(80)
The
allure
for
construction
international
contracting
U.S.
construction
Japanese
market
market
had
market
First,
contractors.
a
undeniable
the
is three times larger than the
shared
by
some
Second,
companies.(81)
250
entire
multinational
the American market is
characterized by established participants:
84
U.S.
clients,
design
firms,
contractors,
engineers.
Third,
predicted
sub-contractors,
project
expense
suppliers,
can
be
due to stable costs of labor and
and
reasonably
materials,
and
transportation and communications systems allow for relative
certainty
in
political
stability
changes
planning and scheduling
assures
operations.
against
in government policy,
abrupt,
exchange
requirements
and long-term commitments.
triumphs
Japanese
of
automotive,
Fourth,
unforeseen
controls,
capital
Fifth,
the
great
electronic,
and
steel
exports in the vast U.S. market, although indirectly related
to
construction,
contractors.
environments
Business
was
Comparing
to
assuredly
experience in
that of
Manager
of
not
U.S.,
lost
on
major
developing
Ryuichi
Hasegawa Komuten
Komori,
in
country
Overseas
Tokyo,
largest builder of residential condominiums,
Japan's
stated that in
some countries negotiations can be virtually impossible.
the U.S.,
In
he counters, "We can negotiate. We can understand
one another very quickly."(82)
Recent Experience: Project Ventures
Japanese
differing
construction
strategies
throughout the U.S.
projects
and
in
companies
geographically
are
following
diverse
Some firms are taking on many differing
while others focus on a particular market
area.
residential
For
markets
example,
subdivisions
Kitano Corporation
in
85
suburban
has
Maryland,
segment
targeted
while
has
Hasegawa
ha s co-ventured a Phoenix office park and
Shimizu
Japan
with
Air
Toyota's
Corporation
is
residental
projects,
two
in
involved
Kajima
California
in
ventures
joint
Dallas
in
while
facility.
Southern
mixed-use
parks
office
Minneapolis ,
assembly
Toronto
constructin g
invested
House
Essex
York's
in New
Lines
market.
condominium
York
on the New
keyed
Beach,
Long
and
California, and is building Mitsubishi and Mazda auto plants
in Chicago and Detroit.
the
U.S.
into
construction serves as a transitional step
Plant
service
allows contractors to test
and
market,
capability, gain credibility, and profit from large Japanese
the
to
Assistant
Suzuki,
big
the
we'll have credibility," predicted
projects have succeeded,
Fujio
after
good quality and,
has
"Kajima
contracts.
President
Kajima
of
Corporation. "Our plan is to go through stages: Stage one is
general construction, like Turner; Stage two is engineering,
like
Stage
and
Bechtel;
development,
like
Construction
has
Tishman."(83)
organized
Corporation for construction,
Corporation
notes
for
Inc.,
Equities
market
and
management
property
real
U.S.
plans:
example,
Shimizu
subsidiaries
Shimizu
to
America
Shimizu Development Inc., for
operations,
hotel
estate
an
development,
for high-tech building
operations,
in
four
business
separate
implement
As
and
construction
is
three
Shimizu
and
information,
Land
Shimizu
money
and venture capital investment.
Porter
diversified
firms
Competitive
Advantage
86
that
require
horizontal strategy to face a dual set of issues in
corporate planning:
which
to compete;
business
first,
second,
strategies.
implementing
advantages
the selection of industries
the coordination of the
Japanese
horizontal
chosen
construction companies
strategies
to
of vertical integration in the
in
are
leverage
the
fragmented
U.S.
construction market:
Horizontal strategy is a coordinated set of goals
and policies across distinct but
interrelated
business units. Horizontal strategy is a concept of
group, sector, and corporate strategy based on
on
financial
advantage,
not
competitive
both
existing
considerations...It
encompasses
business units and the selection of new industries
to enter based on interrelationships with existing
units. (84)
Japanese
firms do not
construction
individual businesses,
across
competitive
advantage
of
activities
from
different
view
but rather seek to establish
the
mutually
businesses.
reinforcing
Japanese
Bringing
such as
however,
construction expertise to new businesses,
U.S.
competition
real esate development, involves risk and has thus far
yielded uneven results.
co-ventured
& Co.,
Mitsui
company,
and Westcor,
Ltd.,
a local developer.
Land Corp.,
development
joint
in
provided
along
equity
with
which established an office in Phoenix
to monitor day-to-day progress.
follow-up
and
Mitsui
with
trading
a leading Japanese
introductions,
knowledge,
Shimizu
Shimizu
the development of an Arizona office park
partners
market
In one successful example,
This project has led to
venture with the same partners
Tempe,
Arizona.
87
However,
for
while
a
hotel
Kajima
Corporation
developer
successfully co-ventured with Dai-Ichi Life and
Bob
condominium,
Boisclair on
Lake
Minneapolis'
Point Tower,
first
high-rise
it stumbled on a follow-up
project, River Place, a downtown condominium which failed to
sell. Both Shimizu and Kajima view these results as learning
experiences which rework and redefine strategic plans.
Case Study: Hasegawa Komuten Co.,
Ltd.
Hasegawa Komuten (Haseko) is a leading
developer
of
residential high-rise
condominiums;
diversified operations in office buildings,
property
management,
refinishing,
Insurance Co.,
has
structural
It is a closely-held,
concern among whose principal
shareholders
Asahi Mutual
Life
and the Yasuda Trust &
The Daiwa Bank Ltd.,
million
in
it is less than one-fifth the size of such giants
as
Banking
1985,
it
land brokerage,
sales,
Mitsui Trust & Banking Co.,
the
figure
condominium
and commercial rentals.
family-operated
Tokyo-based
Co.
Shimizu
or
net sales exceeded $700
Although
Kajima.
Haseko
has built more
than
condominium units in Japan and invests in R & D,
condominium
"integrated
apartment
160,000
aiming
to
production
create
an
system,"
according to their 1985 annual report. Haseko began
overseas
in
activity
Hawaii
and
in
office
1973
as
building
a
high-rise
developer.
It
condominium,
hotel,
extended U.S.
operations to California and New York in 1982
and
has
pursued
a cautious
88
and
deliberate
strategy
of
learning the U.S. development business.
In
Japan,
business
to
development
sales,
and
is
implementing
the
to
vertically
the
construction
broad
Its
macroeconomic
policy in housing
first time in company
real
main
estate
domestic
conditions
and
which
construction.
history,
a
revenues resulted from real estate
from construction activities.
condominium
on
a
residential condominium development
government
of
reliance
brokerage activities.
vulnerable
for
portion
increased
segment,
influence
1985,
is
shift away from dependence on
integrated
business
Haseko
In
greater
sales
Overbuilding in the
market has slowed new construction,
than
Japanese
and Haseko
is responding with horizontal strategies which include Tokyo
land speculation,
luxury condominium development,
office
developments
building
Land
clients.
which
brokerage
Haseko sells,
for
transacts,
analyzes,
residential properties for client investors.
systems
information
management
is
which provide brokerage
business
and
features such
as
in
constructs
It invests
and
in
property
data to clients in domestic branch offices,
developing
six
institution
financial
is an important new
and
and
design
computer-assisted
presentations of investment opportunities. The company views
itself
as
a leader in residential project
technolgy,
and
desires to implement a similar strategy in foreign markets.
Haseko's
integrated
construction
objective
investment,
services to
in the U.S.
feasibility,
Japanese and
89
is to
provide
transaction,
American
fully
and
clients.
It
with
started
a
strategy
of
experience
gaining
in
condominium and hotel construction in Hawaii, where Japanese
The company
investors represent a strong investment market.
established
offices in Los Angeles and New York in 1982
expand U.S.
activities and reduce exposure to the
market.
Hawaiian
overbuilt
and
Townhomes,
Inc.
condominiums
in
In
suburb of
the
Pasadena.
modeled after closely studied Colorado resort
reflect
Japan.
for
Haseko
townhouse
units,
These
developments,
themes
of the technology-intensive marketing
some
characterize Haseko's real estate sales
which
cyclical
Angeles,
low-rise,
building
is
Los
to
approach
in
The units are designed with multiple-option features
individual
structural
warranty
construction
modification
buyer
as a result of
techniques.
and
a
carry
advanced
10-year
anti-seismic
Earthquake resistent
residential
structures, in which Haseko has invested R & D and developed
proprietary know-how, are a unique and desirable feature for
the Southern California home market. In New York, Haseko has
condominium
co-ventured
company and,
Japanese
trading
most recently, a local developer, W.J. Haines.
New York experience illustrates a learning progression
This
of
projects with a
strategy and objectives similar to those experienced
other Japanese contractors in the U.S.
Haseko's
series
real estate
East-Side
condominiums
preferences.
The
market.
first step in the Manhattan market was
of purchases of 46 apartments in recently
a means to
as
study
successful sale and rental of
90
by
a
completed
buyer/renter
all
units
year prepared Chief Officer Katsu K.
a
within
Kiuchi
for
"Kiuchi
active development of a similar East Side location.
learned quickly by getting involved in very basic aspects of
the New York real estate business,"
says Kunio
Ohsawa,
who
spent eight years in Manhattan with Sumitomo Corporation and
managed
when
to observe Haseko's strategy.
to
"He learned
get in and out of condominium
markets,
timing,
and
also
on a key strength of the Hasegawa organization:
capitalized
lean staff and quick decison-making."(85)
Next,
Haseko formed a "124 East 79th
with Nissho Iwai,
Japan's sixth largest trading company, to
a
suitable
site for development of
condominium
project.
After an
purchase
approval
Peter
Samton
of
eight-month
a
high-rise
special-permit
construction began on the 22-story,
process,
Belgravia condominiums
unit
Partnership"
March,
in
Samton,
Gruzen,
66-
Architect
1984.
Steinglass
Architects
recalls that Haseko executives were committed to the idea of
30
smaller
stories,
but
density,
optimum
and
neighborhood
tiny
6743
consuming.
"listened
thereby
lower
prices,
and
maximum
to our advice that 22 stories
learned
tremendous
a
foot
square
Construction
site
were
difficult
and
management was handled by
Kiuchi observed,
"major
was
about
amount
goodwill and approvals."(86) Logistics on
Construction because,
are
units,
the
time
Tishman
contractors
able provide working drawings quickly and sales
agents
can become involved from the outset. Also, there is no worry
about
materials
delivery
91
or
completion
bonds."(87)
significant
cost
materials
was delayed,
year after completion of the building in November,
66 units remain unsold.
the
to
had
window frames
be
and interior work redone. Furthermore, almost one
rejected,
of
and
overruns
fell five months behind because delivery of high
scheduling
quality
were
there
Nevertheless,
methods of design,
1985, 13
Haseko learned about
U.S.
and marketing.
construction management,
For example, when costs exceeded budget, Haseko assumed that
prices could likewise be raised on units.
However, when the
higher-priced condominiums did not sell, "they learned about
the prices which buyers in a soft market will pay," observed
Jim
President of
Stuart,
Gilbert,
Charles,
Baylen
real
estate brokers.(88)
October 1984,
In
joint
subsequent
"584
Anderson
New
Jersey.
The five-story,
24-unit
a
to
Partnership"
the Cliff Heights condominium project in
develop
Park,
venture
Haseko and Nissho Iwai formed
Cliffside
was
project,
brokered to Haseko by a Japanese/American who introduced the
local
developer/land
schedule in October,
units
owner.
on
The project was completed
1985 and sold out within 24 hours. The
were aimed at investors rather than users,
and
many
were purchased by Far Eastern expatriate executives who live
in the area.
The example of this project taught Haseko that
different,
user and investor preferences are sometimes very
according
to
Jim Stuart,
whose firm was not
involved
in
Cliff Heights. "Cliff Heights was an effective lesson in the
smaller
condominium
market,"
92
says analyst Makoto
Kaimasu,
marketing.
interest is to become a sales company,
similar to
"and it was the type
Mukai of Nissho Iwai America,
Ryoitsu
enough
didn't use consultants nor even have
We
Belgravia.
the
than
familar
more
were
we
which
with
project
notes
excellent,"
strategy in Tokyo."(89) "Timing was
its
of
estate
real
taught a lesson in
which
Haseko's
the
simple
"It is a small,
Nomura Research Institute in Tokyo.
project
for
industry
Japanese construction
the
follows
who
time to raise the prices!"(90)
the project,
which
flexibility
a
from
credit
Haseko both contributed $10
Japanese
bank,
million
of
same
one
had
which
The developer complied
of
project completion guarantees and a nominal amount
collateral.
equity
Japanese
Introductions
get
between
the developer
bank.
"We
understand
into
why we were
the
and
partner were arranged by the local subsidiary
project," reveals Kiuchi,
to
the
Haines.
introduced them to the W.J.
with
U.S.
to
bring
guaranteed a similar sum via a standby letter
and
cash
contractors
financial
the
of
example
an
As
Japanese
projects,
development
Belgravia's
but declined as many of the
unsold.
remain
units
to
Nissho Iwai was invited
on Manhattan's Upper West Side.
join
Manhattan
with
Haines on the 306-unit Bromley condominiums
W.J.
developer
83rd
West
"225
in
partner
limited
30%
a
as
Associates"
joined
has
Haseko
Currently,
offered
of
this
"but this is the only way for
this business."(91)
project is targeted for a different,
93
The
a
us
400,089-square-foot
more
moderate-income,
and is
non-investor buyer than was the upper-end Belgravia,
pre-sold
aggressively
being
a
market
The new
Inc.
date by Market Directors,
completion
expected
before
year
in
which Haseko hopes to understand lies somewhere
segment
The marketing firm
between the Belgravia and Cliff Heights.
"has a different philosophy, of extensive pre-selling, which
by
experience seems sensible to us,"(92) says Hiro Higashi,
who
as
served as Haseko's project manager on the Belgravia
well as the present site.
York
New
These
to
proceeding
projects
suggest
New
of
learn the subtle distinctions
is
Haseko
that
York
condominium
markets as groundwork for eventual full-product
capability.
Such
experience
domestic
Japanese
full-
It believes it
high-tech residential development.
service,
to
commitment
and
its
of
a strategy would be an extension
can establish a niche for full-service capability because it
has
where
found no comparable service in New York,
buyers
confront a confusing array of brokers, bankers, and building
managers.
projects has
from Hawaiian hotels to New Jersey
ranged
from
The scope of its U.S.
townhouses,
units.
Haseko
contributes capital
and
California
Manhattan condominiums to moderate
luxury
rental
purposefully
in
return
for
project experience and marketing know-how, and is taking the
initial
steps
similar
in
firms.
which
toward
implementing a
scope to those of other
horizontal
Japanese
strategy
construction
These strategies aim to create market conditions
in
thrive
on
real
estate
development businesses
94
can
service
integrated
than
rather
transactions
traditional
build-and-sell relationships.
Conclusions
The
United
overseas
activities
future.
The
U.S.
opportunities
for
service
Japanese
ambitious
horizontal
estate
principal
arena
for
in
the
of major Japanese contractors
companies
in
a
presents
market
businesses
activity.
real
will be the
States
all
implement
to
categories
strategies aimed at
development
business,
development
have
become
however,
be
a
separate,
the
do
not
because
they
management.
barriers
will,
It
employed to drive a number of peripheral,
businesses such as land development,
management
business.
profitable
adopted
penetrating
believe that construction alone can overcome entry
nor
services,
building
Japanese
of
full-project
of
companies
construction
range
unique
new
planning, construction
technology,
contractors
are
and
property
that
convinced
integrated project services will bring comparative advantage
and
real
fragmented
help to differentiate them from many highly
estate
development
competitors.
It
their
is
key
business objective.
Strong
contractors
incentives
for
Japanese
to engage in overseas activities.
available land,
construction
exist
general
Scarcity
shrinking property investment returns,
industry
overcapacity
95
in
Japan
of
and
have
incrementally
pushed contractors to international projects.
in part, on steady construction volume which can be
depend,
supplemented by strong overseas billings.
overseas projects
each
other's
closely and are especially sensitive to
changes
rankings of top companies which follow
boost
activities
in position.
For example,
historically
have
projects
sector
for public
awards
contract
Importantly,
contractor's
in
precedent
been
although international contracts
a
portion
small
billings (less than 3%),
1985 by achieving
large
a
of
Kumagai-Gumi
set
number-one ranking on
There
basis of strong (21% of total) overseas activity.
a
the
is
an historic gearing-up in the industry for increased foreign
work.
The
Japanese government has historically assisted
industrial expansion into foreign markets,
overseas construction company success.
are
The
and will promote
Further, contractors
relatively free of cumbersome MOF restrictions such
placed
those
on financial institution foreign
construction industry is among Japan's
contributors
to GNP,
key
as
investment.
most
important
and employs almost 10% of the
stable
workforce.
Direct
U.S.
foreign investment of Japanese manufacturers in
facilities
will
provide
a
transitional
revenue for contractors over the immediate future,
school
organizations
in
land
use
planning,
source
of
and will
regulatory
constraints, political negotiations, supplier relationships,
and labor disputes. Japanese banks and multinational trading
96
will
companies
to
knowledge
companies.
construction
and
market
Financing
ability
backing
financial
provide
access to the development process,
provides
permits
Japanese
construction companies to
which in
turn
goals,
define
structure capabilities, and position resources.
Many
such
industry,
construction
of
characteristics
domestic
as
Japanese
the
and
structure
cost
competitive relationships, cannot be transferred to the U.S.
Contractors
market.
rates
and
long-range
exchange
favorable
aware that
are
excess liquidity provide an immediate boost
objectives,
for
but are not content to invest in
a
passive manner.
Joint
strategic
ventures
with
alternative
currently
used
contractors
to begin business in the
involvement
allows
and
developers
established
by
U.S.
business.
It
provides
Japanese
construction
Joint
responsibilities,
Active
invaluable perspective
companies
a
set
can
adjust
context
in
project
barriers
development
from
which
horizontal
and -share
form relationships
ventures
and
the
a
Japanese
contractors to overcome entry
learn the processes of competition in
strategies.
most
are
which
Japanese
contractors can overcome difficult cultural obstacles.
It
can
is uncertain whether Japanese construction firms
achieve their ambitious objectives for the
estate development business.
U.S.
real
Industries open to competition
are usually distinguished by either high-growth environments
or scant proprietary information.
97
The legendary entrance of
automakers
Japanese
involved
market
and television producers to
export
the
present
industries
development
an
differing
entirely
substantial
in which Japanese entrants must make
adjustments to the local marketplace.
of
durability,
costs,
and quality. The domestic U.S. construction and
innovation,
scenario,
U.S.
developed
domestically
lower
such as
competencies,
Japanese
of
the
We believe that many
these adjustments will be made by means of intense joint
activity
venture
projects
Successful
from,
a
on
historically
demand
projects
throughout
increasingly depend
coordinated approach of
development companies.
abroad.
many
large,
on,
fully
the
and
U.S.
benefit
integrated
Japanese construction companies have
prospered along these lines,
both at home and
They will commit substantial resources to create
for
full service U.S.
future.
98
real estate services in
a
the
Chapter V:
Real Estate Development Companies & Trading Companies
"It's a wilderness out there...
if you cannot find a buyer,
you're lost."
N. Ide
Property and Service
Business Group
Mitsui & Co., Ltd.
"We have been involved in Real
Estate for 20 years, we think we
understand this business."
Kenichi Tsuboi
Property and Service
Business Group
Mitsui & Co., Ltd.
Overview
in
operating
1970s
as
California,
and
land
Arizona and Texas in
some are investors,
Although
land,
of
development
These
property.
subdivision
residential
homes,
companies
began
companies
development
estate
real
Japanese
early
the
developers.
their primary focus is
commercial
generate
industrial
and
U.S.
sales
development
investment opportunities for their own account, for Japanese
and individual capital sources,
institutional
joint
venture
for
funding
domestic
U.S.
and
provide
real
estate
developers. Leading firms such as Mitsui Fudosan, Mitsubishi
Estate
and
Sumitomo
banking/trading
Realty
concerns
are
with
associated
of the same
names,
but
independently of group-wide corporate management.
99
huge
operate
By comparison,
Mitsubishi
and
multinational
estate,
but
trading companies such as Mitsui &
Sumitomo
form
corporations
are
the
hub
of
massive
which are not oriented to
intermediaries of goods and
international markets.
Co.,
real
services
They have traditionally managed
in
the
overseas activities of virtually all Japanese manufacturers,
investors and financial institutions. Japanese investment in
the U.S.,
is
in securities, industrial plants and real estate,
expected to double in 1986 and trading companies want to
play
a role in the process.
Although they may be
unfamiliar with individual activities,
and
in
financial services,
somewhat
such as real
estate
Professor Michael Yoshino observes
The Invisible Link that trading companies adjust to
new
opportunities in order to survive as intermediaries:
.
.
.
company)
major
The basic strategy of a sogo shosha (trading
must be to build series of relationships with
as well as minor
actors.
.
.
and
always
be
searching for new business opportunities to add to its
existing array of services to specific clients. It also
means
that the sogo shosha must constantly strive to
identify the emerging points of greatest leverage over
a
particular product system and
then
undertake
activities, such as research or investment, that give
them influence or control over those points.(emphasis
added)(93)
Trading company interest in U.S.
real estate is based
upon
adopting an intermediary role between Japanese and U.S. real
estate participants.
manage
They want to find,
and market all types of U.S.
kind of Japanese client.
as
"an
analyze,
finance,
real estate for
every
Trading companies view real estate
emerging point of leverage" among a number
100
of
new
intermediary activities which result from increased Japanese
investment in the U.S.
Real
estate development companies need outlets for
investment
opportunities
which
they
create.
the
Trading
companies require real estate product for their vast network
of Japanese investors.
Each performs a complementary
in
capital
matching
Japanese
with
U.S.
real
role
estate
opportunity.
