The measure of one's worth: real estate

IT COMES AS SOMEWHAT of a surprise that such a precious resource could devalue so drastically in just 12 years. From a peak in 1990, property prices in Japan have plummeted over 60 percent on average, and have dropped almost 80 percent in Tokyo. Given these precipitous declines, we wondered if real estate prices in Japan have hit bottom and whether it is once again safe to think of investing in a Real Estate investment trust (REIT) or an office--or even to buy a house.

Stabilization

Experts in the Japanese real estate market agree that the rapid rate of decline in land values is flattening out. Koji Takeda of Yamate Homes, a local real estate agent, tells us, "The price of real estate has dropped every year for 13 years due to the recession and delayed disposal of Non Performing Loans (NPLs) held by major banks. Now that land prices are at a 20-year low, investment yields from real estate leasing have become quite attractive, even compared to yields from other cities around the world."

In fact, according to the Tokyo Government, nationwide commercial land prices were down 7.4 percent over last year and residential land was down 4.8 percent, so it depends where you are looking before one can say that the price drops are over. In Tokyo at least, the decline seems to be easing. Residential pricing was down just 1.8 percent and commercial properties down 3.1 percent.

TP Publishing's Steve Mansfield confirms the bottoming out: "The market appears to be bouncing along the bottom. There may be further dips but these will most likely be short lived, also there is little to suggest there will be significant price appreciation of Japanese real estate over the next few years."
While the bottoming out may be true for real estate in general, there is still scope to improve property investment returns by applying some thought to investment. For example, the apartment conversion business in Tokyo is undergoing a renaissance. Space Design's Haruka Yamaji tells us: "There are some real estate investors who are doing well, such as those providing serviced apartments, and those involved in apartment conversions [from office space to apartments] and refurbishment. We expect that the demand for such value-added properties will peak in a few years' time. But right now demand remains ahead of supply."

One company that knows all about serviced offices is Servcorp, a leading serviced office company with operations in 11 countries. Servcorp is bullish on Japan and already has nine building locations at present, with another two--one in Tokyo and one in Osaka--opening up in the next few months. Servcorp's General Manager, Susie Martin, says: "We are experiencing increased demand from foreign companies entering the Japanese market and expect that external demand for Japanese real estate will increase."


The typical profile for a Servcorp client is a small advance group that comes to Japan to develop its business and finds within two years that it has grown to 10 to 15 people--at which point it starts to think about branching out on its own. This prompts an expanding demand for office space.

Should you bug a house?

It has been well publicized that a whole generation of home buyers (and 60.3 percent of Japanese do own their own homes) has been sucked into debt and a downward spiral by falling house prices. There are numerous cases (including the wife of this writer) of people buying very average houses in the early 90s for [yen] 50 million and seeing their properties today worth less than [yen 30 million. Meanwhile, their 30-year bank mortgages are still up in the [yen] 35 to [yen] 40 million range--meaning the investment is under water.

The pressure of falling prices on existing domestic housing stock appears to be ongoing, especially at the higher end of the market. Century 21 Sky Realty's Ken Arbour tells us: "Rental prices on higher end apartments are still dropping, as much as 10 percent this year, so we assume that the value for such property is still declining as well--although not as much as last year. We think that the correction still has a little way to go, and we're not optimistic that it's over." He goes on to say: "If you are a prospective tenant, take advantage of the situation by asking your landlord to do proper renovations. We're seeing a lot more extensive work--not just wallpaper and carpeting--being done these days. Some landlords of more expensive properties will even pay for your move-in costs and other related fees. It pays to ask."

New housing stock in downtown areas, however, seems to be enjoying somewhat of a renaissance, as Coyo CEO Yoichi Mizukami comments: "The trend is for retired couples to sell up the family home out in the suburbs and move back into the center of Tokyo. They want the convenience and entertainment that the city can offer. This has fueled the demand for office conversions to apartments and new condominiums." A recent Forbes article confirms this: "Behind the slowing decline in central Tokyo residential land prices is continued demand for condominiums and other dwellings in the city center, with prices now at more affordable levels and convenience increased by redevelopment projects."

So it appears that those developers willing to invest time and creativity in making homes more livable are being rewarded. It also implies that demand is stable for downtown convenience. For this market segment at least, buying property could well make sense.

Yamate Home's Takeda makes an interesting side comment. She says that they are getting inquiries from foreigners overseas who are interested in buying a residence in Tokyo--something that didn't happen much in the past. Certainly, as more and more Asian families in particular discover the joys of shopping, and entertainment such as Disneyland, in Japan, the attraction of being able to come back on repeat visits increases--almost like keeping a condo in Hawaii. Although one imagines the sunset in Hamamatsucho is not quite the same as the one in Honolulu.

Commercial sense

As a March 2003 article in J@pan Inc revealed, Tokyo is the largest commercial office market in the world, with over 840 million square feet of office space in its 23 wards, according to a Morgan Stanley strategy report. So there can be little doubt that at a macro level demand will continue, especially since the demographic trend of people migrating from the countryside to the cities is continuing.

On a micro level, however, the glut of new office space, coupled with the continued slow economy, has meant that the vacancy rate for offices is at an almost record high and rents are still dropping. According to local realtor Miki Shoji, the office vacancy rate in Tokyo's Central Business District (CBD) is 8.4 percent. But the future looks better than it has for a while.