Real
estate development companies possess an
comparative
estate
advantage
companies
multinational
Mitsubishi,
important
over other U.S.-based Japanese
because
of
their
financial/trading
Mitsui and Sumitomo,
links
real
to
conglomerates
major
such
as
as well as the fact that
their activities are not severely restricted by Japanese MOF
authorities.
Over
time they have
accumulated
development
experience and U.S.
real estate know-how which in many ways
is
that
superior
to
participants
development
in
U.S.
companies
of
real
other
prominent
estate
markets.
Japanese
Real
estate
for
varied
have in-house expertise
activities such as residential development, income-producing
joint ventures and project consulting.
estate
of
Moreover,
while real
companies are engaged in an effort to build up
these businesses to
profitable
self-sufficiency,
likewise have a fiduciary-type objective to invest,
and
sell
for
development
Japanese
and
client
others.
They
intend
to
provide
101
individuals.
they
develop,
diverse
investment alternatives for many types
institutions and
each
Some
of
will
attempt
to
provide
clients,
whereas
trading
companies
these services
the
larger
directly
firms
will
to intermediate the
to
use
Japanese
affiliated
investor
developer
process.
Background History
The
U.S.
real estate activity of both development
trading companies occurs within the context of an
and
evolving
pattern of Japanese direct foreign investment. Prior to 1972
virtually
all forms of overseas investment were
by the Ministry of Finance.
to
raw
materials,
manufacturing
government
restricted
Foreign investment was limited
natural
resources,
and
small
scale
in developing countries targeted for Japanese
bilateral
aid.
Japanese
overseas
activity
differed historically from that of western countries such as
the
U.S.,
Britain,
West
Germany
and
France
because
penetration of foreign markets was promoted by sophisticated
export
products
rather than direct overseas investment
in
plant and equipment.
Foreign
investment
financial/trading
batsu=group),
dependence
every
which
overseas
aspect
companies.
firms,
of
Author
strategies
were
termed "Zaibatsu"
managed
Japan's
Edwin
by
(zai=business,
by
or
102
supply
coordinated
Japanese
Reischauer notes in The
that:
major
traditional
and either controlled
foreign involvement
led
client
Japanese
Japan entered its modern period with a complex, even if
pre-industrial, economy. There was a unified nationwide
market, banking institutions were well developed, large
family
enterprises like Mitsui operated in several
regions and diverse fields, such as banking and dry
goods...The distinctive new Japanese economic institution
that first caught the attention of the outside world was
the zaibatsu system, as this had developed by the 1920s.
The zaibatsu were the great commercial and industrial
combines, which embraced a remarkably large proportion of
the upper level of the economy.. .The four greatest
zaibatsu combines were Mitsui, Mitsubishi, Sumitomo, and
.
Yasuda.
.
(which) spread widely across the fields of
banking, manufacturing, mining, shipping, and foreign
marketing. Each centered around its own bank, which
financed the component parts. Another key institution was
the general trading company (sogo shosha),
which started
in foreign trade...(94)
Real
estate
development
companies and
share a common zaibatsu heritage.
trading
The development companies
were
originally formed to administer the domestic
real
estate holdings of the zaibatsu families
the
1930s,
became
management
Mitsui
and
Real
Japan's forerunner of
brokerage firms.
Estate
of
March
square
while
1985,
feet,
Mitsui
Nowadays
and Mitsubishi Estate
largest property owners,
and,
modern
during
property
firms
are
such
among
owner of 24.6
by far Japan's largest
(13.7
Japanese
million square
feet)
The trading companies continue to act
centerpieces
of
War II
conglomerate
owner,
the
largest.(95)
pre-World
as
million
property
was
as
the
managers and brokers in Japan;
Mitsubishi Estate,
was
companies
third
as
the
umbrellas
described by Yoshino as follows:
A
holding
company extended over a
network
of
subsidiaries
and affiliates,
through linkages of
intercorporate
stockholdings,
interlocking
personnel
help,
management
directorates,
decisions
operating
and bank credit.
transfers,
for the subsidiaries and affiliates were made by
103
American occupation forces dissolved the formal holding
company
ties
in
1946,
splitting
off
the
real
estate
development and trading companies from ownership by zaibatsu
group
banks.
Individual companies were incorporated under
separate charters with independent managements. Today former
zaibatsu
banks,
development
trading
companies,
corporate names,
each
other
patterns.
Japan,
many
of
and
which
through
share
interlocking
commingled
estate
to clients or via
companies
banks
such
Yasuda
ownership
market
small
to
as
developers
Mitsubishi,
zaibatsu)
company
development
long-
and can introduce
and
entrepreneurs.
Sumitomo
and
are among the largest
companies.
in
investor
Fuji
in
world and stand behind the efforts of both trading and
estate
U.S.
Trading companies have extensive,
established business contacts in the U.S.
(formerly
same
development companies provide
directly
funds.
development
estate
the
corporate
projects for trading companies to
either
Zaibatsu
real
operate in close informal cooperation with
Real
development
companies
the
real
These long-standing
inter-
(but intra-zaibatsu) linkages can be potent
forces
in connecting Japanese capital to real estate opportunity.
Real Estate Development Companies
Real estate development companies
Hawaii
and
began operations
California prior to the arrival of
most
in
other
Japanese real estate investors and contractors now active in
104
the U.S.
marketplace.
business
offered
Establishment of a U.S.
an "emerging point of leverage" in
based real estate businesses for bank,
management
idea
U.S.-
trading and property
arms of the former zaibatsu
groups.
The
group
was to strategically position these companies over
extended
so
development
period in U.S.
that
they
would
an
real estate development businesses
be
able
to
generate
development
opportunities in geographically diverse markets for Japanese
institutional
foothold
in
and
this
effort
because
common
perception
individual
investors.
business was perceived
Establishing
as
a
Japanese executives and investors
that the U.S.
development
a
long-term
share
business
a
is
quite risky. "Although experience is helpful in consistently
choosing
above-average
absolutely
of
investment
properties,
essential to be able to cope with the high
on-going development," observed Toshio Koga,
Planning
it
and
development
Development for Toyo
Real
Estate
risk
Manager of
Co.,
arm of Sanwa Bank.(97) Trading companies
complement and coordinate,
is
the
could
rather than compete against, the
efforts of these Japanese real estate development
companies
in the U.S.
Trading Companies
The
U.S.
process of bringing Japanese capital together with
real
related
estate investment will be managed
trading companies,
by
zaibatsu-
because they can provide access
105
to
medium-to-large
funds
is
scale Japanese
investors
and
channel
to real estate development companies in the U.S.
an
intermediary service similar to the
one
they
It
have
traditionally offered in the now-declining export sector.
Different
objective,
real
trading
companies
will
accomplish
this
however, through distinct approaches to the U.S.
estate
development
and
investment
process.
Yet,
although a common strategy for the development business does
not exist even among the largest trading firms, some similar
patterns
of
trading
company real
beginning to emerge.
Mitsui
and
estate
objectives
are
A few large trading companies, such as
Sumitomo,
want
to concentrate
on
brokerage
rather than direct investment and partnership involvement in
development projects.
in
Some of these trading firms
Californian and Hawaiian income-producing properties
the
early
1970s.
They
acknowledge,
ventures have not been profitable.
initial
of
that
or eventual goals.
Sumitomo
attention
to
"The attitude
admits
Corporation.(98) Today,
finding,
on U.S.
most
rather than investing
properties and development projects.
in
many
These trading firms made
buy a property and study it',"
venture
however,
approaches to the marketplace without a clear
objectives
let's
of
invested
was
Kunio
idea
'OK,
Ohsawa
are
turning
in
existing
Although they will co-
projects with Japanese client firms
which
are new to the U.S. market, they intend for this direct role
to
be
a
temporary
means
for
establishing
relationships in the U.S. real estate business.
106
intermediary
Alternatively,
&
Co.
pursue co-venture development projects for their own
account.
In 1985,
value of its U.S.
$375
other trading companies such as C. Itoh
million.
roles
on
for example, C. Itoh & Co. increased the
development projects from $50 million
"We
our
are unique because we
projects,"
stresses
take
Hiroshi
to
leadership
Abe,
General
Manager of Overseas Construction and Contracting at C.Itoh &
Co.
in Tokyo. "If a developer has a good project we must be
able to analyze it ourselves rather than depend on a bank or
consultant,
because
Japanese
clients
look
to
us
for
guidance."(99)
Both
of
these
differing means,
companies.
It
approaches
underlie,
albeit
through
the basic intermediary role of the trading
is a role with which trading companies
comfortable and confident.
ago," observed N.
"I joined this company 27
are
years
Ide of Mitsui & Co., "when cement, sugar,
and rubber were key businesses;
but they have also dropped away,
later,
.
.
textiles dominated,
.
now, real estate.
There is no difference, except its immobility."(100)
Inter-Company and Intra-Zaibatsu Relations
Relations between real estate development companies and
trading
firms may lead to vertically-integrated development
activities by zaibatsu-group companies.
the
Since World War
II
major businesses of the zaibatsu holding companies have
operated
autonomy."
with
what
might
best
be
termed
There is potential for group-related
107
"coordinated
businesses
to
real estate projects at different stages
impact on U.S.
of the development process.
(the
Estate
company) may not
development
relationship
reporting
For example, whereas Mitsubishi
the
of
directors
to the board of
strict
a
have
Mitsubishi Bank or the Mitsubishi Trading Company, each real
project
estate
it undertakes in the
nonetheless
is
U.S.
likely to be affected in some fashion by other businesses in
the
Mitsubishi
Life.
partially
Mutual
Meiji
The trading company marketed steel and elevators
for
and portions of
the
to
the
contractor,
building to the U.S.
project
may
eventually
be sold off as securities
Mitsubishi Banks' client base.
will
tower
office
Oregon
by a group-related insurance company,
funded
the
Portland,
A
which Mitsubishi Estate invested was
in
project
Group.
Marketing of the
securities
be accomplished by the financial services division
of
the Mitsubishi Bank.
There
are
many other aspects in
group-related
which
companies can contribute to a project. For example, Mitsui &
Co.
Finance Inc.,
formed
to
provide
(trading company affiliate) was recently
"financial services
to
Mitsui-related
companies in the U.S. and Canada, and for Japanese companies
making
services
general
direct investments in these countries."
will
residential
include
construction
loans,
and
mortgage
(101)
These
financing,
intelligent-building
construction financing. Additionally, Mitsui U.S.A. (trading
company
subsidiary) has recently formed a
fund with U.S.
investors,
Japanese banks,
108
venture
capital
and the Shimizu
America
Corporation
for
the
purpose
of
technology
application to a variety of projects, among them intelligent
buildings.
Two brief overviews of zaibatsu group companies engaged
in
U.S.
between
real estate-related businesses,
and the
relation
the development and trading companies operating
in
the U.S., suggest future patterns of group interrelations in
the U.S. real estate market:
a)
the
Mitsui Real Estate Development Co.,
real
estate development operation arm
Ltd. (MRED) is
of
the
Mitsui
Group. It is just one of many Mitsui-group companies engaged
in
real
estate
activities,
as
the
following
list
demonstrates:
Company
Business (principal
and otherwise)
Mitsui Matsushima Co., Ltd.
Real Estate Services
Mitsui Construction Co.,
Construction/Engineering
Ltd.
Mitsui Harbour & Urban
Construction,Ltd.
Land development;
construction materials
Mitsui Home Co.,
Land sales; design;
construction, and sale of
housing
Ltd.
Mitsui Lumber Co.,
Ltd.
Building materials
Mitsui Road Co., Ltd.
Civil Engineering
Mitsui Real Estate Sales Co.,
Ltd.
Mitsui Real Estate Development
Co., Ltd.
Commercial/Residential
Brokerage
109
Real Estate Development
Mitsui Kanko Development
Co., Ltd.
Sunland Co.,
Source:
The
Commercial/Residential
Hotel Management
Ltd.
Recreational Development
and Management
(102)
trading company began U.S.
real estate activities as a
strict investor, but has shifted to co-venturing development
projects
as
a
transitional
providing
intermediary
brokerage.
For example,
real
entered
into
projects
in
early
performance
in
the
estate
Mitsui & Co.,
initially
the
step
Southern
1970s.
on some projects,
direction
services
development
mixed
the development
was
U.S.
Fudosan.
entrusted to MRED's
In
addition
to
financial
such as the Portman-designed
Bonaventure Hotel in Los Angeles,
largely
as
Ltd. (trading firm)
California
After
such
of
development
business
subsidiary,
Mitsui
activities,
the
development company later expanded into investments. It owns
two
prominent
Manhattan
office towers,
as
well
as
the
Crocker Bank Center and adjacent land in Los Angeles.
Mitsui
& Co.(trading company) is currently involved in
high-tech communications ventures with the Enhanced
Network
Services group of AT&T,
a part of which operates out of the
AT&T
Angeles
Center,
purchased
a
Los
office
building
recently
by MRED and the Dai-ichi Life Insurance
Company.
MRED (development company) generally assumes a joint venture
partnership position in these purchases,
but is brought
to
the joint venture by Mitsui & Co.(trading company). However,
110
occasionally
obligated
Mitsui
&
to ease U.S.
Co.
(trading
with
a
degree of comfort in
market environment.
arranged
and
Construction
For example,
invested
Company
will
market entry for a Japanese
via direct joint venture participation,
client
company)
in
be
client
which provides
the
the
unfamiliar
U.S.
Mitsui & Co. has recently
a joint
venture
with
and a local developer in
a
Shimizu
Phoenix,
Arizona office park and hotel/recreational facility. Shimizu
had desired to become involved in the fast-growing Southwest
area,
and Mitsui & Co.
offices
(trading company),
in Dallas/Fort worth,
El Paso,
which maintains
Phoenix,
and
Los
Angeles was able to prospect on a Sunbelt area-wide basis to
find
an
appropriate match of project
with
developer
and
investor.
b)
The Sumitomo Realty & Development Company (SRDC) is
the real estate development arm of the Sumitomo Group
which
began U.S. operations in 1973 with a Hawaiian hotel project.
It
then
moved
subdivision
on
to
Southern
development
and
California
sales,
residential
before
diversifying into commercial properties in 1983.
ten
U.S.
Only after
years of development projects did it invest in existing
property,
reasons.
1985,
further
It
downturn
less
for
strategic
than
purchased a New York City office
according
President
but
to
Yoshiteru
Nishimoto,
of East Coast operations,
financial
building
Executive
in
Vice
"because we foresaw
a
in the profitability of the California residential
development
business and wanted to protect
111
ourselves
from
the
cyclical
nature
of
the
development
business."(103)
SRDC's principal focus remains real estate development,
in
a
fashion
Company's,
as
product
recently
a
co-ventured
syndicate
liquefy
Estate
means to eventually
in Japan.
center in Ontario,
to
Real
Development
they view their sister trading company (Sumitomo
Corporation)
estate
similar to Mitsui
and
our
Overseas
in
Corporation
real
the
company
has
example,
a $20 million
the future.
investments,"
"and
U.S.
mixed-used
commercial
California, portions of which it desires
Business
operation,
For
market
observes
Director
obviously
could
"We would like to
Takaaki
and former head
Ono,
of
the Sumitomo Bank
handle the
marketing
begin
and
and
to
SRDC's
the
U.S.
Trading
distribution
aspects with the Japanese investors."(104) The New York City
investment
range
of
could likewise be sold or syndicated to
Sumitomo Corporation (trading
company)
a
wide
Japanese
clients.
The
Sumitomo
Corporation,
Group's
trading
company,
is primarily an investor in U.S.
Sumitomo
real estate,
but appears to be moving toward an intermediary role similar
to that of Mitsui & Co.
the Mitsui Group,
and services.
company)
developer,
estate
annual
and
It boasts, like
of a wide range of real estate activities
For example,
1985
Construction
(trading company).
Real
contractor,
Sumitomo Corporation's (trading
report
Estate
describes
Division
its
"as
group's
investor,
and investment consultant for
real
and construction operations in domestic and overseas
112
markets.
and
This division is engaged in real estate businesses
in
the construction of
offices, shopping
The
Sumitomo
private
centers and industrial
America
Corporation
subsidiary) owns the 42-story,
New
York
complex
City,
in
properties
Corporation
estate
in
has
and
Houston
(trading
condominiums,
facilities."(105)
(trading
company
600 Third Avenue building in
developed an office tower
Hawaii,
in
homes,
purchased
and
Kansas
and
industrial
City.
warehouse
The
company) is investing
hotel
Sumitomo
in
U.S.
real
order to satisfy Japanese investor appetite
existing U.S.
for
property opportunities. The SRDC (development
company) is poised to develop U.S. real estate projects that
can be sold by the Sumitomo Corporation (trading company) in
Japan to these same institutional and individual investors.
A
many
closer
of
look at Mitsui Fudosan will
help
the underlying motivations and goals
highlight
of
Japanese
real estate development companies active in the U.S. market.
Case Study: Mitsui Real Estate Development Company, Ltd.
Corporate Heritage
Mitsui Real Estate Development Company,
owns
14 million square feet of office space
inventory
Estate
1985
of
which
is exceeded only by
Ltd.
in
landlords
(25 million) and Nippon Life (17 million).
("MRED")
Japan,
an
Mitsubishi
Its
FY
assets of $4.025 billion would rank it in the top half
the Fortune 500,
ahead of such companies as
113
TRW,
NCR,
Reynolds Metals and Delta Airlines.
its
land
Moreover,
holdings carried at book value,
with 75% of
asset
value
is
understated on the balance sheet.
In the past,
MRED's principal activities in Japan were
development oriented.
represented
Income-producing property was largely
by office buildings held for rental income
long-term appreciation.
not
a
and
Sales or short-term investment were
principal component of the MRED
modus
operendi,
a
philosophy consistent with that of most Japanese real estate
investors
strong
who,
whether large or small,
disinclination
towards
In the early 1980s,
new corporate strategy.
office
leasing
diversify
appropriate,
Until
so
MRED's
activities.
This
board
diverse
most
construction
estate.
sought
included,
the development and sale of office
recently,
building
real
The Japanese economy had slowed and
In the 1984 annual report,
increasingly
selling
a
however, MRED began to formulate a
stagnated,
corporate
generally share
where
buildings.
Mr. Hajime Tsuboi wrote, "
strategies
are
becoming
energies have been
and leasing.
Now,
to
.
essential.
directed
toward
the Company
is
expanding its scope of operations into such diverse areas as
sales of office buildings [and] construction and
of
hotels ....
"(106)
management
This goal to effect a more
blended
portfolio was stated even more explicitly in another section
of the annual report:
114
In the real estate industry, maintaining a healthy
balance between sales and income requires constant and
It is no longer desirable to
careful consideration.
concentrate solely on leasing buildings, a long-term
This area must be complemented by
capital investment.
the construction and development of buldings for sale, a
result,
a
As
investment.
capital
short-term
profitability will be raised, and income flow will
In other words, we at Mitsui Real
become more stable.
Estate believe that a long-term stable income source in
the form of leasing activities supplemented by shortterm capital gains anticipated from our new area of
operations is the best combination to ensure continuing
prosperity. (emphasis added)(107)
U.S. Activities
activities in the U.S.
MRED's
policy set in Tokyo.
yet
have
activities
Sales-oriented
properties.
by
The long-term strategic plan calls for
U.S.
and sale of a small number of select
development
the
are largely defined
to
be
implemented in the U.S., however, in large part because MRED
to
want
executives
development
process
all
learn
facets
American
the
of
before putting the firm's name on
the
line.
subsidiary, Mitsui Fudosan ("MF")
MRED opened its U.S.
in
York
1972 in Los Angeles,
in
Among
1983.
transactions
to
and subsequently expanded
the thirteen recorded
real
New
estate
in which MRED and MF have participated are the
following:
1.
The AT & T Tower --
in L.A.
a 1 million square foot office
Equity purchase with Dai-Ichi Life (Date
of
completion/execution:1984).
2.
Palomar
Airport
Business
115
Park
--
a
340-acre
business park near San Diego (1984).
3.
The
Hyde Park Hotel
--
a 16-story Manhattan hotel
at 77th and Madison which is currently being refurbished
(1984).
4.
--
Suburban Chicago office building
participating
permanent loan,
coupon
yield
upsides
(1985).
plus
cash
5. Development project -office
building
Manhattan.
at
MF
$48 million
from which
flow
MF
and
receives
future
sale
a planned 260,000-square foot
the corner of 40th
will
a
co-develop
and
and
has
Fifth
a
in
forward
purchase commitment. (1987).
Mitsui
portfolio
Fudosan
that
investment
same
is
desires
to
assemble
risk-diversified
vehicle,
development
(by
an
property
noted above confirm such dual objectives.
Park hotel project,
with
a New York developer,
the
first-hand
The
for maximum educational benefit.
Hyde
type,
stage and region) at
time that it creates opportunities to gain
experience
American
projects
For example, the
in which MF is a limited
adds a hotel to
the
partner
portfolio
enabling management to witness a thorough
renovation
job and assess its impact upon hotel operations.
Financing
while
arrangements
and
distant
facility
test their ability to underwrite deals in
an
investment
is unprecedented among Japanese
investors.
markets,
which
new
as well as
116
innovate
The
40th & Fifth office project,
partner,
in which MF is a
general
will test its ability to develop a major Manhattan
office building.
There
First,
are two components to this educational
like
Sumitomo),
which
its
principal
and
them
with
U.S.
business
methods
and
This is evident in the educational backgrounds of
management;
among
assigned to the U.S.
at
(Mitsubishi
MRED categorically supports learning experiences
familiarize
markets.
competitors
process.
Cornell
the
ten
or
so
individuals
is a senior executive who was educated
Business School and a junior executive
matriculated at Harvard Business School.
Americans
currently
and the U.S.
who
is
Their knowledge of
real estate market is impressive by
any standards.
Second,
MRED
wants
to
learn
about
many
different
investment products and vehicles, for they intend ultimately
to export such techniques back to Japan.
estate
market
instruments
In
an
has
neither
the
The Japanese real
sophisticated
nor the varied techniques of the
article appearing in a Mitsui &
report,
a
Japanese
Co.
financial
U.S.
market.
market
update
real estate analyst writes
that
"the
United States and Europe are still far ahead of Japan in the
real
estate
industry,
so
it
is
very
likely
that
the
opportunity to gain broader experience is part of the allure
for Japanese companies to move abroad."
(108)
MRED believes
that participants in the Japanese real estate market
desire
to utilize such advanced techniques, a belief reconfirmed by
117
the
reaction
word
got
to their Chicago participating
out
unprecedented]
Japanese
solid
we
placed
the
on the Chicago office
an
MRED
executive
opportunites,
and
quickly
most
of market needs,
importantly,
and
building,
in
the
an
overseas market,
practice
however,
of such traits may
considers
such
be
us
for
Tokyo
and
speed.
for
new
flexibility
are
characteristics which the company lauds.(110)
in
many
the
an eye
creatively"
"When
[heretofore
MRED prides itself on innovation
understanding
respond
had
and securities companies contacted
claimed
office.(109)
"A
loan
banks
details,"
that
loan.
corporate
When
dealing
the risks attending
high.
to
the
Nonetheless,
MRED
risk essential to both the educational
and
long-term investment exercise.
Strategy, Strengths, and Weaknesses
Real
estate development companies have
expertise
and
knowledge in differing aspects of the business, such as land
banking and development,
and
residential subdivision and sales,
industrial property prospecting and development.
recently,
large
commercial
office projects have
Until
been
exception rather than a rule for most group-related as
as smaller,
Mitsubishi
an
well
independent development companies. For example,
Estate
(development company) has developed
the
following residential projects over a ten-year period in the
118
U.S.:
Houston, TX
1981
470 single family lots on 122 acres
Commercial center on 14 acres
Atlanta, GA
1982
300 single family lots on 174 acres
Commercial strip center on 6 acres
110 single family lots on 89 acres
Palm Beach, FL
1983
120 single family lots on 115 acres
10 Condominiums on 5 acres
In 1984, Mitsubishi Estate co-ventured a 736,000-square-foot
office tower in Portland,
Oregon with Meiji Mutual Life,
a
zaibatsu group-related insurance company.
For
has
all of these organizations,
seasoned management and places them in
position
to
generate
company
experience
an
exceptional
diverse
development
Additionally,
development
geographically
projects for Japanese investors.
the
practical
managements have experienced good and bad times
U.S.
real
fortunate
to
estate
business,
and in many
be able to shift away from
cases
in
were
regional
markets
before boom conditions turned to bust environments.
Takaaki
Ono,
Director of Overseas Business at Sumitomo Realty,
Akihiro
Inouye,
Estate,
have
Overseas
each
Business Manager
spent over 12 years in
development assignments,
at
a
"I
built,
who is best qualified to build it,"
"and
and
Mitsubishi
variety
of
and consider themselves local U.S.
developers.
know
and
what will sell,
where it
should
noted
be
Ono,
I understand equally well the dynamics of the Southern
California market."(111)
Real
estate development companies are
119
confident
that
will
capabilities
Japanese
investors through trading
company
but no longer,"
in
each
area.
market
adds in referring to future
he
believe,"
alternatives
and
experience
have
"We now
Mitsubishi Estate's Akihiro Inouye.
cautions
"We
contacts.
to leave details to general partners,
used
to
tie-ins
lucrative
permit
project
We
company
trading
links, "tthat these companies will come witn us."(ll2)
fact that development companies have learned about
The
real estate development process liberates
the U.S.
trading
companies to concentrate on recognized strengths for selling
and
rather than building or buying.
brokering,
strategies
although
overlapped
between
and
have
objectives
real estate development
Therefore,
occasionally
and
companies
trading firms, there appears to be an increased awareness on
the
of each of the benefits involved in
part
coordinating
long-term goals and the means used to achieve them.
firms
are
moving
from
direct
and
investment
Trading
project
involvement to concentrate on intermediary and transactional
aspects of the real estate business.
getting
Makoto
analyst
division
Kaimasu,
for
with
from long-term return situations
are basically unfamiliar and
they
are
away
"Trading companies are
the
construction
Nomura Research
advises
uncomfortable,"
and real
estate
Institute
in
which
securities
Tokyo,
of Japan's largest securities trading firm.
aiming
for
brokerage as
a
strategic
direction
a
"They
for
involvement in U.S. real estate."(113) Trading companies are
neither
accustomed to holding assets nor comfortable in the
120
to
started
about
think
&
Mitsui
of
stages
securitization."(115)
three
distinct
brokerage,
development,
involvement:
states
organizing,"
"so that we foresee
Ide,
Co.'s
we
"The
depreciation!"(114)
company is in the business of
trading
few
activity,
even after 30 years of U.S.
until the 1970s,
just
has
"and that
Sumitomo's Ohsawa,
depreciable assets," cautions
real
U.S.
"Recall that a trading company
business.
estate
in the
involvement
extent of their
the
limit
they want to clearly define and
As such,
sellers of goods.
and
buyers
but are rather
of products,
phase
production
decided to pass stage one
Having
and
to
development companies, the trading companies are emphasizing
the second stage of involvement.
directly to Japanese investors,
be
must
companies
brokered
their
projects
because investment packages
banks,
through
possess
Development
weaknesses.
not have mechanisms to bring
do
companies
and
strengths
complementary
trading
and
development
Both
firms,
securities
and
trading companies. Alternatively, trading companies have not
opportunities
development
had
great success in generating
for
the sources of capital which they are uniquely
of
channeling.
aware
that
strategies
be
may
coordinated
trading company sales of development company
development
capital.
eliminate
the
by
promoting
projects,
and
access to trading company
sources
of
of
company
to
significant weakness and avoidable costs
of
company
This
increasingly
group companies are
Zaibatsu
capable
is
a
way
for both
121
kinds
failing to focus on available strengths.
Conclusion
treatment of Japanese real estate activity in
our
size
the
investors in Japan.
longer
for
estate
concerns.
distribution
and
range
positioned
scope
by
investment
for
available
U.S.
are
companies
Development
increase
diverse
a
encompasses
U.S.
of
the
of
participants.
to
substantially
estate
real
projects
institutional
principally
They have been active developers in the
real
than any other category of Japanese
They now have the product and
mechanism.
withdrawing
gradually
concentrate
on
Meanwhile,
rather
marketing,
are
trading companies
from direct investment in
to
order
real
generating,
than
a
require
estate products for investors. It is an appropriate match.
Trading companies occupy a unique place in the spectrum
of
projects.
service
sellers
and
buyers
The
of
trading
putting
opportunities.
of properties
firms
capital
and
into
are moving
together
developers
with
"Bankers have a limited audience,
the
of
basic
investment
they have
only their depositors," suggested Ide of Mitsui, "but we are
connected to almost everyone."(116) They will operate on the
development
side of real estate through a relatively
small
group of zaibatsu-related development firms.
Successful
coordination
of development companies
investors will create an important,
product
segment
and as yet
within the Japanese market for
122
with
unrealized,
U.S.
real
large
it is presenting opportunities for
Currently,
estate.
as well as medium and smaller-sized institutions;
market
investor
five. There
is
which
potential
investment and development,
parameters,
trading
development
companies
analyzed
is
for
an
ahead
integrated
in
individual
they will intermediate for the huge
the future,
the
chapter
in
chain
of
with Japanese investors setting
companies
providing
determining
varied
markets,
projects.
It
and
is
within the proven capabilities of major zaibatsu concerns to
manage
this
process of real estate capital allocation
investment.
123
and
Chapter V:
Small Investors:
An Overlooked Market Coming Of Age
"There are countless people who wish to
invest in U.S. real estate. The problem
is finding the product. What we need are
American developers to present us with
product."
Hideo Niou
President
Jones Lang Wootton (KK)
section treats,
This
subject
in
investment
of
in an omnibus
U.S.
real
estate
Japanese investors, including individuals.
the
fashion,
by
smaller
Examples of such
investment and potential areas of opportunity for
Americans
will be reviewed.
Partially
new
and
in
defined
vehicles
terms
area,
U.S.
investment
market segmentation is
of prospective
available.
investors
although there
But
is
or
sector,
almost
all agree that it is a
is
a
well
not
sorts
of
disagreement
observers as to the "investor profiles"
some
among
this
untested
such
because
sector
within
which
holds a huge potential for capital inflow into U.S. realty.
Investor Personality Traits and Investment Biases
"Small
investors"
small-to-medium
are
non-financial
corporations, closely-held companies, high-net-worth individuals,
and
middle-income
individuals.
124
Not
surprisingly,
there
are
investment
disparities
among these groups.
Notwithstanding such differences,
however,
the
investment
personalities of these groups show a correlation on most issues.
Among these are the following:
a.
Such investors are increasingly edgy about investing
in
Japanese real estate.
While they used to be
with reasonable 4%-6% yields
comfortable
quite
capital
and
appreciation, they are finding it difficult to tolerate
the current 1%-2% yields.
entry
the high gross
means
costs put much real estate beyond the
such investors.
varying
price
of
The allure of America's 8%-10% yields
as is the potential availability of
is great,
of
Furthermore,
ranges within a
large
product
market
and
stable country.
b.
investors have found it difficult to
Small
locate
appealing and affordable U.S. product, and they believe
that only those products offered by "name" institutions
can
be
treated
institutions are
skepticism.
without
disinclined
investment magnitudes, due
to
to
trade
Yet,
in
diseconomies of
The result: a severe shortfall in supply of
such
small
scale.
"endorsed"
product.
c.
These
Japanese are unfamiliar with most
American
cities, with the exception of Honolulu, Los Angeles, San
Francisco
and Manhattan.
125
This is not to say that they
have
not heard of Dallas,
more
D.C.,
Washington,
certainly,
than
Americans
are
and
reluctance
no
but the Japanese are
city
respective
familiar
with,
say,
Such unfamiliarity
Yokohama, Osaka, Nagasaki and Kyoto.
breeds
and,
Philadelphia
with their location or
familiar
dynamics
Chicago,
dissuades
and
suspicion,
investment.
d.
The preferred real estate product is urban office
so
not
but
buildings,
kinds of products may
Other
institutions.
small
investors
who are personally familiar
their
operation
in
investment-driven
not
though
Second homes
Japan.
purchases,
larger
with
as
exclusively
appeal
to
with
the
in
Hawaii,
been
have
popular.
e.
Japanese are unfamiliar with partnerships as legal
if passage of
the
germane provisions of the Senate version of the new
tax
vehicles
bill
for
investment (although,
barrier).
There
legal concept
no
is
of
partnership
Thus, deals which call for special
within Japanese law.
allocations to various partners for tax reasons and
like are unacceptable.
to
percentage
see
their
of
a
the
Importantly, such investors are
not favorably disposed towards shared ownership.
want
a
such unfamiliarity may be moot as
takes place,
property
pool.
126
--
There's
they
some
don't
"They
want
mystique
a
to
hard
ownership."(117) They prefer direct investment in
real estate assets rather than financial securities.
f.
wait
to
prefer
but
until
only
not
their
to where Mitsui and others have put
."(118)
clusters
However
to
while slow
be
often exhibit a characteristic lacking in most
market,
institutions:
the
ability
make
to
a
quick
"Any company owned by one person can make a
decision.
quick decision --
regardless of size."(119)
in comprehending U.S. real estate goes
Difficulty
beyond
.
in
smaller investors, once comfortable with a
convinced,
large
.
.
be
money
we find them wanting to be
other words,
In
down.
market,
"[They want] to
also until the verdict is in.
close
more
and
larger
have invested in a
institutions
knowledgeable
h.
They
These individuals are not market risk-takers.
regional
unfamiliarity;
compounded
it is
by
investment and underwriting norms used by the
different
For instance,
respective countries.
the American norm
goal) of assigning the greatest amount of a
(and often,
building's value to its improvements is contrary to
the
of
the
Japanese
value
valuation
system,
which places most
in the underlying land --
explained
by
depreciation
increased
to
dramatic
a difference
differences in
schedules (U.S.:
19 years,
30 or more years under the
bill; Japan: 65 years).
127
the
partially
respective
likely to
proposed
be
tax
There
i.
is
growing moderation in
aversion
Japanese
towards selling
the
real
traditional
real
estate;
estate is slowly being viewed as more of a transactional
Intermediaries
commodity.
investors
with
such
claim that they may be somewhat receptive
to
may
be
calling
deals
who have worked
for
a
shorter
This
hold.
their
particularly true of smaller investors because of
relative freedom from "public perception" considerations
(specifically,
"loss of face") which tends to
inhibit
the sale of real estate.
In order to develop these and other points further,
we
investment
by
address
focusing
the
upon
issue
the
of
"smaller
vehicles
investor"
available
to
them:
direct
investments, sponsored programs, and securitized real estate
and pooled funds.
Opportunities for Direct Investment
Japanese
real
estate investors of
almost
any
size
generally prefer to own all of a small building than part of
a pool.
"It's very difficult for them to invest in a basket
of properties." (120)
A
principle deterrent to such acquisitions by Japanese
investors has been the absence of product -Manhattan.
This
shortage
128
particularly in
is largely a function
of
two
disinterest of large institutions and brokers
the
factors:
in
properties
smaller
such
for
U.S.
More
U.S.
the
capable
and institutions are interested in and
individuals
market
together with a fairly efficient
for such product,
of
acquiring properties costing $1 million-$15 million than
in
the "mega-deals," and such investors often enjoy all
of
the benefits coming with a home-field advantage.
property
small
seller
American
prospective
exist
greater
however,
few
whereby American property owners can
tap
Currently,
demand for his product in Japan.
mechanisms
even
an
would find
a
where
exist
situations
"market,"
American
the
efficiency of
relative
the
Notwithstanding
exists.
problem
corollary
a
Nonetheless,
into Japanese smaller investors.
global
truly
Such
Wu,
opportunities is K.S.
U.S.
and
real estate investment
including
Japan.
and
other
side
American
and
international
between
The real bottleneck lies
small companies unable to find
of
--
facilitating
the
and Japan doesn't lie between multi-
like IBM and Sony.
medium
to
a
"My observation is that the bottleneck of
trade between the U.S.
nationals
create
president of Peers & Company,
merchant banking house devoted
U.S.-based
--
inefficiencies
One who is attempting to capitalize upon such
opportunity.
trade
market
the Pacific."(121)
Asian
employees
business
Peers
with
and investment
long
access
&
Co.
on
the
employs
backgrounds
banking.
in
It
in
also
takes advantage of both the capital and the market knowledge
129
of
the $ 73 billion Japan Long-Term Credit Bank
shareholder in Peers.
(LTCB),
a
To date, most of its investments have
been in non-real estate fields, but Wu sees a growing market
demand for U.S. realty.
Not surprisingly,
with
given such market barriers, together
the disaggregation and lack of coordination within the
small-investor market, a variety of remedial steps are being
tried.
Some
the U.S.
companies have attempted to go directly
market,
with apparently mixed success.
A case in
point
is the experience of Kato Kagaku Corporation's
Kato,
chairman
manufacturer.
of the Japanese malt syrup
"Spending
major hotel for sale,
into
and
Masao
cornstarch
a week in Manhattan to look for a
Kato learned of a few .
.
. possible
But 'our negotiating partners didn't appear at the
deals.
appointed hours,
and the selling prices were never fixed'."
(122) He returned to Japan empty-handed.
Another step has been the establishment of
Japan-based
consulting firms which affiliate with an American consultant
or broker.
Ltd.
furthermore,
PRR acts strictly as an intermediary;
(PRR).
it
One such company is Pacific Rim Research,
does not pretend to be a real estate expert,
and relies
heavily upon advice obtained through a cooperative agreement
with
the international law firm of Coudert Brothers in
York,
together
with
obtained
information
American
contacts.
According to its
current
consulting
activities
130
by
through
marketing
Pacific
Rim
New
other
brochure,
Research
include
introducing
in
opportunities
investors
"Japanese
United
to
Western
States,
investment
and
European
Australian real estate and introduc[ing] foreign real estate
developers from such jurisdictions to
and
owners
The chief of the Tokyo office,
investors."(123)
able to produce quick decisions."
being
in business for a number of years,
been
Japan is a new one;
therefore,
(124)
market
PRR
has
but its office
in
there is no track record on
it is noteworthy
Nonetheless,
which to judge its success.
a company such as PRR has identified a
that
Yoshinori
claims that "we want to be known within the
Takagi,
as
Japanese
market
demand
for such intermediation.
A
similar
step
real
estate
Japanese
is the opening
companies
of
which
U.S.
have
offices
by
established
networks of smaller-sized clients. In Japan, these companies
organizational structures and orientations somewhat
exhibit
has
Hawaiian
buildings,
Japanese
select
up
a
With an emphasis upon smaller properties, it
"dwellings,
brokers
small
shopping
properties
to
One typical Toyo activity is
to
"dwellings for Japanese residing in [L.A.),
prospectus
office
centers,
condominiums and other
investors."(125)
for each such home
Japanese to become the owner."(126)
demonstrates
is one
subsidiary in Los Angeles,
incorporated a U.S.
such company.
which
Company,
Toyo Real Estate
similar to a Century 21.
and
drawing
soliciting
Toyo's success
that a market for their services
rich
clearly
exists,
and
that it is growing fast; "our 1986 commissions should double
131
to
$15
million,"
claims
Toyo's
vice
president,
Imao
Kawai.(127)
A
Case
Study of What a
Pennsylvania Avenue
In early 1986,
company,
Small
Kokusai Kogyo,
purchased
10%-15%
Investor
Seeks
1001
a Japanese aerial survey
of the equity
in
a
700,000
two-stage office building in Washington, D.C.
square- foot,
investment marks a significant milestone for the
"The
institutional
investor.
non-
This is the first-ever investment
by a non-institutional investor," claimed Daniel M.
president of Lehndorff-Pacific,
Inc.,
Murphy,
a subsidiary of
the
major international consulting and brokerage firm, Lehndorff
U.S.A.
While
Kokusai
purchase
such a statement borders on
is
most
significant
hyperbole,
for
a
the
number
of
reasons.
First,
the
project
represented
the sort
project
which Japanese investors prefer,
plenty
of
prestigious
names
on
and
the
of
"name"
Kokusai
project
saw
list.
Approximately 50% pre-leased upon opening, 1001 Pennsylvania
Avenue
It
is a high-visibility building.
is
equidistant
from the Capitol and the White House, was designed by highly
regarded
Hargred,
Hartmann-Cox/Smith
and
was developed by
Segreti
Cadillac
equity investors include the pension
Technologies,
Tepper
McMahon
Fairview.
&
Other
funds of Kodak, United
The World Bank and a British utility company.
The size of Kokusai's investment is estimated to fall in the
132
million
$10-$20
range,
"Kokusai
and was selected because
believes the United States to be the safest market and
provides
also
the best return on such investments."(128) Because
gives
its investment
Kokusai is not a real estate company,
testimony to the depth of Japanese demand for real estate as
a component of an investment portfolio.
targets small investors.
that
plan
strategic
the purchase was facilitated by a
Secondly,
Murphy,
According to
formed an alliance with the Mitsui companies
"Lehndorff
to
invest Japanese funds in U.S. properties to meet the growing
of
need
medium-to-small sized investors
funds
surplus
attractive
foreign
their
invest
assets."(empahasis
working
He claims that Lehndorff is currently
added)(129)
on
in
to
investors."
two more deals "involving non-institutional
(130)
Finally,
1001
the
Pennsylvania
Avenue
purchase
play
an example of the role which Japanese firms can
gives
in such deals;
in particular, Mitsui Trust & Banking (MTB),
which has Kokusai as a client,
(MRES),
which
is
making
and Mitsui Real Estate Sales
a market
in
suitable
locating
investment opportunities for smaller Japanese investors.
Lehndorff contacted MRES
this
particular deal,
them
of the availability of the stake;
its sister organization,
the
stake
clients.
for
to
In
inform
MRES then contacted
which originally wanted to acquire
the portfolio of one
of
it
pension
fund
Approval of the pension fund investment could not
133
be
obtained from the Ministry of Finance,
turned to Kokusai,
however,
so MTB
another client, and the deal was quickly
done.
an
closer look at Mitsui Real Estate Sales provides
A
example
of
this small investor market and how it
will
be
serviced.
A Case Study of a Small Investor Intermediary:
Estate Sales
Mitsui
Real
"In Japan business society, the name of
the
company is critically important.
Companies are eager to keep the good
name,so people trust it".
Takahiro Fujiwara
Vice President
Mitsui Fudosan (N.Y.), Inc.
Mitsui
is one of the more heralded names
And Mitsui Real Estate Sales,
real
estate.
many
independent
companies
in
as one of the
under
operating
Japanese
the
Mitsui
umbrella, enjoys substantial corporate goodwill.
Within
Japan,
MRES
and
small
residential
is best known
properties
for
its
domestic
business.
brokerage
However, in 1982, a feasibility study identified a potential
demand by smaller Japanese investors for U.S.
As
a
result
of
these
conclusions,
an
real
estate.
international
operations department ws formed.
In 1983, "we began to knock on the doors of the middlesized
real estate holding companies in
134
Japan,
principally
Tokyo,"
says
Mayumi Oda,
manager of MRES's
operations department.(131)
were
slow
that
time
were
opportunities
"the
satisfactorily
were
ackowledgement
that
Most individuals were
to respond.
available.
on
is
the
--
and
Furthermore,
world's
content
to
Yields
at
Tokyo.
high,
the part of such
U.S.
clients
Despite these efforts,
in the market they knew best
invest
international
real
despite
prospective
most
estate
stable
the
investors
country,"
discrepancies between the norms of the American and Japanese
markets
result
"caused
the
Japanese big
of these factors,
problems."(132)
As
a
little international business was
transacted in 1984, and Oda and his staff (eight individuals
in Tokyo,
two in L.A.) used this time as an opportunity
to
learn about the U.S. market.
Things
conditions
began
to
change in
1985.
Two
macroeconomic
began to make Japanese investment in
estate
a more desirable proposition for smaller
First,
the
U.S.
real
investors.
real estate market of Tokyo became superheated;
not only did prices, due in part to the involvement of large
companies,
rise beyond the means of many smaller investors,
but yields (due to a host of factors, including governmental
rental
accomodations
policies
commercial tenants) fell to 1%-2%.
that
property,
"now,
affordable or not,
transactions
which
existing
favor
A related phenomenon was
became less
available;
are becoming less frequent and
slower,
and the holding period is becoming even longer."(133)
Second,
the yen,
starting in late 1985, began a forty
135
percent climb against the dollar.
Combined with the market
constriction in Tokyo and other macroeconomic
currency-induced
fall in U.S.
factors,
the
real estate prices increased
interest in the product MRES was selling.
MRES
estate
acquires information about
through its staff in L.A.,
exclusive
brokerage
Wakefield
satisfy
office
and
or
its
Jones
U.S.
real
as well as through
non-
relationships
Lang
"investment
&
available
such
Wootton.
standards"
as
Cushman
Properties
which
generally
urban
are
buildings costing between $5 million
- $10
million
throwing off a going-in cash-on-cash yield in the
percent range;
percent
&
nine
the internal rate of return, assuming a four
inflation factor and a nine percent cap,
should be
approximately twelve percent.
Currently, most of the investment opportunities come to
MRES through brokers, while most of their Japanese customers
come
in
without having been
referred
by
institutions,
efforts.
"We
Mitsui
Trust
solicited;
they
&
or
Banking
are
either
other
like
or respond to articles which publicize
MRES'
don't have to pay for our ads," claims
Oda.
"[The newspapers] write about us."(134)
how does MRES deal with the bogeyman
But
investors
--
slow decision-making ?
of
Japanese
Slow decisions may be
even more fatal in the small property market, where a larger
number
of
prospective buyers exist.
Even
investors may be slow to make decisions.
136
small
Japanese
Furthermore, "many
of
They are
them are first-time offshore investors.
thus
very cautious, and they want to rely on somebody."(135)
answer is to acquire the desirable
MRES'
its own name.
This allows MRES time to find the appropriate
who will doubtless be comforted
for the property,
investor
by the MRES stamp of approval.
the
MRES will then sell all
of
parcel it off to two or
property to a single investor,
or hold onto all
investors as tenants-in-common,
three
in
property
or
part of the property itself.
But
such
how
did MRES itself develop the ability
three
years
traditional
the
"It was tough,"
admits
he and his staff had to
make
Oda,
and
to
the
conform
But by 1985, his department had developed in-house
system.
investment
board,
of
contravention
norms ?
decision-making
for
in
decisions,
to
criteria
and
since
and
then
experience
Oda
has
which
satisfied
enjoyed
fairly
his
broad
discretion on deals of up to $10 million.
In 1985,
MRES transacted approximately $30 million
in
sales. However, in 1986, the number is expected to more than
double
into the $75 million -
$100 million range.
It is a
growth pattern which is likely to continue.
Sponsored Investments
Mitsui
preferably
Real
Estate
Sales,
while
predominantly
acting as an intermediary on behalf of
Japanese
investors, occasionally must act as a sort of sponsor.
137
and
Such
a
role --
sort
of
that is,
merchant banker or equity co-venturer --
evaluated
by
companies
which
Such
a
programs
investors,
large
wonder
investment
also
is
a
being
Japanese
real
estate
are currently active in the
U.S.
market.
would be targeted towards the
as
small-to-medium
and
However,
natural
larger
sized
such as
small
companies
given
orientation
studying such programs,
Mitsui
might
of
institutions.
capitalization
Co.,
number
such
second-tier
currently
where an investment advisor is
the
of
and
sizable
those
Mitsui
firms
Trading
Fudosan and Japan Long-Term Credit
Bank,
why they would trouble themselves
with
one
such
vehicles when they are fully equipped to buy
on
their own account.
Some
corporate
representatives
about such sponsored programs.
express
ambivalence
On the one hand,
they view
such programs as an opportunity to enjoy significant returns
in the form of fees,
is
also
exposure
a
return on equity and appreciation.
method by which they can
gain
greater
It
market
and expertise while concurrently laying off
risk.
Most importantly, however, it is an opportunity to reinforce
existing
client relationships by helping to introduce
into
a desirable market which they might not
able
to enter efficiently.
otherwise
them
be
"Many of our clients come to us
for advice on American real estate," claims an executive
of
Japan Long-Term Credit Bank.(136)
Some of these representatives express trepidation about
138
such
programs
targeted
to
the
smaller
investor.
concerns center around the issue of relationships,
specifically,
event
a
the
Most
and more
potential damage one might suffer in the
sponsored
investment
sours.
One
experienced
individual familiar with the issue noted:
[Working with small investors]
is a two-edged
sword.
Smaller
investors
tend to be
less
sophisticated about real estate.
They do not
understand that a pro forma is not a guarantee, not
written in stone. If actual performance falls even
slightly below our projections, I will get a
telephone call, and no matter how much I explain,
they will not be satisfied.
They will say, "I
invested with you because of your
[company's
reputation and] name.
You should make me whole."
This is very serious,
because Japan is
not
a contractually based society. Very often we will
make investors whole, to protect the relationship
and our name.(137)
But,
such
these companies are almost certainly going to give
programs
completely
their
feet
a
try.
without
wet by
Such cooperative efforts
precedent;
are
some companies have
"sponsoring"
investment
not
gotten
opportunities
whereby pre-existing relationships are brought into a largescale joint venture.
Nonetheless,
many large
institution
programs geared toward the smaller investor are still in the
planning stage.
For Mitsui & Co.
investor-oriented
stage
strategic
LTCB,
such
deals
programs
(trading company), small-
are "stage three" of
plan which is just
are
stage
two
beginning,
--
"about
a
three-
while
five
for
years
away."(138)
Given the pendency of such programs,
to
it is
precisely predict what form they will take.
139
impossible
"It
would
probably
would
be structured like a participating loan,
where we
take the lead position and would bring clients in
participants,"
clients
says a representative of LTCB.
The
as
likely
would be "smaller corporations and institutions
not individuals,
--
who are more disposed to securities with a
fixed return. "(139)
However,
programs
small
this same representative knew of two separate
currently
being
formulated to tap
institutional investor market.
"famous
American
developer,"
investment
bank,
investors;
another developer,
bank,
is
is
one
concert
Japanese
program,
with
creating a program targeted
together with an
a
a
U.S.
at
such
investment
seeking to acquire a Manhattan office building by
raising capital in Japan.
structure
and
in
In
the
Unfortunately, the exact nature,
and goals of these vehicles "are
still
secret,"
because they have not yet been booked,
their
relative
success cannot be measured.(140)
A
novel
institutional
is
way
in
which
LTCB
investor market,
exploits
(original
banking
between
investors,
germinate
capitalization:
the
relatively
million)
D.C.
Formed
merchant
to
help
the "bottlenecks" which obstruct easy access
smaller
its
Co.,
$12
house based in Washington,
circumnavigate
small
and served its client base,
through its investment in Peers &
small
this
Japanese
president
and
notes
American
companies
that "I have
started
this concept in business and investment
140
and
to
banking.
We tend to put our money where our mouth is, instead of just
putting deals [together] and earning fees from that."(141)
are
targeted
which
corporate
investors is just beginning.
planning
the
stage and are
just
Japanese
smaller
towards
vehicles
in
real estate
the current status of sponsored U.S.
Thus,
offered.
being
now
are
programs
Most
Institutions which plan to one day offer such programs would
putting
some
name on a product targeted towards
their
before
market
gain more experience in the U.S.
to
prefer
of
their more valued customers.
Small Investor Securities and Pooled Funds
It can be seen from the preceding two sections that the
distinctions
between different kinds of
vehicles
investment
available
to
estate
real
U.S.
Whether
corporations and institutions are somewhat blurred.
a
direct or a sponsored investment,
vehicles
sized
small-to-medium
prefer
such investors
which bear the imprimatur of a reputable
Japanese
or American institution, are in familiar locations and offer
high and predictable returns.
Investment
individual
adventurous;
orientation
and
instruments
investor
indeed,
are
not
geared
any
towards
more
the
distinctive
small
or
they are less so, with an even higher
towards fixed-income annuities,
yield security
name underwriting than the relatively larger
small investor.
141
corporate
Ironically, most of the Japanese interest in
estate-backed
securitization has been pushed by
institutionals
Europe,
...."(142)
growth,
the
than
centered
in
Japanese are rapidly overtaking everyone else
One of the biggest impediments to even
however,
is
mere comprehension --
American real estate market,
boot.
large
"While much of the initial
real estate securitization] was
'the
the
The level of interest from both kinds of
investors appears to be growing.
[in
real
towards like-sized institutions rather
smaller investors.
activity
U.S.
greater
not only of the
but the secondary
market,
to
Before such knowledge can trickle down to the "man in
street," the Japanese brokers must both be educated and
convinced:
The major foriegn investment houses also have
undertaken their own education efforts. "Virtually
every
international financial institution
has
someone who is aware of securitization and is doing
studies for senior management"
...
For example,
Nomura, one of Japan's largest investment firms,
has
developed
a
number
of
brochures
and
publications on U.S. mortgage securities, and the
Nomura Research Institute, which is the biggest
think tank in Japan,
...
has done several reports
(143)
Such educational efforts extend to the U.S., as well.
Akita,
has
a
vice president in Nomura's New York headquarters,
a library of information on
reflects
issue.
Nomura
Shuko
the
U.S.
real
estate,
amount of time and energy he devotes
According
to his associate,
Research Institute,
to
the
Kazuhito Kondo of the
an author and noted
142
which
expert
on
Japan's real estate market,
partnerships.
limited
master
U.S.
in
Japanese
the
there is growing interest among
a good deal of his time is now spent studying
Consequently,
this new real estate investment vehicle.
efforts
Educational
securitization
by
the
Moro
of
being met with tepid enthusiasm
is
themselves.
Japanese
brokers
Yamaichi
Securities
Yukio
Although
(N.Y.) was quoted in the
Street
Wall
as claiming that "Japanese investors are very eager
Journal
to
estate
real
notwithstanding,
make more investments in [U.S.] real
in
noted
later
currently
a
conversation
such
in
active
that
Yamaichi
not
was
"Many
securitization.
he
(144),
estate
my
of
colleagues are afraid that they will ultimately lose part of
their
securities
business if their
too
become
customers
interested in real estate as an investment."(145)
such reluctance truly exists within the securities
If
by
reinforced
the
performance
and
of
it is estimated that
estate
$100
million of the $750 million program was
Become
investors,
contoversy
and
Nomura,
143
in
a
approximately
purchased
under the slogan
Manhattan Landlords," both underwrote and
large portion of that amount.
is
the
which
community took a large position
offering;
been
has
This program
real
Japanese
it
to have been the first in
considered
investment
Japanese
mixed
might expect that
the Rockefeller Center REIT.
surrounding
generally
one
community,
brokerage
by
"Let's
placed
a
Although many critics of the
offering
of
are willing to concede to the long-term
deal --
the
an element of great importance to the
sighted Japanese -are
Initially
now
program,
no
managers,
future
offering is likely to be
a
the
branch
Without the full support of these
issue.
stagnant
over
clients are reportedly grumbling
their
branch
these
skeptical,
managers had to be strongly lobbied to support the
and
far-
a large number of Nomura branch managers
burnt.
feeling
potential
success.
"[Rock Center] will dampen enthusiasm, not only of investors
but of the Nomura branch managers as well.
will
very hard to overcome," predicts
be
I think that it
one
experienced
Japanese analyst of the U.S.real estate market.(146)Nomura's
has a completely
Akita
"Rockefeller
have
speaking
12,
however.
been
not
Ken
Miyao,
Officer
Rockefeller
real
Those who are interested in U.S.
deterred."
(147)
agree;
Others
Executive Vice President and
Chief
alluded
of Mitsui Fudosan (U.S.A.),
Center and said:
June
on
before the Asia Society in New York City
1986,
Executive
point-of-view,
Center was more of a financial asset deal than
a real estate deal.
estate
different
"We are sure that there is
and
large market for such investment vehicles in Japan,
to
a
we
are conducting a preliminary study on the subject."(148)
The
not
only
Bank of America is one American company which
committed itself to developing U.S.
real
has
estate
investment instruments targeted towards the Japanese market,
but
has also taken tangible steps towards
144
their
creation.
to Jack S.
According
Cooper,
Managing
Vice President and
Director of Bank of America Investment Real Estate,
BOA has
other
foreign
similar
developed
"real estate funds"
for
investors, and they have developed four different investment
prototypes
which
are
designed
would
appeal
to
Japanese
structure and liquidity.
investors of various size,
funds
to
These
which
be offered in an investment climate
he
summarized as follows:
Typical Expected Returns, U.S. Real Estate, 1986
Downtown U.S. office buildings: Initial return (cap
rate) of 5%-7%; long-term return (IRR) of ll%-13%.
Other U.S. institutional real estate: Initial return
of 7%-9%; long-term return of 12%-14%.
Participating and convertible mortgages:
Initial
return
(coupon rate) of 9%-10%; long-term return of
11%-12%.
Given the relatively low rate of U.S.
interest rates, participating mortgages are currently
less attractive to developers.
Conventional mortgages:
of 10%-12%.
Source:
The
Initial and long-term return
(149)
four generic types of funds being formulated by Bank
of America are: a real estate certificate of deposit; a real
estate open-ended trust fund;
a
real estate limited partnership.
the
only
principally
of
a real estate "security'; and
a
ability
open-ended
trust
to
According
program
would
towards institutional investors,
be
145
targeted
this in light
typical minimum subscription of $500,000 due
of the investor to redeem shares
Cooper,
without
to
the
penalty;
the
other programs would have minimum subscriptions running
$1000
from
(the
real
estate
the respective funds vary in terms
Although
to
"security")
characteristics are quite similar:
rate
internal
liquidity,
of
subscription and underlying security,
minimum
$50,000.
6%-9% going-in, 11%-14%
properties,
producing
to
Fund proceeds would be used
of return.
income-
conventional and participating loans against
place
yield
their
or
buy such
to
property
the
for
account.
To date, however, BOA's program has not been offered to
investors
Japanese
at approving them for sale.
balked
both
the Ministry
because
of
has
Finance
Despite the fact
that
Nomura Securities and Toyo Land are co-sponsoring
the
instruments, Cooper notes that
the Ministry of Finance is somewhat reluctant to
embrace a real estate fund at this time which might
rates.
with ongoing Japanese interest
compete
However, I feel that a fund structured so that it
does not compete with those rates, but rather keeps
in line with them, where gains would be realized on
the sale of the property, should meet with a greater
of
Ministry
the
by
approval
of
measure
Finance.(150)
in
Thus,
authorities
real
and brokers insist that a strong latent
estate-backed
small
instruments exists among
assigned
have gotten off to an erratic start.
to
a number of parties:
overly cautious investors;
the
Japanese
overly ministerial
146
Blame can
overly zealous
of
demand
programs designed to tap
individual investors,
demand
number
while a significant
conclusion,
that
be
brokers;
governmental
officials.
Nonetheless,
such investment seems almost destined
become a potent source of capital outflow,
the
past
pattern
Specifically,
of
Japanese
investment
the
in
U.S.
while programs attempt to work the kinks out,
penetration of the market and with that,
of
for it fits into
Japanese institutions will continue to expand
larger
to
knowledge.
By
the
their
expand their
time securitization
base
are
programs
smoothed out and have developed a track record of sorts, the
investors
will
institutions
be
able to look
to
And assuming
for investment guidance.
spreads remain sufficiently high,
Japanese
experienced
yield
small investor capital is
likely to chase products offered by "name" institutions.
Summary
Opportunities
and
programs
"small
currently in
vehicles
many of the large players --
small,
of
resources
America
and
LTCB, --
to their study
investor"
Although the number of
are proliferating.
markets
Bank
tap into
to
and
place
is
capital
formal
relatively
Nomura, Mitsui Fudosan,
are committing
formulation.
significant
Concurrently,
intermediaries which specialize in finding direct investment
opportunities
for such investors are appearing on the scene
in growing numbers.
The presence of such a capital
market
will increase the options available to smaller American real
147
estate
able
owners and developers.
to
look
to
the
contemplating development,
the
small
American
Such participants
Japanese
capital
finance or sale.
real estate
investor
will
markets
when
Increasingly,
will
become
beneficiary of the internationalization of real estate.
148
be
a
PART III:
INVISIBLE LINKS --
THE TIES THAT BIND
Chapter VII:
Characteristics Common To All Japanese Investors
In Section III, we studied some of the distinct sectors
real estate, placing emphasis
of Japanese investors in U.S.
upon
respective
their
One
idiosyncracies.
to demonstrate that,
of the principal pedagogical goals was
contrary to popular
American real estate
of
"consumers"
and
strategies
investment
wisdom,
manifest
Japanese
significant
diversity in style, experience, preferences and goals.
In this section, we identify and discuss some important
investor characteristics which are almost universally shared
by
investors.
Japanese
underpinnings
of
The
empirical
and
such characteristics are
sociological
addressed,
their effect on investment behavior are portrayed.
instances,
the
real
American
authors
estate
present strategies
players
to
In a few
which
capitalize
and
upon
enable
such
Japanese traits.
A.
The Corporate Method of Decision-Making
"
Traditional Japanese decision-making
We have to behave like
takes too long.
American developers, which are generally
miss
will
we
or
held,
closely
opportunities."
Senior official of a large
construction company
149
Japanese
Mention
and
he
"Japanese
is
bound to respond:
development
dealing
investor" to an American
community
has
"Too
formed
slow."
the
with the Japanese is a slow,
tortuous
exercise
heralded
by
--
qualities
American
developer
The
American
expectation
that
tedious and sometimes
which
developers.
are
anything
Accounts such
but
as
the
following only tend to reinforce the stereotype:
The developer had scarcely put the prime San
Francisco office property on the market when he
received a call from a Japanese institution eager
to talk about a deal.
Discussions followed in
California in August, then a few phone calls, then
--
nothing.
The developer found another buyer and
by December had completed the sale.
Six months
later
he got a letter from Tokyo.
To his
amazement, the Japanese institution indicated that
its lawyers were finally ready to return to San
Francisco and complete the deal.(151)
Japanese,
slowness.
Hideo
(Japan)
estate
too,
and
firm,
are
Niou,
critical
of
such
inculcated
president of Jones Lang Wootton KK
a former executive of a
large
Japanese
real
complains that "when [Japanese] are ready
buy, all the good property is gone.
to
And, if the property is
still available, it's either no good or too expensive."(152)
Such
however.
sentiments seem to be a bit on the extreme
Furthermore,
not all Americans are uncomfortable
with such glacial tendencies;
the
Japanese
Company,
working
process
for instance,
with
and
many have learned to adapt to
pace.
Tishman
Construction
has enjoyed substantial success
the Japanese.
"When the Japanese examine
project, they are not subjective .
amount of homework,
side,
.
in
a
. They do an incredible
and it takes a long time to get them to
150
the
table,"
president
to
play
with Tishman.(153)
the
According
waiting game,
there is often
to Gordon Clagett,
for
process
real
people
to
a
undergo the
consideration .
they
.
Nonetheless,
.
may
an
executive vice
have
vice
enough
incentive.
president
of
[The Japanese] realized
"
type
of
they have in place to make a major
estate,
senior
And for those patient
Equitable Real Estate Group, Inc.,
that
,
notes Christopher McGratty
to
time-consuming
decision
pay
for
about
the
extra
."(154)
most
of
the
Japanese
interviewed
are
extremely sensitive to the criticism, and believe that steps
must
be taken to expedite the process if they are to
competitive
force in the U.S.
However,
be
a
before describing
such remedial steps being evaluated and undertaken,
a brief
background on the decision-making process will be offered.
The Corporate Method of Decision-Making:
System
Most
corporate
The "Ringe"
decisions of consequence are
accordance with the "ringe" system (loosely,
a
problem").
process,
called
It calls for a formal,
made
"consulting on
hierarchical
"nemawashi" (literally,
in
"root
review
binding"),
starting at the bottom of the corporate ladder and moving up
until a consensus is obtained.
be
While certain exceptions can
made in order to fast-track a decision,
such situations
are a rarity and must be of an extraordinary nature.
151
The practical effect of the unadulterated ringe
review
process as it relates to U.S. real estate investment is that
cannot be rendered in much less than two or three
decisions
months.
is
(It is important to note, however, that the process
further
Chapter II).
by
slowed
by MOF
review,
addressed
earlier
in
An example of how the system works was offered
the Tokyo-based deputy general manager of a
estate development company's foreign section.
major
real
He described
a ten-step process, as follows:
Step 1: Information on a prospective deal is
received in New York office.
After a thorough
review, a decision is made on whether to recommend
further study. Business days elapsed: Three.
is
recommendation
Step
2:
Information and
forwarded to Tokyo.
A junior official reviews and
presents preliminary report to his superior. Days:
Three.
Step 3:
If interested,
Tokyo requests more
In
detailed cash flow and related information.
response, New York gathers information, analyzes,
and if satisfied, forwards to Tokyo. Days: Five seven.
Step 4: Junior official undertakes a thorough
analysis, including but not limited to computer
runs.
Such junior officials have an impressive
knowledge of the expanded real estate market. Days:
Four-five.
Step 5: New York is contacted and consulted.
Senior Tokyo official ascertains whether project
If so, requires two or
warrants trip to the site.
three days to obtain approvals for the trip.
Days:Three-four.
Step 6:
Three.
Senior official travels to States.
Days:
If satisfied, senior official, upon
Step 7:
begins explaining the project to his
return,
superiors. Normally requires about three contacts,
152
"and they are all very busy people."
Depending on
their availabilty and familiarity with the market:
Seven -ten days.
Step
8:
For
a
large
scale
investment
(approximately $50 million),
a managing director
may have to fly to the site. Days: Four-seven.
Step 9: A formal presentation is made to
chairman and his board. Days: Unpredictable
the
Step 10: If a really large scale investment, the
company president will travel to the site.
Days:
Unpredictable (155)
Thus,
after
a
minimum
of a month and a
half
(and
more
frequently, two-to-three months) has elapsed, a decision can
be made. At this point, if the votes are favorable, approval
is given --
to begin negotiations.
Given
surprise
that
--
heralds
deals
such a laborious process,
Kilstock,
opportunities are lost in an industry
and
which
it should come as
occasionally
deifies
are made on the back
president
of
--
an
of London & Leeds,
quick
no
which
decisions,
envelope.
Kurt
a company which is
co-venturing with Sumitomo Life on an apparently
successful
office project at 52nd & Lexington in Manhattan, claims that
Sumitomo
missed
Washington,
an opportunity to co-venture on a site
in
D.C. solely because it deliberated too long; by
the time Sumitomo responded affirmatively,
the position had
been taken by a British pension fund.(156)
Similar examples
are
numerous.
Arthur
over
During a recent meeting with
Mitchell
fifty
subsection),
of Coudert Brothers,
Japanese
clients
(more on
who has
him
the
authors,
represented
in
a
later
received a telephone call from a developer who
153
advised
him that a deal had been closed with another
and that,
as a consequence,
been shut out.
no
party
Mitchell's Japanese client had
"I tell my Japanese clients that they
have
more than two weeks in which to make a decision,"
states
Mitchell. (157)
Initial Steps
Market
Heeding
expediting
system.
strict
to Mold Ringe to the
advice
as
Real
Mitchell's is
However,
one
Mitchell believes that,
in
adherence to the ringe system is fairly
is
Estate
way
or circumnavigating certain layers of the
exists in form,
there
such
American
often
key
person "who
organizational chart" who,
may
not
ringe
actuality,
rare.
but not in substance," he claims.
a
of
"It
Instead,
be
on
the
if convinced of the propriety of
a certain action, will act as the ramrod.
"The key thing to
understand is that there are 'anointed ones'."(158)
Nonetheless,
the
Japanese
decision-making
employees themselves feel
process is at times too cumbersome
permit them to compete in the U.S.
"We,
his subordinates,
senior
officer
subsidiary
specially
and we are
claims an executive of Mitsui Real
Development Company, Ltd. (Tokyo).(159)
to
like others, have
missed good opportunities [because of slowness],
going to change,"
that
Estate
According to one of
those changes include the assignment of a
to
(Mitsui
the Los Angeles office
Fudosan (U.S.A.),
Inc.)
of
who
their
would
vested with the discretion to sign off on
154
U.S.
be
deals,
up
to
under
a certain amount.(160)
study
A similar sort of
at Yasuda Trust & Banking,
plan
according
to
is
the
manager of its Foreign Real Estate Group.(161)
A
company
hasten
which has already taken tangible
the decision-making process is Nippon
other things,
ability
to
million)
steps
Life.
to
Among
a senior managing director is vested with the
approve certain deals
(up to approximately
without obtaining full board
approval.
Also,
$50
a
special section exists which deals exclusively with Ministry
of
Finance officials,
snags
occur
information
senior
due
to
of
proposal on a U.S.
process
misunderstandings
supplied to such officials.
manager
within three.
helping to ensure that no delays
by
As
Nippon claims that they
project
or
or
inadequate
a
result,
a
submit
a
can
in about a month, and can close
This may not seem like a particularly speedy
to most Americans,
but when compared to the normal
three-to-four months required by most Japanese
institutions
to prepare a mere proposal, it is positively fast-track.
Exceptions to the Ringe System
The
formalized
institutions
which
infrastructures.
ringe system is a creature
have
However,
well-developed
in
those
of
bureaucratic
instances
corporation is either smaller or is closely held,
a
single
individual,
when
the
the ringe
The decision-making "body" may
system may not exist at all.
be
larger
perhaps even the
handled the deal from the onset.
155
one
who
has
In such instances, one can
expect a far quicker response.
The
Mayumi
contrast
Oda
smaller
can be
quite
striking.
of Mitsui Real Estate
investors
telephone,
in
in
Japan
often
earlier
to
the
make
Ltd.,(MRES)
deals
Such speed is
absence of
in the paper,
over
the
ringe.
principally
MRES,
as
is focusing its attention
smaller Japanese investor,
and it
noted
upon
the
views such speediness as
a key asset which is transferable to the
the
Co.,
to
the quickest of fashions and not unlike some
of their American counterparts.
attributable
Sales
According
U.S.
aforementioned 1001 Pennsylvania Avenue
market.
deal,
In
Kokusai
was able to approve the deal in a matter of weeks.
The Equitable has witnessed a similar disparity between
the
speed
shown by institutions which are subject
ringe system and those that are not.
has
participated
institutions:
with
a
employees,
Penney.
a
joint
retailer
which,
only slightly smaller than
Each
in
the largest of the six --
Hawaii
to
in
which
Department
of
million of its own capital --
to
negotiate
Japanese
and
of
and
K-mart
one
$6.5
14,500
or
J.C.
project has been large-scale and structurally
Yet
(according
with
with 1985 sales
calling for the development of a
complex
ventures
net worth in excess of $1 billion,
is
complex.
six
the
Equitable
five with life insurance companies,
Daiei,
billion,
in
Since 1981,
to
and
156
Daiei
deal,
regional shopping mall and
the
retailer
Commerce
contributed
statistics)
took the least amount of
one
close:
the
month
to
finalize
$330
time
the
principles,
and two more to close the deal.
project
relative
a
breeze
notwithstanding the
Daiei's
to
Why was
negotiate
and
commence,
immense size of the Japanese
corporate
structure,
according
to
this
company?
Equitable's
Clagett; "it is largely a closely-held corporation."(162)
Such
an
experience confirms what
many
observers
of
Japanese activity have long believed: that, all things being
equal,
make
Japanese companies which are equipped and willing to
quick
decisions
investment
will
enjoy
far
opportunities in the U.S.
more
real
than those
estate
companies
wedded to the unadulterated ringe system.
B.
American-based Employees: Staffing
and Acquisition Targets
Levels
All blame for slow decision-making cannot be attributed
to the ringe system.
Some must be assigned to the staffing
policies exhibited by Japanese institutions.
affect
the
ability to comprehensively gather
information,
presence.
the
Such policies
not
Two
ability
and
process
to mention the ability to effect a market
of the most pronounced
factors
affecting
of Japanese companies to make quick
decisions
about American real estate investment opportunities are
the
size
of
subsidiaries
the
staffs
in
the
offices
of Japanese institutions,
of
the
(1)
U.S.
and (2) the general
hiring policies manifested by such companies.
In
general,
the
size
157
of
such
staffs
is
small.
Notwithstanding
from
the fact that annual investment goals range
$50 million (Meiji Life) to $300 million (Nippon Life)
while
total
U.S.-based
respective
million,
Meiji
portfolios
staffs
Life
of U.S.
has
Fudosan,
three
are
$100
held
million
and
guaranteed.
within
to
$600
subsidiaries are stretched
specialist
three;
in
Nippon Life,
thin:
its
U.S.
four; Mitsui
two.
Japan
Add to this lean condition the
these employees are not only foreign
generally
English,
assets
in New York and four in Los Angeles;
Long-Term Credit Bank,
but
fron
one real estate
Dai-Ichi Life,
that
estate
range
offices;
fact
real
both young
and
nationals,
marginally
fluent
in
the inevitability of workload bottlenecks
is
"A
lot
of
my
Japanese
friends
here
are
overworked," notes Jon Minikes, senior portfolio manager for
Jones
Lang
seemed
New
Wootton Realty Advisors.(163)
to confirm such a judgment;
York,
chief
manager of Meiji --
experience
during a single trip to
we learned that two of our
representative
Our
of Dai-Ichi,
--
interviewees
and the deputy
the
general
were returning to Tokyo in part to
make
special requests for more personnel.
A
seemingly logical way to both beef up a
staff
and
quickly enhance its expertise regarding American real estate
would
be to hire American employees.
inconsistent
concerns,
Dai-Ichi's
sentiment:
with
the
however.
New
"Dai-Ichi
hiring policies
Akira Yashiro,
York
Such a step would be
office,
prefers
158
many
Japanese
chief representative of
voiced
to
of
a
teach and
representative
use
its
own
employees, and that is why we are moving slowly.
short cuts .
.
care."(164)
Nonetheless,
;
.
it may take a long time, but we don't
a recent trip to Tokyo in search
of more staff suggests that he does in fact
ambivalence
based
was
manager
Investment
American
other
department.
Tokyo-
Real
Estate
While he acknowledged that
hiring
might be a good idea for a
visibility,
--
Similar
the
of Nippon Life's International
employees,
taken.
care.
expressed by Takahide Moribe,
employees
reasons --
We take no
local knowledge,
variety
of
and influence upon
he doubted that such a step would
be
"To date, the personnel policy of Nippon Life is one
of 'pure blood' --
A
more
we breed our own from within."(165)
dramatic step by the
Japanese
to
"localize"
their expertise in order to facilitate efficient penetration
into
the
U.S.
market
would
be
the
acquisition
existing, well-established U.S. real estate firm.
strategy
perhaps
recent
which
the
of
This is a
has been pursued in non-real estate
most
notable example
being
areas,
Sumitomo
Bank's
purchase of a large stake in Goldman Sachs for
million.
Given
corporations
industry,
and
the
large
percentage
partnerships
complicated
entry
which
make
of
an
$500
closely-held
up
barriers would be
the
U.S.
relatively
small for a well-capitalized Japanese firm.
Indeed,
such
steps have indeed been begun by some
the real estate field.
E.
Heller
& Co.,
based in Chicago.
In 1984,
Fuji Bank acquired Walter
a $3 billion commercial-finance
company
Part of the prize was Abacus Mortgage,
159
in
a
large
and
lender.
nationally-recognized
As
(LTCB)
noted earlier,
interim
and
Japan Long-Term
permanent
Credit
Bank
owns approximately five percent of Peers & Co.,
the
Washington, D.C.-based merchant banking concern which, among
other
things,
identifies
U.S.
real
opportunities for Japanese investors.
view,
owns
From LTCB's point-of-
( an affiliate of Kemper
approximately 40% of Peers.
knowledgeable
Finance
acquisition
source,
about
it
However,
given
possibility
by
have
ministry
should
according to
a
the
of
making
but was
such
dissuaded
ministry's
tepid
an
from
response.
recent regulatory relaxation undertaken
Ministry of Finance,
companies
which
Sumitomo Life talked to the Ministry
the
further
Insurance),
Finally,
about four years ago,
pursuing
the
investment
a collateral benefit is their affiliation with Kemper
Financial Cos.
of
estate
already
be
by
together with the fact that other
charted
a
similar
more amenable to
course,
such
a
the
discussion
today.
At least two knowledgeable observers are convinced that
further
acquisitions
inevitable
One ,
and
estate
American
companies
are likely to take place on a large
construction
structuring
noted
real
a leading national mortgage banker,
Japanese
buy.
of U.S.
deals
companies
are
are
scale.
claims that many
searching
out
which permit them to get close to
construction firms and position themselves
and
major
for
a
Commenting upon a recent project on the East Coast, he
that
"these
guys
don't
160
really
care
about
[the
developer]
or
opportunity
to
the
deal.
What they really
cuddle up to [the
want
contractor],"
is
a
the
major,
closely-held general contracting firm.(166)
Arthur
Mitchell
of Coudert Brothers predicts
that
a
similar step will be taken by another industry sector: large
Japanese
securities
terribly
sophisticated about U.S.
firms.
"Currently,
they
real estate.
are
But
not
I'll
tell you, they are very sharp, and they in many ways want to
model
themselves after Goldman or Salomon.
play
the
Center
such
sort
of role Goldman played in
offering."(167)
Japanese
firms
To do so,
They
the
Mitchell
to
Rockefeller
predicts
will gain market entry
through acquisitions.
want
and
that
position
"Much as 20% of Babcock & Brown
(an
equipment leasing firm) was acquired by a securities firm, a
real estate company will be bought."(168)
Thus,
in
conclusion,
Americans
will
witness a
character
of U.S.
while it appears unlikely
change in
the
that
composition
and
subsidiaries in the very near term,
the
Japanese will continue to expand their penetration into
the
U.S.
and
real
estate
market through company acquisitions
horizontal integration.
C.
The Cultural Disinclination to Sell Real Estate
"In
Japan,
for a company to
sell
property, it would be conduct of shame."
Akihiro Inouye
161
Deputy General Manager
Overseas Business Dept.
Mitsubishi Estate Co., Ltd.
Standing alone,
and
developers
the idea that most real estate
are reluctant to sell their land
seem particularly extraordinary;
this
in
property"
are
passwords in the American
is often the case,
those
does
phrases such as ,
business for the long haul," and,
flipping
well-worn
"I'm in
and
often-hallowed
real estate fraternity.
practice varies from dogma,
of circumstances,
not
"I'm not interested
But
as
and many of
who publicly denounce sales strategies are,
variety
owners
under
really quite receptive to
a
them.
After all, the phrase, " I don't really want to sell, but my
partner"
(choose
one
or all)
with,"
(b) "wants to sell,
of
sense of obligation,"
a
setbacks
(a) "is impossible
to
deal
and I wish to accomodate him out
(c)
and needs the cash",
"suffered
some
business
is no less venerated in
the
annals of real estate idiom.
Nonetheless,
appear
to
Japanese
reasonably
real
remarkable
were
investment
"flexibility"
does
not
of
the
exist within the strategies
estate investor.
is the overt,
interviewees
estate
such
In fact,
what
is
quite
unsolicited aversion most of
our
held towards the notion of selling their
investments.
"If a Japanese financial
real
institution
to sell one of its properties in Tokyo it would
be
a
sign that it is in some kind of financial trouble," claims a
Japanese
Jones
venture partner.(169)
Lang Wootton KK (Japan),
162
According to Hideo Niou
"most people will hold
of
the
They
forever.
property
sell
will
if
only
have
they
(170)
problems."
This disinclnation to sell is a function of a number of
125
of
country
Japan is a densely populated
is geographic.
One
factors.
million
individuals
slightly smaller than California;
than 33%
is
an
area
mass,
less
in
living
of this land
is reasonably habitable or arable, and urban sprawl
by
confined
the
politically
land is so scarce,
"Because
lobby.
farm
sacrosanct
the Japanese have an emotional
attachment to land and a disinclination to sell any property
own.
might
they
This attitude prevails
among
only
not
individuals but among corporations."(171)
factor is economic.
Another
system
tax
The Japanese
penalizes near-term sales:
[O]wners hesitate to sell property [because of]
When a Japanese company
the capital gain tax.
sells property that has been in its possession for
less than 10 years, any capital gain from the sale
is treated as short-term capital gain and is
subject to an additional 20% capital gain tax
levied on top of the 42% corporate income tax.(172)
economically-based considerations,
Other
such as a lending
institution's policy of matching long-term liabilities
with
long-term assets, also play a significant role, as was noted
in Section III.
Finally,
which
influence
reinforce
honor
belief
certain
the
somewhat philosophical factors exist
national
personality
the disinclination to sell.
and
that
"saving face" are deeply
one's peers are going to
163
In a
tend
and
where
country
inculcated,
conclude
the
--
to
mere
whether
correctly or not -the
that business problems are necessitating
sale of property is enough to dissuade most individuals
from taking such action.
border on esoterica,
favorites
was
specialty
is U.S.
There are even explanations which
yet have a ring of truth;
comment by Nomura's
a
Shuko
real estate investment
one of
our
Akita,
whose
vehicles:
"The
American investment personality seems to have been shaped by
its
history as a cattle society,
and
a
commodity.
In
Japan,
where the asset is mobile
we
are
traditionally
an
agricultural society, and land is venerated."(173)
So
how
do
such
factors
influence
the
scope
and
character of Japanese investment in U.S. real estate ?
In a
least two ways.
the
number
Japan,
tight
of real estate transactions within
when
property,
First, these factors artificially restrict
a
major company announces that it
will
spot.
sellers
and
This
attitude cuts the
reduces
real
estate
number
sell
a
of
investment
opportunities" (emphasis added).(174) A consequence of
artificial
"in
most observers conclude that the company is in
financial
potential
Japan;
such
restrictions is that real estate becomes an even
more illiquid asset.
Thus,
prudent
real estate
investors
are enticed to look at different markets in order to achieve
a portfolio which balances yield, liquidity and risk.
Secondly,
such
factors naturally affect the investment
personality of the Japanese. Having been weaned on a diet of
non-transactional
conservatism,
164
the
Japanese
are
more
inclined
to
choose U.S.
investments and
deal
structures
which are similarly conservative.
A deal featuring a steady
and
stream is
satisfactorily
preferred
weighted
to
high
ones
towards
income
whose
returns
future-sale
investors by nature,
are
likely
to
be
disproportionately
proceeds.
Being
long-term
they are well aware of the vagaries of
the market and the unpredictability of long-term forecasts.
Of
course,
the Japanese have proven themselves to
be
geniuses in their ability to learn and adapt to new products
and markets,
and
many American real estate people who have
worked with the Japanese on U.S. real estate projects
that
they
thinking
can already see some manifestations
on
furthermore,
better
the
certain
equipped
holding
issue
period,
and
as
of
kinds
noted
investment
realty
of real estate
more inclined
Notwithstanding such trends,
estate
selling
of
to
earlier
changed
investments;
investors
accept
in
claim
are
a
shorter
this
paper.
however, current Japanese real
behavior is greatly
slanted
towards
a
long-term hold of property, and most investors are likely to
retain such a bias well into the future.
D.
The Importance and Role of Relationships
"We're not going to make a decision
based upon the deal; we base it upon the
people."
Hitoshi Suga
New Business Development
Mitsui & Co. (USA),
Inc.
165
Japanese
place
upon
companies are renowned for the emphasis
the
development and
relationships.
Our
nourishment
experience
of
they
business
confirmed
such
an
orientation; every interviewee spoke of his company's desire
to
associate with owners,
high
reputation
developed
developers and
and competence.
slowly,
Such
institutions
of
relationships
over time and deals,
are
and are preferably
done in a direct fashion between principals.
Given this,
estate
companies
consultants
inherent
institutions
discomfort
who
on
claims
chairman
brought
Americans
an
rather,
animus"
towards
real
notes
estate
intermediaries
Leonard
--
apprehension
an
has worked with a
about
of
Japanese
co-ventures.(176)
is
never
Barr Smith,
far
senior
Such
from
the
partner
and can be
properly cultivate Japanese relationships
arrived
in
Japan."(177)
What
failed to realize is that "you just
the Japanese;
in fact,
of
and
easily
Barr Smith claims that his efforts
to a screeching halt when "scores
an
institutional
number
of Jones Lang Wootton,
In 1982,
and
or
middlemen,"
with
provoked.
brokers
--
with
surface,
"almost
and intermediaries.(175) "The Japanese have
representative
slowly
harbor
distaste
dealing
former
it is no great surprise that Japanese real
to
were
bag-carrying
these
American
can''t
nothing could be worse.
'sell'
They much
prefer to do their own analysis and let the numbers, not the
broker, tell the story."(178)
salesmanship
tactics
According to Barr Smith, such
"put the Japanese on guard," and
166
set
back his and other's efforts by a couple of years.
But the Japanese find themselves in a dilemma.
hand,
they
other,
eschew
and idiosyncratic industry,
without
This
intermediaries;
on
the
they realize that they are not only new players in a
large
the
instinctively
On one
established networks,
but they are
foreigners
contacts or cultural
bonds.
absence of connections is particularly unsettling
Japanese,
network
is
for,
as
Barr Smith notes,
stronger in Japan than
for
"the 'old
boy'
--
even
anywhere
else
Britain."(179)
Steps Taken
As
a
result,
certain Japanese concerns have
that
it
is advisable to enter into
with
well-placed firms.
exclusively)
consulting
This is particularly
decided
agreements
(and
the case with Japanese trust banks.
almost
Sumitomo
Trust & Banking is in the third year of a five-year contract
with
Richard
Ellis,
Yasuda
Coast and Grubb & Ellis on the West,
Banking
It
is
Trust
&
has recently affiliated with Cushman
natural for such trust banks to be
quite
Banking
the
funds
acknowledge
important,
back
that
and
the
that
in
Japan.
use
for they
"They
are
of consultants
the
in
most
themselves
beginning
the lack of their use may
167
East
Wakefield.
primarily as advisors to clients and as fiduciaries
pension
is
and Mitsubishi Trust &
willing to affiliate with consultants,
act
&
Citibank Real Estate Advisors on
by
represented
Inc.,
America
well
to
to
is
have
contributed to past mistakes."(180)
Nonetheless,
within
That
most
the U.S.
is
not
Japanese firms continue to
without a formal consulting
to
say
that
they
operate
relationship.
categorically
disdain
information generally available from consultants;
like most
of their American counterparts, they avail themselves of the
numerous --
and often free --
information
market-status reports and like
regularly provided by consulting and
brokerage
houses.
Central
desire
to
to
the
build
Japanese vein of
up
their
own
independence
corporate
without undue reliance upon outside
.
"Dai-Ichi
.",
the
head of the New York office.(181)
own
evaluations," notes the Tokyo-based manager of
life insurance company.
to
asserts
"We like to do
"We do not want to limit ourselves
a single consultant.
go
our
another
If we do this,
we feel that many
deals [offered by other consultants or brokers] will
to
a
infrastructure
assistance.
prefers to teach and use its own employees .
is
elsewhere."(182)
Clearly,
when
it
decide
comes
to
information, the Japanese prefer an open-door policy.
Another
difficult
factor
one
is
which
the
makes the
innate
consultants'
Japanese
expectation
unwavering
fidelity.
"The
exclusivity
on
and this is a real problem
timing.
to
a deal,
Japanese
I mean, they can take so long!
invite,
investment
say,
expect
for
168
each
a
of
absolute
as
to
And yet, it's death
four potential competitors to
opportunity,
lot
one
will
review
an
invariably
ask,'who else have you talked to?'."(183)
real
The chief foreign
estate manager for one of the Japanese trust banks
currently
reevaluating its relationship with
consultant
and
concerned
American
replacements;
"I
am
with the relationship because our consultant also
represents
careful
evaluating potential
its
is
sellers."
to
(184)
Wise
American
honor the expectation of
partners
fidelity.
"I
are
would
never even talk to another Japanese concern unless and until
I
had first received permission from [my partner],"
Will
Zeckendorf of Zeckendorf Company,
which is
currently
co-developing six Manhattan projects with KG Land,
subsidiary
of Kumagai Gumi,
a large Japanese
claims
the U.S.
construction
company.
Those
consultants
and partners who have succeeded
in
establishing relationships with Japanese concerns know
that
such
good
success
is
more than a function of
information or development opportunities.
dinners
and
getting
to know each
possessing
"It is a lot
other.
It
is
really
learning about the entire company," notes Evan Hellar,
president of Richard Ellis,
lay
know
Inc.(185)
you
vice
The Japanese want to
a groundwork for "a long term alliance.
if
of
They want
are the kind of company where there
to
will
be
to
be
mutual respect, trust and understanding."(186)
The Equitable Life Assurance Co. Experience
One
without
American real estate company which appears
peer in understanding the importance and process of
169
relationships
to
the
Japanese is
general corporate (i.e.,
began
the
Equitable.
non-real estate) level,
to initiate relationships with Japanese
in the mid-1960's.
life
insurance
estate
companies
Equitable
institutions
had
clerked
at
Equitable
The result of
for
such
according to Kazunobu Nisawa of Meiji (NY)'s real
section,
is
that "the mid-level staffs
other real well."(187)
passed
a
Employees from Meiji, Sumitomo and other
anywhere from six months to two years.
exchange,
On
know
each
And although approximately ten years
before any cooperative real estate transactions took
place, Equitable's patient cultivation bore fruit.
To date,
Equitable has entered into six joint ventures with
Japanese
institutions,
"our
and
Equitable's Gordon Clagett believes that
willingness
helped
to
following
to cultivate a
cement
the
lead;
our
relationship
relationship."(188)
slowly
has
others
are
such an apprenticeship program is
place at Cabot Cabot & Forbes in Boston,
where an
in
employee
of Kajima Construction Company is currently working.
But,
in
Japanese
light
of the earlier observation
about
insistence upon exclusivity and fidelity,
Equitable
able
to
work
with
four
different
the
how
is
Japanese
companies, three of which (Nippon Life, Meiji Life and Asahi
Life) being direct competitors?
because
"It's not a problem for us,
our partners know that information about each
is kept in absolute confidentiality.
that because we are so big,
accomodate
all
of
our
Furthermore, they know
no single partner can
business,"
170
deal
claims
Tim
possibly
Welch
of
Equitable.
"We
are very careful about our the sanctity of
our relationships." (189)
Equitable
has
recently announced plans to open
real estate office in Tokyo -firms.
who
up
a
a first among American realty
This office, to be headed by a senior vice president
has
a
Japanese
long history of working
partners,
relationships
while
is
certain
with
to
facilitating the
the
Equitable's
cement
existing
cultivation
of
new
the long-term prospects
for
ones.
Trends
But
even
mutually
beneficial
relationships with
Most
are
uncertain.
desire
for Equitable,
to
Japanese
the
Japanese
quite candid
about
ultimately handle almost all components
are
their
of
the
real estate investment and development business.
They
are
simply
as
required
inculcated
to
the
dislike for intermediaries,
current
market.
to temper this desire,
realities of their
as well
their
in order to conform
inexperience
and
the
Nevertheless, a senior official of a large Japanese
development firm which has had a long-time affiliation
with
an American company notes that "we are beginning to stand on
our
they
own
have
two feet," and adds that over the past few
begun to look for
investment
opportunities
their
own.(190)
Equitable's Clagett believes
there
probably will always be a demand by certain
171
years,
that,
on
while
Japanese
for
the
sort
brings,
the
of services an
affiliation
with
nature of the relationship will
Equitable
change.
"It
areas
for
will be on their terms, not ours."(191)
Lawyers
Curiously
consultants
appear
"The
enough,
one
of
the
growth
is in legal-related services.
What makes this
so odd is the heralded Japanese animus for
Japanese
believe that parties
with
lawyers.
problems
should
first try to settle them through reasoned discussion, and an
injured party will enter into a lawsuit only after all other
efforts
have
been
12,000 attorneys in
the U.S.;
many
in vain."(192)
all
are
fewer
than
Japan, compared to more than 600,000 in
Washington,
as
There
of Japan.
D.C. alone has almost three times as
Legal
departments
within
major
Japanese corporations are often staffed, and even headed, by
laypersons;
aggregate
Toyota Motors is an example.
Japanese
$37 million a day,
Commenting on an
corporate entertainment expenditure
a director of one such Japanese
of
company
explained:
Americans spend more than that each day on legal
fees.
We prefer to invest the money in more
pleasant activity that lets us see if a person is
worthy of trust.
If there is trust, there is
little need for lawyers.
In Japan, we have a
saying:
"You get through to a man's soul at
night".(193)
A
senior
example
official
of
Sumitomo Life
provided
of the role such trust plays in the
172
a
graphic
Japanese
real
the
Tokyo,
in
interview
our
During
world.
estate
representative was lamenting the fact that a recent purchase
of
an American office building required almost two thousand
pages of documentation.
He then pointed to a rendering of a
million Japanese mixed-use project in
$150
acquired
recently
had
a majority
which
Sumitomo
"The
interest.
total
length of that purchase agreement was four pages."(194)
Notwithstanding such dislike, the Japanese are not only
that
rules
and norms,
initiative,"(195)
much
failing
of
to
do
but
the Japanese are
the
Granted,
so.
an American lawyer is thought to be
"sometimes
American
but they are extremely anxious about
consequences
potential
to
they must play the game according
aware
taking
too
learning
to
accept the lawyer's role much as their American counterparts
--
have
although
outside
as
a
necessary
"amazed
experts .
evil.
The
Japanese
when he sees the high charges
.
.ends up paying the fees
investor,
billed
by
because
he
treats them as a kind of 'insurance' or 'security' cost that
is
necessary if he is to do business in this country."(196)
Furthermore,
some
Japanese actually gain comfort from
the
thorough process by which property interests are transferred
in the U.S.
"In the U.S.,
it is safer, for you have title
insurance as well as many experts involved in the
process."
(197)
One
lawyer
who was early to recognize
the
potential
benefits of working with the Japanese is Arthur Mitchell
Coudert
Brothers,
an
international law firm based in
173
of
New
York.
Mitchell lived in Japan for over ten years,
Japanese
law
Japanese
Ministry
of
Education,
American
attorney
at
a major Tokyo
at Kyoto University under a
involved in real estate,
and
played
House
Japan
was
law
from
the
principal
firm.
Actively
Air Lines.
JAL,
Among the deals in
which
Street
Journal
article in
he
the
Essex
a
recent
and his stature was confirmed by
front-page Wall
than
including Dai-Ichi Life, Sumitomo
an instrumental role was the purchase of
by
the
he has a client list of more
fifty Japanese companies,
Life
and
grant
studied
which
he
was
featured.
Perhaps
acting
on
counselor,
Mitchell
what
cements his position as a
behalf
of
top
Japanese clients is his
in the generic sense of the word.
was
instrumental
in
attorney
role
as
a
For example,
orchestrating
the
recent
cooperative agreement between Mitsubishi Trust & Banking and
Cushman & Wakefield,
consulting
to
negotiations,
a
a relationship which goes beyond
form
the
of
loose
proposed
joint
venture.
affiliation
ran
mere
During
into
some
difficulties at the Ministry of Finance; it appeared to both
principals
intimate
that
the
deal was in
jeopardy.
Due
familiarity with the legal and regulatory
in both countries,
to
his
systems
Mitchell was ultimately able to craft an
agreement which was satisfactory both to the parties and the
Ministry of Finance.
According to Kevin Haggerty, executive
vice president of Cushman & Wakefield,
174
There's no doubt in my mind that the deal came
about because of Arthur Mitchell and Coudert .
.
.
He was the ideal matchmaker.
He understands the
people and the culture, and also the regulatory
agencies, the protocol, licensing requirements, fee
structures.
No one ever left the table with a
misunderstanding.(198)
Summary
In conclusion,
for
various
brokers,
kinds of relationships differ.
consultants
exclusive
services
it appears that the long-term prospects
and
other
For
intermediaries
relationships but who provide
American
who
arguably
which either can be acquired for
free,
seek
fungible
performed
in-house or provided by direct dealing with principals,
long-term
future is not terribly bright.
Japanese
firms enter the
Japanese
predecessors,
penetrating
the market.
however,
such
pioneers
for
companies
U.S.
market,
will
Granted,
they,
require
such services,
their
assistance
well look
rather
as new
like
According to Equitable's
may
the
to
than
the
in
Clagett,
Japanese
U.S.
brokerage
rosier.
American
houses or consultants.
The
lawyers,
future
for
is
offering services which the Japanese are in no way
equipped to provide,
And
other sectors
American
should be the greatest
beneficiaries.
joint venture partners who provide
sustained
market access and acceptability in preferred markets
should
likewise fare well, although expansion of their relationship
with
a Japanese partner may prove increasingly difficult as
the partner becomes more acclimated and self-sufficient.
175
Chapter VIII:
Washington, D.C.: A Target City, And Why
"Today, Washington is our next target."
senior representative,
Japanese life insurance company
In July of 1985,
there had yet to be a single recorded
acquisition of Washington real estate by a Japanese entity.
Today, one year later, Washington has witnessed no less
than
three
buildings.
subject
Japanese
purchases
Additionally,
of
interests
in
office
at least one office building
is
to a forward-purchase commitment and will be closed
upon this fall,
and active negotiations are underway on
no
less than four other projects.
Washington,
D.C.
serves
activity in U.S. real estate.
sectors
life
have
as
an example
of
Japanese
Representatives of almost all
invested or are negotiating to invest
insurance companies,
construction firms,
there:
real estate
development companies and small non-institutional companies.
Forms
and scale of investment have varied.
And almost all
of the activity has taken place within the last nine months,
allowing
for
a
fresh
snapshot
of
Japanese
investment
patterns.
The Reasons for Coming to Washington, D.C.
Why
has Washington enjoyed such an increase in demand,
an increase which, with the possible exception of Boston, is
176
seemingly
unmatched in the nation ?
Most of our
Japanese
interviewees cited some or all of the following:
1.
2.
3.
4.
5.
6.
Size and zoning limitations
Growing familiarity
Presence of federal government
Smaller dollar size of transactions
Large size of base market
Current and historically favorable
vacancy rates
7. Emotional appeal
1. Size and Zoning Restrictions
Washington is a relatively small city of sixty-nine square
miles.
given
Its effective size is shrunk even further, however,
the
fact
that a very large portion of its
dedicated to the federal government,
that
it
code
Congressional
Washington
protector
has
Act
which
fire
it
has
severely
ladders
been
limits
the
The
a
1910
height
originally legislated
could
reach
popularized and
the
top
preserved
of
Washington
Monument and the Capitol.
Washington's
zoning
two
restrictions
tallest
is
buildings,
of
to
of
all
as
of the low scale of the city while enhancing
prominence
these
cities.
incorporates
although
to
District of Columbia are
effectively
buildings;
that
buildings,
of
dedicated
the more restrictive of major American
zoning
ensure
area
major American city.
The zoning regulations of the
among
is
together with the fact
has one of the proportions of
parkland and public greenspace any
area
a
the
The
The practical effect
to
limit
the
height
(exclusive of penthouse) of most buildings to ninety feet; a
177
relatively
small area (less than two square
structures
of 130 feet,
Avenue
miles)
allows
while buildings along Pennsylvania
between the White House and the Capitol
certain circumstances, reach to 160 feet.
may,
under
Applicable floor-
area ratios within the CBD range from 6.5 to 10.
Together,
these
size
and zoning limitations
act
to
control the amount of space which can be delivered into
the
market; one is not going to awake one morning and learn that
his project will soon be competing with a forty-story office
tower.
Such
restrictiveness
foreign
real
estate
Writing
about
favorably,
report
the
appeals to both American and
investors,
factors
which
including
foreign
the
Japanese.
investors
consider
Mahlon Apgar IV notes in an Urban Land Institute
that
"[i]n zoning and physical limitations
procedures
for
development,
Washington,
D.C.,
New
Orleans
predictable
and structured,
and
cities like
Boston
and San Antonio
are
making competition and
in
and
more
growth
more predictable and structured."(199)
2. Growing Familiarity
Although Washington is the Nation's Capital,
now
nor has it ever been a center of commerce.
bona fide port or industrial base,
draw
the
actively
San
interest
of
Japanese
established
mercantilists
As companies such as Mitsui &
its New York office in 1879,
178
Without
a
Washington had little to
pursuing business in such cities as New
Francisco.
it is not
who
were
York
Co.,
and
which
proliferated,
it
was only natural that familiarity bred interest in the
host
city's real estate market.
Today,
however,
Washington
familiar town to the Japanese,
First,
most
targeted
ever
become a
much
due to a variety of factors.
Washington in their strategic plans for
their U.S.
subsidiaries opened
its proximity to New York,
regionally
more
Japanese corporate real estate investors
since
Given
has
compatible
have
expansion
around
1981.
Washington was viewed
as well as easily accessible to
relatively thin staffs of the Japanese companies.
as
the
Secondly,
in the last six years, Washington has gained new prestige as
a
center of real estate development;
national
developers
Companies,
Hines,
such
as
Boston
Cabot Cabot & Forbes,
Lincoln
Associates,
Property
Spaulding
&
Manhattan
origin,
satisfy
Finally,
property
it
is
their
investments
period,
Properties,
Beacon
Cadillac Fairview, Gerald
Company,
Prudential,
Rose
completed
The presence of such developers
is a natural draw for the Japanese,
approval.
that
Slye and Trammell Crow
their first D.C. projects.
of
within
in
giving a city the stamp
light of the high
by foreign investors
of
demand
almost
for
every
increasingly difficult for the Japanese
investment
there;
parameters
as a result,
through
they have embarked
to
realty
on
a
special effort to familiarize themselves with Washington and
other East Coast cities.
3. The Presence of the Federal Government
179
The
fact
government
Japanese
is
an
immensely
investors.
stability
be
that Washington is the home of
It
important
implies
in the marketplace,
as
"recession-proof"
suggested
(and
statistics
do
historically
as
a
federal
for
underlying
some
of
the
the
interviewees
used
to
Washington
herald),
market
don't see much change in the economy.
always be in demand."(200)
expanded
on
envision
this
point,
various
improvement
A number
stating that
factors,
of
"and we
interviewees
while
they
the
advent
including
of telecommunications,
"It
Lawyers and lobbyists
could
eventually eroding
importance of locating within any one of many
did
has
been one of the most stable in the U.S.
is the center of politics," noted one such person ,
will
most
and while Washington may not
as
that
factor
special
many Washingtonians
suggest
the
cities,
not forsee such factors undermining the importance
certain
tenants
diplomacy
will
to locate in
always be
Washington.
"Politics
person-to-person
noted one Japanese institutional investor,
and
the
they
for
and
'businesses',"
"
and their home
will always be Washington."(201)
Finally,
on
a
related
theme,
Washington
beneficiary of analogy and transference,
the
most
Japan,
Japanese
is
for Tokyo, home of
highly desired and richly priced real
estate
is likewise the home of the federal government,
investors
are
well aware
of
the
stability such a presence brings to that city.
180
the
strength
in
and
and
4. Smaller Dollar Size of Transactions
In
estate
many
ways,
presence
the
in
entry costs of acquiring
Washington
are
less
than
a
real
in
other
A number of factors conspire to keep the average
value
comparably sized cities.
of Washington buildings at a relatively low level.
land
the
Although
costs for premium downtown commercial sites are
highest
F.A.R.
in
square
smaller
due
restrictions,
maturity
of
opportunities
the nation (ranging from $90 to
foot),
to
buildings
the
together
the
to
aforementioned
with
the
market
there
$120
a
height
fact
that
are
put together large-scale
established premium locations.
factors
tend to be
per
good
deal
and
bulk
due
to
relatively
the
few
assemblages
in
The effect of these various
is demonstrated in a review of the downtown
buildings
among
office
completed or scheduled to be completed from 1985-
1987:
1985
--
Number of buildings: 20
Average square footage: 158,850
1986
--
Number of buildings:
19
Average square footage:
1987
--
Number of buildings: 23
Average
Source:
185,750
square
footage:
208,875
(202)
Of all these buildings,
only three are in excess of 400,000
181
square
feet
in size,
and none are in
excess
of
600,000
square feet (although 1001 Pennsylvania Avenue, developed in
two
separate phases,
totals slightly in excess of
700,000
square feet).
Finally,
limit
the
certain
total
construction-related
development
cost
of
factors act
Washington,
to
D.C.
product.
First, the lower height permits the use of poured-
in-place
concrete
often
more
construction in addition to
costly)
methods,
particularly
other
(and
steel.
And
secondly, Washington contracting is not predominantly union;
in
recent years,
jobs
have
larger
more than fifty percent of
gone to open-shop contractors,
contracting
subsidiaries.
firms have both
Testimony
to
the
the
downtown
and many of
closed- and
dominance
of
the
open-shop
open-shop
contractors was the adoption, in 1984, of a "Market Recovery
Plan" by the metropolitan Washington trades
incorporated
a
number
of
council,
cost-reduction
and
which
no-strike
provisions designed to recapture a portion of the market.
The
--
net effect of all these factors is that the
the cost, assuming a willing seller --
and hence,
value
of the
typical investment-grade Washington office building is
expensive
than
Current
total
running
in
range,
in Manhattan,
building
costs
for
new
or
Chicago.
developments
the $180-to-$220 per F.A.R.(net leasable)
and sales prices of premium leased properties
exceeded $300 per F.A.R. foot.
majority
San Francisco
less
are
foot
have
Such numbers would place the
of new buildings in the $30 million-to-$40 million
182
cost
range,
fully
leased
--
million
zone
while the sales price of the majority
product might range from
all numbers which are
$35
of
new
million-to-$55
well within the "comfort"
of most Japanese institutions now active in
the
U.S.
5. Large Base Size of Market
Perhaps
potential
earlier,
which
availability
it
is
markets.
space
of product;
after
all,
is lack of satisfactory product
partially
fueling
Japanese
as
in
noted
Manhattan
interest
in
other
Washington's existing inventory of downtown office
is
combined
almost as important as acquisition cost is the
one of the largest in
the
nation.
with the relatively low entry costs,
This
fact,
expands
the
opportunities for a variety of Japanese investors to acquire
product.
6. Current and Historically Favorable Vacancy Rates
The
current
Washington
projected
office
vacancy
rate
for
the
city
of
(203),
with
it
to increase to approximately 15% in the
wake
of
is
approximately
ten percent
market oversaturation which is characteristic throughout the
nation.
(204).
Both figures compare most favorably against
those of other major American cities (205).
Furthermore,
comparatively
information
well
Washington
against
contained
has
such
historically
cities.
According
within two separate market
183
fared
to
reports,
over
last eight years Washington has
the
downtown
office
vacancy
Manhattan (midtown:
rate
in
not
excess
of
a
suffered
14%;
only
7.4%; downtown: 10%) and Boston (13.7%)
boast better maximum numbers. During that period, Washington
has
enjoyed six bi-annual periods in which its vacancy rate
7;
was below 1% (San Francisco:
and Boston:
0),
Los Angeles:
5; Manhattan
and its unweighted average vacancy rate for
Francisco
the entire period (5.6%) is surpassed only by San
(4.2%) and midtown Manhattan (5.4%).(206)
7. Emotional Appeal
low-slung
scale
L'Enfant's
city
The
Pierre
aforementioned
people;
1910
of Washington --
plan,
of
function
concert
congressional act --
appeals
with
the
to
many
Europeans, finding the scale and urban design to be
pleasantly reminiscent of Paris,
their
in
a
other more hallowed cities,
Rome,
Munich and some
seem to be
of
particularly
impressed.
Apparently,
the
very
such features appeal to some Japanese, for
same reasons.
"There are no high buildings.
similar to many cities within Japan,
many of us."
and
This is
to
appeals
(207)
Current Japanese Activity in the Washington, D.C. Market
In
the summer of 1985,
insurance companies
four years after Japanese life
were permitted to invest in
184
U.S.
real
estate, Meiji Mutual Life Insurance Company became the first
Japanese
D.C.
company
office
introduced
venture
to acquire an interest in
building.
and
the
development of
200,000-square-foot
Equitable
Lafayette
(which
five-phase
loan
Center
co-
III,
a
office building which is the third of a
office
complex.
approximately half of the deal,
full
the
Washington,
the Japanese life to the project) agreed to
on
planned
Meiji
a
In
exchange
for
Meiji/Equitable made a very
(approximately 100% of total project cost) at
below-par coupon rate,
permanent
loan.
and will provide a similarly
a
priced
The project is scheduled for delivery
in
late 1986 or early 1987.
This
deal
incorporates many of those
which are quite typical of most Japanese
of
all,
within
characteristics
investors.
the project is a well-located one;
it is
First
nestled
Washington's "Golden Triangle," that area bounded by
Connecticut,
Pennsylvania
and
New Hampshire
avenues
and
which,
for the last twenty-five years, has been the premier
office
submarket in Washington.
venture
with
the
Equitable,
Secondly,
an
it is a
association
joint
which
many
Japanese investors covet both as a learning vehicle as
well
as
a
security
representative
experienced
blanket;
of
furthermore,
Equitable,
"
Meiji
according
is
to
somewhat
and a good deal more conservative than some
a
less
of
our other Japanese partners, and they take special solace in
our
sold
involvement."(208)
Finally,
the local developer which
part of its interest to the life
185
insurance
companies
(Farr-Jewett,
on behalf of a development partnership) is an
experienced one,
having succesfully developed the first two
phases of Lafayette Center.
At least three other deals involving Japanese investors
have
been made or committed to in the last
and each of them varies from the above.
months,
twelve
As noted earlier in
Kokusai Kangyo Aerial Surveys acquired a partial
the paper,
Cadillac Fairview's 1001
Avenue
Pennsylvania
interest
in
project.
Nissei Realty, Nippon Life's U.S. subsidiary, will
on an as-yet unnamed office building later this fall.
close
reputedly purchased one half of One Thomas Circle,
fully
a
outside
225,000-square-foot office building located
leased
has
life insurance company (as yet unrevealed)
a
Finally,
of the Golden Triangle, from Prudential.
all Japanese investments have been in the form
Not
At least two other Washington
equity or "dequity," however.
The
estate ventures have involved Japanese concerns.
real
first,
an
of
office building in Northern Virginia,
being
is
built by Kajima Construction Company on behalf of its future
tenant and owner,
N.E.C.
( the large Japanese
electronics
firm).
The
months
second
ago,
a
is a more
intriguing
one.
three
About
seven-year open-ended mini-perm was
placed
against Washington Square, a new (completed in 1984),
leased 680,000-square-foot office building located not
fullyonly
within the Golden Triangle but at arguably the best location
in the city.
The lender, Mitsubishi Bank (in participation
186
with
a local bank,
American Security,
and a consortium of
other lenders) sought to enter the Washington market but was
only
interested
Washington
Square,
capitalized
tenants;
and
absolutely
they
premier
found such
renowned
local
a
projects.
building:
developers;
In
heavily
prestigious
high (if somewhat controversial) design;
rent roll;
And,
in
a strong
a superior location over a Metro subway station.
having
found
a building which met
their
investment
criteria,
Mitsubishi was prepared to be most aggressive
order
obtain
to
participants
the
would
loan.
Although none
comment
on
the
terms
of
the
of
reputable sources cited a rate which floats at
in
loan
the
loan,
forty
basis
points below prime, with a 6% floor and a 13% ceiling.
Not
market
every Japanese effort to penetrate the
has met with success,
expressed
great
interest in
however.
Sumitomo Life has
D.C.,
despite
yet
negotiations on two joint venture opportunities
Golden
Triangle,
Manhattan;
the
with
London
by
Construction
venturing
KG
Land,
the
U.S.
Company which,
with
its
partner
Zeckendorf
A similar fate
subsididary
has
of
among other projects,
Company on their
in
$500
been
Kumagai
is
co-
million
Protracted negotiations with a
Madison Square Garden site.
Washington
Leeds,
(one, in the
a hot new submarket in the East End) it
yet to close on a property.
suffered
major
&
extended
other with Gerald Hines Interests on a site
at Franklin Square,
has
Washington
general contractor and
developer were recently terminated,
187
major
Washington
to the surprise of many
knowledgeable
development
parties.
The
package deal called
three separate sites --
of
other two in Northern Virginia.
close
to
the
responsible
subject
for
deal,
and
"they
fair.
one
[KG]
They
were
tough,
also showed
claimed that,
D.C.,
the
but
that
to some of the same restrictions as
they
the
According to an individual
we
quite
they
are
Americans,
while they wanted to do the
their home office just couldn't approve it."
a
in
for
(209)
deal,
At least
half dozen other developers and contractors claim to have
had
"substantive" discussions about a potential
with
a
Japanese
entity,
but
nothing
has
co-venture
yet
come
to
fruition.
Finally,
interesting
At
the
there
is one Washington project which offers
insight into Japanese
same time,
investment
methodology.
it serves to illustrate the point
that
underwriting standards and investment goals may vary as much
between Japanese companies and industries as they do between
their American counterparts.
The subject project is currently under construction
a
prominent
location
Approximately
have
the
Golden
150,000 square feet in size,
construction
which
within
quality
are of the highest
at
Triangle.
its design
--
order
undoubtedly contributed to its being
and
factors
55%
pre-
leased two months prior to completion.
To
offers
company,
date,
two Japanese companies have made unsolicited
on the property.
was
introduced
One,
to
188
a real
estate
the property by
development
an
American
company
with
which
it has
pre-existing
relationship.
Their interest is limited to a 100% purchase,
based upon an
8%-9%
a
cap of the stabilized first-year income.
entity,
introduced
The second
to the project following a
blind
call
from a Washington broker, is a life insurance company.
They
are
proposing
a convertible mortgage,
which would have
coupon rate based upon an 7.5%-8.5% cap of stabilized
year
income;
stipulated
point
in
addition,
between five and ten years,
convert
the
leases.
At
any
some
the company could opt to
outstanding debt into a 70%-80% stake
building.
One apparent problem,
desire
the part of the Japanese company
on
first
credit would be given for
rent bumps incorporated into
a
in
the
as yet unresolved, is the
to
receive
a
preferred return on its equity stake following conversion, a
requirement
which could well limit the developer's
ability
to finance the project.
C. Summary
The
dramatic
increase
in
investment
interest
in
Washington
real estate over the last twelve months seems to
foreshadow
a sustained influx of Japanese capital into
metropolitan area.
life
The variety of the kinds of investors --
insurance companies,
construction
real estate companies and "individuals" (
well)
--
the
companies,
banks,
corporations,
as
attests to the diversity which the market seems to
offer.
189
The nature of the Japanese investments in Washington is
consistent
with
this paper.
investment patterns
prestigious
leased,
throughout
Well-located downtown office buildings are the
preferred product.
buildings
described
Whenever possible, an affiliation with a
developer
should
be
or
institution
is
existing and fully
sought.
or
The
substantially
unless the development project is a co-venture with
a strong and experienced developer or institution.
Of
into
course,
the
predicted influx of Japanese capital
Washington could well be stemmed by one or two
publicized
investment mistakes which would induce
among nascent Japanese real estate investors.
the
highly
anxiety
Judging from
first wave of investments which have been noted
however,
there
would
catastrophe;
all
established
buildings,
seem to be little chance of
but one are equity investments
conservatively-structured
and
joint
the
other
venture
is
above,
such
in
well-
a
enjoying
a
fairly
a
fine
location and a strong institutional partner. Thus, given the
predicted
success
of
these
initial
investments,
more
Japanese capital is almost certain to flow into Washington.
190
PART IV:
SUMMARY
Chapter IX:
"So What Does This All Mean, And How Can I
Take Advantage of It ?"
authors have demonstrated Japanese activity to be a
The
broad and diverse real estate phenomenon.
in
U.S.
estate
real
has expanded into
service areas of the investment,
and
management
businesses.
Japanese activity
all
product
and
construction
development,
Firms in each of
areas
these
operate with different goals and business philosophies.
We have observed that life insurance companies and trust
banks
MOF
are
risk-averse
regulated,
conservative
and
investors. They are fiduciaries and not operators, investors
and not developers.
investments
U.S.
While the quantitative amount of
increase due to
must
Japanese real estate product,
slow,
to
of
nevertheless the
their presence in the U.S.
qualitative
will grow
within
a
evolutionary process. These companies will be allowed
invest more but will be no less regulated by MOF.
will
than
Japanese property returns and scarcity of domestic
domestic
extent
U.S.
higher
their
follow a step-by-step incremental investment
rather
than innovate the expansion of Japanese real
activities into products,
development
markets
and
areas and services.
As
They
approach
estate
Japanese
companies and contractors seek new geographical
project
opportunities,
191
life
and
non-life
companies
and trust banks will cautiously follow them
second-tier cities and non-prestige investment deals.
institutions
nature
are
oriented to size and
location,
into
These
and
the
of their activities will not change over the medium-
term future.
They transact with major
counterparts
and
builders.
not
smaller
Innovations
U.S.
institutional
investors,
developers
in strategy and operating
or
procedure
will come from learning through association with U.S.
joint
venture partners.
Real
estate
different
They
to
are
geographical areas and a variety
able to understand local U.S.
estate
groups
involved
of
services
real estate
development firms associated
markets.
with
which ease adjustment to unfamiliar
provide
partnerships.
companies
local
U.S.
intermediaries
"Zaibatsu"
environments
for
market,
these
and
and
small
U.S.
brokers can
real
establish
companies through domestic U.S.
personal intermediaries.
to
developers,
relationships
banks,
have
Therefore,
estate
brokers
with
and
Though larger Japanese real estate
development companies understand regional U.S.
enough
project
but do not
group-related advantages as do the larger firms.
financiers
trading
Medium-sized and smaller Japanese development
want to enter the U.S.
medium-sized
in
businesses.
benefit from ties to big banks and powerful
companies
and
companies
generate product and often need intermediary
be
Real
development
progressively
dispense
markets well
with
intermediation services of investment bankers and
192
expensive
brokers,
U.S.
intermediaries
must
help
newer
Japanese
developer
entrants to the U.S. market to overcome entry barriers.
Construction
the
U.S.
construction business before they
strategies
for
Construction
estate
companies need to learn the intricacies of
full-scale,
can
full-service
implement
operations.
companies have neither the experience of
real
development companies nor the limited strategies
institutional
investors.
services
to
clients
companies
will want to learn about real estate markets
participants
scattered
sized
an
Because they wish to provide many
of
differing
ample
range
markets throughout the
size,
of
U.S.
construction
joint
with Japanese contractors.
of
Japanese
transitional
foreign
and
ventures
Therefore,
developers and builders have a chance to
ventures
phase
via
of
in
medium-
form
joint
The plant construction
direct
investment
cushion for Japanese contractors.
is
a
During this
period they want to become fully involved in mainstream U.S.
real
estate
contracting
with
medium
and
small
developer/builders in geographically diverse markets.
Small
Japanese
investors
have
few
opportunities
to
invest in U.S. real estate. There is little supply of direct
and institutions gearing up to market
investment
vehicles,
U.S.
estate investment to smaller Japanese
real
face significant MOF approvals and
opportunities
are
estate
process,
create
markets
great
scrutiny.
and at every stage
investors
However,
of
the
Japanese securities firms will attempt
for U.S.
product.
193
Pending
MOF
the
real
to
approval,
development
with
who
developers
business
insurance
with
co-venture
make construction loans to contractors and joint
companies,
venture
will
funds
investment
pooled
companies.
U.S.
can identify product segments
brokers
and
and
develop
strategies should be able to generate exciting new
business opportunities.
But, the development of this aspect
of Japanese real estate activity in the U.S. is likely to be
an
extremely time consuming process for Japanese
and
U.S.
participants.
opportunity for U.S.
working
capital.
others,
real estate participants interested in
institutions,
Japanese
with
contractors,
five areas of immediate business
therefore,
We target,
in gaining access to sources
or
Whereas
can
all
developers
of
Japanese
some opportunities are longer-term
be
actively
probed
for
and
than
relationship
development.
OPPORTUNITY #1:
AMERICAN REAL ESTATE PROFESSIONALS CAN INTERMEDIATE ON
BEHALF OF JAPANESE AND U.S. PARTIES WISHING TO JOINT
FURTHERMORE, AMERICANS WISHING TO CO-VENTURE WITH
VENTURE.
EMPLOY JOINT VENTURE STRUCTURES AS A FORM OF
MAY
JAPANESE
INTERMEDIATION.
Opportunities
activity
in
contractors
U.S.
for
U.S.
intermediaries
real estate are
and developers in U.S.
of
considerable.
real estate
Japanese
Japanese
separately
lack a key dimension of their respective business processes.
Real
estate
development companies want
194
to
liquify
their
projects
and
by packaging and selling
suburban
eventually,
office
projects
residential,
to
industrial
medium-sized
and,
smaller investors in Japan. These types of U.S.
real estate are not traditional forms of investment for most
Japanese.
early
Therefore,
particular care must be taken in
stages of business development to ensure that project
mix,
geographical location and deal structures are
well.
managed
For this reason, smaller U.S. developers with quality
projects
venture
and
proven
expertise
can
capitalize
on
joint
opportunities with Japanese real estate development
companies.
Newer Japanese development company arrivals
particularly vulnerable, through inexperience, to
risk
the
management
and partner
selection.
are
errors in
Japanese
trading
companies expect to fulfill intermediary roles with Japanese
investors for these projects in Japan, but may have problems
in providing coverage of diverse and distinct local markets.
Although
Japanese
intermediaries,
intermediation
companies
there
dislike having to
is little alternative to
services for most
developers.
deal
with
U.S.-based
Real
estate
development
companies eschew dealing with Wall Street firms
because
exorbitant
of
commissions,
together
with
Wall
Street's apparent lack of interest in small and medium-sized
development businesses.
Consequently, there is a clear role
for U.S. intermediaries to link between Japanese real estate
development
estate
potential
companies
activity
with local
outside
major
markets.
metropolitan
but has not been understood by U.S.
195
Japanese
areas
real
real
has
estate
participants.
The move to second-tier cities and suburbs is
a logical extension of current activities for most
real
estate
development
companies.
They
Japanese
need
local
representatives to help them adjust to these markets.
Similarly,
the
construction companies need help in learning
construction
venture
business and
partners.
In
judging
situations
appropriate
where
a
joint
Japanese
construction firm contributes equity to become involved in a
project, project analysis and market judgment
to
success.
Major
are essential
institutional investment banks
do
not
operate in these markets nor command contacts with which the
contractor can enter into business.
once
again,
introduction
these
want
neither
markets
construction
possibilities
participants
play
an intermediary
of contractor with local
companies
regional
to
Japanese trading firms,
with
have local
a depth of
company
exist
for
developer.
expertise
knowledge
managements.
introducing
to each other,
role
in
the
However,
nor
cover
required
by
Intermediation
Japanese
and
U.S.
as well as for presenting
new
markets for Japanese contractors and developers to enter.
Life
are
and
non-life insurance companies and trust
large-scale
project
investors
parameters.
They
with
narrow
banks
geographical
are adequately
served
by
and
Wall
Street investment banks and major national brokerage houses.
Opportunities
are
limited,
for
for
smaller and medium-sized
these
firms
deal
exclusively
institutional basis within major metropolitan
196
intermediaries
on
an
areas. Future
business opportunities should develop along lines similar to
those
of
domestic
investment.
and
banks
a
insurance
have been given
these
investment
pension
real
estate
companies
approval
regulatory
greater percentage of total portfolio in
currency denominated assets,
future
company
Japanese life and non-life insurance
trust
invest
U.S.
companies
in
funds
to
foreign
among them real estate. In the
may
target
different
regional U.S.
markets,
have done
recent
in
types
such as major
years.
of
U.S.
Nevertheless,
unfamiliarity with development projects and extreme aversion
to
risk
make
this
a
longer-term
perspective.
intermediaries wishing to create opportunities in
development
view.
It
activity
which
investors
will
Furthermore,
investors
not
can
thus must adopt a
happen
although
in
these
the
life,
invest greater amounts
Japanese
similarly
near
term
non-life
than
long
future.
and
trust
before,
their
will continue to be heavily regulated by the
approves
basis.
marketing
projects and regional marketplaces to
institutional
U.S.
investments on
individual
Decision
times
are slow and are
a
MOF,
case-by-case
not
expected
to
change dramatically.
Securitization
of
real
estate
oportunities
important focus of large institutional U.S.
of
U.S.
securities
opportunities
managers.
for
to the Japanese market
U.S.
is
an
firms. The sale
offers
product developers,
Major Wall Street firms have devoted
direct
marketers and
substantial
resources to building a direct sales capability in Japan for
197
U.S. securities as have Japanese firms in New York. Matching
good
estate projects with financing and
real
is
potential
a high growth area of
institutions.
institutions
Also,
can
distribution
opportunity
for
U.S.
foreign investment by Japanese savings
be
facilitated by
creative,
new
links
between small Japanese investors and U.S. markets. These are
very long-term prospects.
OPPORTUNITY #2:
ESTABLISHED AMERICAN REAL ESTATE FIRMS WHICH DESIRE TO TAKE
PROFITS
OR TO RE-CAPITALIZE THROUGH THE ADMISSION OF
PARTNERS
SHOULD
CONSIDER CO-VENTURING
WITH
JAPANESE
INSTITUTIONS AND REALTY FIRMS.
Large Japanese institutions which are investing in U.S.
real
estate have many valuable assets:
significant capital
resources;
deep and firm relationships with other
investors,
builders and financiers;
trained staffs.
qualities
At the same time,
which
they
and
experienced
mature,
as
network
being
critical
of
While
contacts.
can effect purchases on an ad hoc basis,
approach
does
integrated,
Some
permit
long-term
to
establish
market presence which
Japanese companies,
and trust banks,
them
and
client bases
Japanese
not
to
real estate market: large
established
staffs,
well-developed
hard-working and wellthey lack many of those
recognize
sustained success within the U.S.
Japanese
the
such
the
they
such as life insurance
a
an
welldesire.
companies
which are fiduciaries, are content to wait
until they unilaterally develop in-house expertise.
198
Others,
however, do not appear to be as patient.
Such impatience presents a real opportunity for certain
American
companies.
Established
incorporate the market knowledge,
U.S.
brokerage
staffing,
firms
and networking
system which all Japanese real estate investors covet, while
American development companies possess a highly
and non-fungible expertise.
The bigger,
specialized
the better; firms
which
specialize in a variety of different regional markets
would
be
an
especially
attractive
institutions
intent
diversifying
portfolio
a national basis.
on
highly-regarded
rather,
if
credibilty
Japanese
the
on
purchase
their
for
large
real
estate
This is not to
regional firms lack any appeal
market is large and
say
whatsoever;
attractive,
and expertise of the firm great enough,
firms
would
want to acquire a stake
that
in
and
the
certain
such
a
regional company.
However, it is unlikely that a Japanese firm would wish
to buy the entire company and its goodwill.
would be counterproductive;
Such an action
for
it would reduce incentives
the personnel --
the
principal "asset" --
may
well lead to an exodus of staff.
to
perform,
and
This would not
only
leave the Japanese with a shell corporation, but would
make
them
business managers,
not currently desire.
a status which they
Consequently,
those American
do
firms
principals desire to sell only a part of the business
whose
and
as well --
remain actively involved in the firm's
profit
management
and
participation are likely to receive a more receptive
199
audience from Japanese investors.
Such acquisitions are not without precedent.
Term
Credit Bank took a position in Peers
Fuji
Bank acquired Abacus Mortgage.
believe
that
&
companies
similar acquisitions.
and
securities
Therefore,
Company,
and
Knowledgeable sources
it is only a matter of time
construction
The Long-
before
firms
Japanese
undertake
qualified U.S.
firms may
enjoy a seller's market.
OPPORTUNITY #3:
SMALL
AMERICAN REAL ESTATE OWNERS AND DEVELOPERS SHOULD
BEGIN TO CONSIDER THE JAPANESE SMALL INVESTOR CAPITAL MARKET
AS A VIABLE ALTERNATIVE SOURCE OF FUNDING.
NOW IS A GOOD
TIME
FOR SUCH AMERICANS TO BEGIN RELATIONSHIPS
WITH
INTERMEDIARIES ACTING ON BEHALF OF SUCH INVESTORS, BECAUSE
THESE INTERMEDIARIES NEED MORE PRODUCT IN ORDER TO CONVERT
SMALL INVESTOR CURIOSITY INTO INVESTMENT ACTIVITY.
The
players
time
is
ripe for smaller
American
real
to tap the Japanese small investor capital
estate
market.
real estate investment opportunities have evaporated,
Tokyo
due to a superheated market which has priced property beyond
the
means
of
investment-grade
range,
yen
most
real
small
Yields
investors.
estate
have dropped
to
on
Tokyo
the
1%-2%
compared to the 8%-10% range extant in the U.S.
The
has appreciated forty percent against the dollar in the
last eleven months, but is likely to fall against the dollar
over
Large Japanese
a foreseeable future.
pioneered investment in U.S.
record
and
have
real estate, developed a track
thereby established both
200
companies
the
credibility
and
desirability of such investment.
But,
the
supply
line
is
clogged.
Neither
American brokers nor large Japanese institutional
have
any interest in such product,
little
transfer
information
and
owners/developers
consequence,
Americans
small
so there is
investors
relatively
small
American
investors.
As
between
Japanese
who are able to circumnavigate
informational
"roadblocks" will enjoy a fairly broad
of
buyers who do not enjoy many U.S.real
potential
large
a
the
field
estate
investment options.
How does one go about charting such a course ?
For the
time being, through established intermediaries and contacts.
Estate
Firms such as Mitsui Real Estate Sales and Toyo Real
are
Sales
possess
which
Wootton KK,
headed
by
is
substantial
and
bases
Jones
real estate market.
Lang
although a new corporate presence in Japan,
is
an experienced and well-connected native who
is
Pacific Rim Research
targeting the smaller investor market.
Limited
companies
highly-regarded
client
extensive
about the U.S.
knowledge
and
well-recognized
similarly
and
new
shares
a
focus.
similar
American lawyers such as Arthur Mitchell of Coudert Brothers
and
Jeff Dwyer of Lane & Edson have overcome
animus
the
Japanese
towards attorneys and become trusted advisors,
illustrating
how
lawyers
intermediaries and counselors.
201
can
serve
as
thus
valuable
OPPORTUNITY #4:
CULTIVATE
WITH
NUMBERS,
NOT
SALESMANSHIP:
AMERICAN
DEVELOPERS
AND PROPERTY OWNERS WHO ARE CAPABLE OF PRODUCING
STATE-OF-THE-ART
QUANTITATIVE
ANALYSIS
ARE
GENERALLY
PREFERRED OVER THOSE WHO LACK SUCH CAPABILITIES.
When evaluating a project,
"sold."
be
Japanese do not like to
The information which is submitted to them
be
should
principally "objective" measures of a project's value or
feasibility,
feasibility
such
as
studies,
photographs.
spreadsheets,
together
with
maps
and
and
aerial
Personnel of the large Japanese institutions,
who possess their own computer models,
information
appraisals
provided
and
closely evaluate all
are not at all hesitant
to
ask
probative, detailed questions.
Consequently,
estate
all
things being equal,
American
real
professionals who are facile with computers enjoy
substantial advantage over those who are not.
is particularly pronounced when
a
The advantage
required to quickly respond
to Japanese follow-up questions which require the use of new
assumptions or a re-programming.
The Japanese may be
slow
to decide, but they expect quick responses.
OPPORTUNITY #5:
MANHATTAN, WASHINGTON, D.C., BOSTON AND SAN FRANCISCO REMAIN
JAPANESE REAL
FAVORED CITIES FOR A MAJORITY OF
MOST
THE
DOWNTOWN
REMAINS
FAVORED PRODUCT
THE
INVESTORS.
ESTATE
OWNERS AND DEVELOPERS OF
CONSEQUENTLY,
BUILDINGS.
OFFICE
A
SUCH BUILDINGS IN THESE CITIES ARE MORE LIKELY TO RECEIVE
AUDIENCE FROM JAPANESE INVESTORS THAN THEIR PEERS
FRIENDLY
HAVING OTHER PRODUCT IN OTHER CITIES.
202
The
Japanese
cities.
its
these
San Francisco's long experience with the Japanese,
market and tough zoning
tight
special
the
prefer real estate investments in
appeal,
while Manhattan,
restrictions
give
it
Boston and Washington --
epicenter and anchors of the "Bowash"
corridor
--
all
combine a number of desired factors.
Projects
in
other
Japanese investors,
cities do continue
however.
For instance,
and Sumitomo Life's recent investments
to
appeal
to
Mitsui Fudosan
in Chicago is likely
to stimulate further interest in that city. Due to its large
Japanese-American
community,
Los
Angeles is
representatives of Japanese investors;
of
Japanese
real
estate
investment.
it has a large
Currently,
perceived as being oversaturated with product;
right
familiar
to
base
it
is
however, the
deal with the right parties is likely to elicit quick
and favorable Japanese interest.
In
conclusion,
the authors believe that an
increasing
Japanese presence in the U.S. marketplace will present great
opportunities
for
almost
all kinds of
U.S.
real
estate
players. Japanese capital will be available and will promote
new
development
strengthen
shine
a
U.S.
and
management
techniques
industry efficiency.
203
can
The rising sun will
most favorable light on the American
game.
that
real
estate
NOTES
CHAPTER I
"Japanese Investment In the United States," in Emerging
1.
Trends in Real Estate: 1986, Equitable Real Estate Group,
Inc., November 1985, p. 13
2. Moribe, Takahide. "Foreign Investors In the U.S.: A
Symposium." In Real Estate Review, Vol. 14, No. 3, 1984, p.
39.
3.
Ibid., p. 40.
4. "Japanese Have the Yen for U.S. Real Estate," Los Angeles
Times, April 29, 1986, p. 1.
5. "Foreign Direct Investment in the United States, 19741983," U.S. Department of Commerce, June 1985, pp. 88-102;
"Foreign Direct Investment in the United States, 1984,"
Department of Commerce, September 1985, pp. 88-92.
6.
Ibid.
7.
Emerging Trends, op cit.,
p. 13.
8. "Japanese Direct Investment Abroad in Fiscal Year 1985,"
Ministry of Finance, May 27, 1986, p. 3.
9.
Ibid., p. 3.
10. "Lower Yen Moves Japanese Investment to U.S.,"
York Times, August 9, 1986, p. 31.
in New
11. "Prime Properties Lure Japanese Investors," New York
Times, April 13, 1986, Section 8, p. 1.
12. Ibid.,
p. 1.
13. Reier, Sharon. "Japanese Investors Come of Age,"
Institutional Investor, December 1985, p. 246.
in
14. Interview with Tadao Toyofuku, Deputy General Manager of
the Sumitomo Trust & Banking, in Tokyo, Japan (May 26,
1986).
15. Apgar, Mahlon. "The Changing Realities of Foreign
Investment," In Development Review and Outlook: 1984-85,
Urban Land Institute, Washington, D.C., 1985, p. 388.
16. Interview with Ryuichi Komori, General Manager of the
Oversea Project Department of Hasegawa Komuten Co., Ltd., in
204
Tokyo, Japan (May 27, 1986).
17. Op. cit., note 10, p.l.
18. Op. cit.,
note 1,
p. 13.
CHAPTER II
19. Ezra Vogel, "Pax Nipponica," Foreign Affairs, Summer
1986,
Vol. 64, No. 5, p.
752.
20. McMillan, Charles J., The Japanese Industrial System,
New
York: Walter de Gruyter, 1984, p. 2.
21. Robert Hormats, "The World Economy Under Stress,"
Foreign
Affairs, America and the World 1985, Vol. 64,
No. 3, p. 463.
22. Op. cit.,
note 19, p. 763.
23. Nomura Research Institute. Quarterly Economic Review,
Vol. 16, No. 2, May 1986, p. 41.
24. Tanzer, Andrew."Tokyo's Nicest Landlord," in Forbes,
June 16,
1986, p.33.
25. Op. cit.,
note 2,
p. 42.
CHAPTER III
26. "Life Insurance Companies Boosting Investment in Foreign
Real Estate Assets," in Japan Economic Journal, October
p. 4.,
23, 1984,
27. Forbes, July 28, 1986, p. 186.
28. Fortune, June 16, 1986, p. 146.
29. Forbes, April 28, 1986, p. 203.
30. Interview with Arthur Mitchell, Esq., Coudert Brothers
in New York City (June 25, 1986).
31. Sumitomo Life Insurance Company Annual Report, p. 13.
32. Interview with Akira Yashiro, Chief Representative, New
York Office, Dai-Ichi Life Insurance Company, in New
(June 25, 1986).
York City
205
33. Interview with Takahide Moribe, Manager, International
Real Estate Investment, Nippon Life Insurance Company,
in Tokyo, Japan (May 29, 1986)
34. Interview with Gordon J. Clagett, Executive Vice
President, Equitable Real Estate Group, Inc., in New York
City (June 27, 1986).
35. Nippon Life Insurance Company Annual Report, p. 2.
36. Moribe, note 33 supra.
37. Ibid.
38. Clagett, note 34 supra.
39. "Life Insurers Stepping Up Real Estate Investment In
Japan Economic Journal, Sept. 7, 198 , p. 4.
U.S."
40. Ibid, p.4
41. Moribe, note 33 supra.
42. Yashiro, note 32 supra.
43. Krishnan, Harikar, "Japanese Investing Funds in U.S.
Real Estate." Daily Washington Law Reporter", June 6,
1986, p.1111.
44. Clagett, note 34 supra.
45. Ibid.
46. Telephone interview with Timothy Welch, Executive Vice
President, Equitable Real Estate Investment Management, in
Atlanta (July 14, 1986).
47. Interview with Kazunobu Nisawa, Deputy Chief
Representative, The Meiji Mutual Life Insurance Company, in
(June 26, 1986).
New York City
48. Ibid.
49. Yashiro, note 32 supra.
50. Interview with Mr. Takimoto, Assistant General Manager,
Tokyo Real Estate Headquarters, Sumitomo Life Insurance
Company, in Tokyo, Japan (May 30, 1986).
51. Telephone interview with Kurt Kilstock, President,
London & Leeds, Inc., in New York City (June 26, 1986).
52. Takimoto, note 50 supra.
206
53. Kilstock, note 51 supra.
54. Takimoto, note 50 supra.
55. Yashiro, note 51 supra.
56. Clagett, note 34 supra.
CHAPTER IV
57. Bennett, Robert, "Now, Japan Wears A Hard Hat."
Times, July 27, 1986, p.4F.
New York
58. Telephone interview with John Johnson, Vice President
of Construction at Tishman Construction Corporation, in New
York City (June 10, 1986).
59. Porter, Michael E. Competitive Strategy: Techniques for
Analyzing Industries and Competitors. New York: The Free
Press, 1980, pp. 58, 247.
60. Interview with Naoshi Oinuma, Vice President of the
Shimizu America Corporation, in New York City (June 12,
1986).
61. Interview with Keisuke Mine, Assistant Manager of the
Real Estate Development Division at the Kajima
Corporation, in Tokyo, Japan (July 7, 1986).
62. Interview with Jack Shaffer, Managing Partner of
Sonnenblick-Goldman, in New York City (June 25, 1986).
63. Interview with James W. Montanari, Vice President of
Cushman & Wakefield, in New York City (June 11, 1986).
64. Interview with Katsu Katsumi Kiuchi, Executive Vice
President and Chief Officer of Hasegawa Komuten New
York, Inc., in New York City (June 25, 1986).
65. Porter, Michael E. Competitive Advantage: Creating and
Sustaining Superior Performance. New York: The Free Press,
1985, p. 341.
66. Sugimoto, Fumio. Potential of U.S. Construction Market
for Japanese Construction Firms. Cambridge, Massachusetts:
Department of Civil Engineering, MIT, pp. 160-161.
67. Kaimasu, Makoto. Impact of the Fiscal 1986 Budget for
Public Works Projects on the Construction and Housing
Industries. Tokyo: Nomura Research Institute Investment
207
Research, April 9, 1986, p. 26.
68. Interview with Makoto Taketoshi, Assistant Director in
the Construction Industry Division of the Japanese
Ministry of Construction, in Tokyo, Japan (July 14, 1986).
69. Interview with Tsuneyoshi Shimizu, Executive of the
Kajima Corporation, in Cambridge, Massachusetts (June 9,
1986).
70. McMillan, op. cit., pp.94-95.
71. Interview with Shinzo Matsumiya, General Manager of the
International Division Planning Department at the Shimizu
Construction Co., Ltd., in Tokyo, Japan (July 8, 1986).
72. Informational Brochure of the Shimizu Construction
Company, Ltd., 1985, p. 2.
73. Annual Report of the Kajima Corporation, Tokyo, Japan,
1985, p.
34.
74. Oinuma, note 75 supra.
75. Interview with Mikio Ishikawa, Executive of the
International Division Planning Department at the
Shimizu Construction Co., Ltd., in Tokyo, Japan (July 8,
1986).
76. Op. cit.,
note 13, p. 246.
77. Matsumiya, note 86 supra.
78. Kiuchi, note 79 supra.
79. Sugimoto, op. cit., p. 32.
80. Sugimoto, op. cit.,
p. 94
81. "The Top International Contrators,"
Record, July 19, 1984.
in Engineering News
82. Komori, note 9 supra.
83. Interview with Fujio Suzuki, Assistant to the President
in the Executive Office of the President at the Kajima
Corporation, in Tokyo, Japan (July 7, 1986).
84. Porter in Competitive Advantage, op. cit., pp. 318-9,
365.
85. Ohsawa, note 54 supra.
208
86. Interview with Peter Samton, Partner at Gruzen, Samton &
Steinglass Architects and Planners, in New York City (June
11, 1986).
87. Kiuchi, note 79 supra.
88. Telephone interview with James Stuart, President of
Charles, Baylen, in New York City (July 29,
Gilbert,
1986).
89. Kaimasu, note 63 supra.
90. Interview with Ryoitsu Mukai, Director of Sun Realty
Corporation (Nisshi IwaiAmerica Corporation), in New York
City (June 25, 1986).
91. Kiuchi, note 79 supra.
92. Interview with Hiro Hiroaki Higashi, Manager of Hasegawa
Komuten New York, in New York City (June 26, 1986).
CHAPTER IV
93. Yoshino, Michael Y. The Invisible Link: Japan's Sogo
and the Organization of Trade. Cambridge: The MIT
Shosha
Press,
1986, pp. 68-69.
94. Reischauer, Edwin. The Japanese. Cambridge: Harvard
University Press, 1981, pp. 180-181
95. Tanzer, in Forbes, op.cit.
96. Yoshino, op. cit., p. 14.
97. Interview with Toshio Koga, Manager of the Project
Development Department of Toyo Real Estate
Planning &
Tokyo, Japan (July 10, 1986).
Co., Ltd., in
98. Interview with Kunio Ohsawa, Manager of the Real Estate
Department of the Sumitomo Corporation, in Tokyo, Japan
(July 11, 1986).
99. Interview with H. Abe, General Manager of Overseas
Construction & Development Department at C. Itoh & Co.,
Tokyo, Japan (July 14, 1986).
100.Interview with N. Ide, Executive of the Project
Department, Property and Service Business
Promotion
Affairs) of Mitsui & Co., Ltd., in
Group (Overseas
Tokyo, Japan
209
in
(July 8, 1986).
101."The Mitsui Group Today," Promotional Brochure of the
Mitsui Group, 1985, p. 17.
102.Mitsui Trade News, Promotional Brochure of the Mitsui
Group, May/June 1986.
103.Interview with Yoshiteru Nishimoto, Executive Vice
President of La Solana N.Y., Inc. (Sumitomo Realty &
Development Co., Ltd.), in New York City (May 29, 1986).
104.Interview with Takaaki Ono, Director of the Overseas
Business Department of the Sumitomo Realty & Development
Co., Ltd., in Tokyo, Japan (July 7, 1986).
105.Sumitomo Corporation 1983 Annual Report, p. 23.
106.Comments of Hajime Tsuboi, President of Mitsui Real
Development Co., Ltd., in 1984 Mitsui Annual
Estate
Report,
pp. 1-2.
107.Ibid.
108.Sagara, Yasuhiko. "Japan's Real Estate Industry," Mitsui
Trade News, January/February, 1986, p.4.
109.Interview with Tomotoshi Shiokawa, Executive of Mitsui
Estate Development Co., Ltd., in Tokyo, Japan (May
Real
26, 1986).
110.Mitsui Annual Report, note
ll1.Ono, op. cit.
112.Interview with Akihiro Inouye, Deputy General Manager of
Overseas Business Department of Mitsubishi Estate
the
in Tokyo, Japan (July 9, 1986).
Co., Ltd.,
113.Interview with Makoto Kaimasu, Security Analyst for the
Investment Research Department of the Nomura Research
Institute, in Tokyo, Japan (July 9, 1986).
114.Ohsawa, op. cit.
115.Ide, op. cit.
116.Ibid.
CHAPTER VI
210
117. Interview with Mayumi Oda, Manager, International
Department, Mitsui Real Estate Sales
Operations
Tokyo, Japan (May 29, 1986)
Company, Ltd., in
118. Kaji, Bruce T., President, Merit Savings Bank, in note
supra, p. 13.
4
119. Interview with Hideo Niou, President, Jones Lang
in Tokyo, Japan (May 29, 1986)
Wootton KK,
120. Oda, note 117 supra.
121. "Secretive Life of D.C.'s Merchant Bankers."
Post, Washington Business Section, June 23,
Washington
1986, p. 26.
122. "U.S. Real Estate Is Profitable; Negotiations Can Be
Japan Economic Journal, Jan. 25, 1986, p. 14.
Frustrating."
123. Marketing Brochure, Pacific Rim Research, Ltd.,
p.l.
124. Interview with Yoshinori Takagi, Chief Representative,
Office, Pacific Rim Research, Ltd., in Tokyo,
Japan
1986).
Japan (May 29,
125. Op. cit., note 122, p. 14.
126. Ibid., p. 14.
127. Ibid., p. 14
128. Op. cit., note 43, p. 1111.
129. Ibid.,
p. 1111.
130. Ibid.,
p. 1111.
131. Oda, note 117 supra.
132. Ibid.
133. Ibid.
134. Ibid.
135. Ibid.
136. Interview with Izumi Nishizaki, Assistant Manager, The
Term Credit Bank of Japan, Ltd. (New York), in New
Long(June 26, 1986).
York City
137. Oda, note 117 supra.
211
138. Nishizaki, note 136 supra.
139.
Ibid.
140.
Ibid.
141. Op. cit.,
note 121, p. 26.
142. "U.S. Mortgage Securities Gaining Foothold in Overseas
Market."
Freddie Mac Reports . . . , June 1986, p. 1.
143. Ibid., p. 2.
144. "Big Japanese Investors, In Shift, Begin To Move
Wall Street Journal, May 2,
Into U.S. Stocks."
Capital
1986, p. 41.
145. Telephone interview with Yukio Moro, Yamaichi
New York City (July 14, 1986).
Securities, in
146. Interview with Kazuhito Kondo, Senior Analyst, Nomura
Research Institute, in New York City (June 26, 1986).
147. Interview with Shuko Akita, Vice President, Nomura
in New York City (June 26,
Securities International, Inc.,
1986).
148. Address by Ken Miyao, Executive Vice President and
Executive Officer, Mitsui Fudosan (U.S.A.), Asia
Chief
seminar on Asian Direct Investment in the
Society
States, in New York City (June 12, 1986).
United
149. Cooper, Jack, Vice President and Managing Director,
America, "Real Estate Investment Vehicles"
Bank of
address before Asia Society, June 12,
(manuscript of
1986), p. 3.
150. Ibid., p. 7.
CHAPTER VII
151. Op. cit., note 13, p. 245.
152. Niou, note 119 supra.
153. Op. cit., note 13, p. 246.
154. Ibid.,
p. 246.
155. Interview with Akihiro Inouye, Deputy General Manager,
Overseas Business Department, Mitsubishi Estate Company,
Ltd., in Tokyo, Japan (May 27, 1986).
212
156. Kilstock, note 51 supra.
157. Mitchell, note 30 supra.
158. Ibid.
159. Interview with Tomotoshi Shiokawa, International
Department,
Mitsui Real Estate Development Company,
Ltd., in Tokyo,
Japan (May 26, 1986)
160. Ibid.
161. Interview with Yoshiyuki Ishikawa, Manager, Foreign
Real
Estate Group, Real Estate Department, Yasuda Trust
and
Banking Co., Ltd., in Tokyo, Japan (May 28, 1986).
162. Clagett, note 27 supra.
163. "Japanese Enter U.S. Markets and Outpace Other
Foreigners."
Wall Street Journal, Jan. 8, 1986, p. 30.
164. Yashiro, note 32 supra.
165. Op. cit.,
note 2, p. 39.
165. Ibid., p. 39.
166. Shaffer, note 62 supra.
167. Mitchell, note 30, p. 39.
168. Ibid.
169. Op. cit.,
note 13, p. 247.
170. Niou, note 119 supra.
171. Op. cit.,
note 2, p. 39.
172. Ibid., p. 39.
173. Akita, note 147 supra.
174. Op. cit.,
note 2, p. 39.
175. Clagett, note 34 supra.
176. Ibid.
177. Interview with Leonard Barr Smith, Senior Partner,
Lang Wootton, in Tokyo (May 24, 1986).
Jones
213
178.
Ibid.
179.
Ibid.
180.
Ibid.
181. Yashiro, note 32 supra.
182. Moribe, note 33 supra
183. Barr Smith, note 177 supra.
184. Ishikawa, note 161 supra.
185. Op. cit., note 13, p. 247.
186. Ibid., p. 247.
187. Nisawa, note 47 supra.
188. Clagett, note 34 supra.
189. Welch, note 46 supra.
190. Inouye, note 112 supra.
191. Clagett, note 34 supra.
192. Op. cit.,
note 2, p. 40.
193. Chesanow, "Mixing Business and Drinks in Japan."
Magazine, July 1986, p. 8.
Signature
194. Takimoto, note 50 supra.
195. Op. cit., note 13, p. 247.
196. Op. cit., note 2, p. 40.
197.
Ishikawa, note 161 supra.
198. Wall Street Journal, January 20, 1986, p.l.
CHAPTER VIII
199. Op. cit, note 8, p. 395.
200. Moribe, note 33 supra.
214
201.
Ibid.
202. "Summary of New Downtown Office Space," Cassidy &
Pinkard,
Inc., July 9, 1986.
203. Studley Report & Spacedata --
Washington, March/April
1986
204. Interpolated from op. cit.,
note 202.
205. The Office Network International Office Market Report,
Spring/Summer 1986.
206. Coldwell Banker Commercial Real Estate Services Market
Report, Fall 1985; Real Estate Research Corp. Report, Summer
1985 (Both reported in Japan Long-Term Credit Bank Market
Status Report)
207.
Moribe,
note 33 supra.
208. Welch, note 46 supra.
209. Telephone conversation with anonymous source, in
Washington
(July 9, 1986)
215