Space Design's Yamaji says of the commercial property market: "2003 has been a watershed year for property development in Tokyo. One big factor has been the redevelopment of JR East's Shiodome property. Where four years ago there were just some vacant railway marshalling yards, now Shiodome boasts some of Japan's most modern and attractive office buildings. This major project offers everyone hope about urban renewal in the near future."

TP Publishing's Mansfield notes that "prices have dropped to a point where, with good management, real estate can generate sufficient cash flow for investors to receive a good risk adjusted return."

Helemsay in world of Real Estate

Helmsley was a long-time member of the Real Estate Board of New York, where he was a governor from 1968 to 1972 and again from 1982 to 1984. In 1995 he became an honorary lifetime governor.

REBNY presented him with its first Distinguished New Yorker award in 1992. That award will now be named after him, REBNY chairman Bernard Mendik said, beginning with this year's presentation to Jerry Speyer at the annual benquet this week.

When that honor was originally bestowed on Helmsley, REBNY chairman Bernard H. Mendik merely stated his name and there was a standing ovation - and then there was quiet. "That's an indication of the real love and respect that the industry had for Harry Helmsley," said REBNY President Steven Spinula, noting that the REBNY dinners are known for their tumultuous networking.

"Harry was everybody's mentor," said Mendik in a sentiment repeated by many others in the industry. "He taught us how to buy, when to lease, and above all, how to negotiate with honor and class. He was as tough as nails, but was such an honorable man."

Born in 1909, Helmsley attended Evander Childs High School in The Bronx and never attended college. That never stopped him, however, from acquiring a fortune from real estate, estimated by Forbes magazine this past fall at about $1.7 billion.

The buildings themselves include hotels, offices, lofts and large residential developments, some in other parts of the country. He owned all or a portion of each property through partnerships which have a total estimated value of $5 billion.

At closings, Helmsley jokingly told developer Larry Silverstein, "he would always defer to the lawyers as they were better educated than he."

Helmsley learned the real estate business from the time he was 16 and joined Dwight Veerhis & Perry as a $12 a week office boy, eventually becoming a broker. The firm specialized in garment center loft buildings and Helmsley began to invest his own commissions to become a partner in the properties.

In 1938, the same year he married Eve Ella Sherpick Green, a widow who he divorced in 1971 and who has since died, he bought the company and changed its name to Dwight Voorhis & Helmsley. He acquired competitor Spear & Company in 1955, which he renamed Helmsley-Spear.

In the 1960's he acquired the "white shoe" residential property management and brokerage, Brown Harris Stevens, but that was finally sold in 1995 in a move to divest non-hotel assets.

With the late-Lawrence Wien, whose son-in-law, attorney Peter L. Malkin, still has a strong hand in operating the family partnerships, Helmsley syndicated and purchased several prominent buildings.

Malkin said, "t was pleasure and privilege to have worked with him for almost 40 years. He was a wonderful mentor, client, partner and friend."

Through partnerships, they own and operate among other properties, the lesse-hold on the Empire State Building, One Penn Plaza, the Toy Center at 200 Fifth and the Lincoln Building at 60 East 42nd Street, where Helmsley-Spear has its main office.

The former 60 East Club, located in that building, had a strong real estate membership, but in the early Nineties real estate slump when many members could not afford to pay dues, it became too heavily subsidized by the building ownership and was closed at the end of 1995.


The club meant so much to Helmsley, however, that the tower express elevator makes an additional stop at the 27th floor club entrance. That way, Helmsley and other company executives could go to and from the club for lunch without other stops.

"Harry used to have lunch there every day," said Spinola.

Among Helmsley's frequent dining and investing partners were his best friend, Alvin Schwartz, and Irving Schneider, both senior executives with Helmsley-Spear.

Schwartz told REW, "I loved the man."

Nevertheless, the two recently felt forced to file a lawsuit over the control of the management of the properties. That suit is now expected to be resolved, as upon Helmsley's death, they have the option to purchase the Helmsley-Spear company or be paid $10 million each. As for the individual building partnerships, the remaining partners may end up purchasing the now re-valued Helmsley shares that have been left entirely to Leona Helmsley.

While the more established brokers often held pieces of properties with Helmsley, not everyone who worked in the company was allowed to become an investor.

Newmark's Vice Chairman Arthur Lerner recalled Helmsley once told him, "The reason I don't want to take all you young guys in as a partner, is if I have to call you on a Monday, and ask you for a capital call of a couple of hundred thousand dollars, I don't want to worry you don't have the money."

A gruff but honorable bargainer, Helmsley nevertheless startled young Lerner when it came time to paying his first commission, which was for a New York magazine deal. Helmsley teased him, "Arthur, you don't need that much money for a commission. What else can I do for you?"

Lerner, who ended his career at Helmsley as a senior vice president in charge of leasing, replied he did in fact need the money and Helmsley paid up, of course.

Helmsley held a "loose rein" in the office, Lerner recalled. "He wanted us to compete, and the bottom line is that you will work harder if you do."

Retail broker Edward A. Friedman, executive managing director of Newmark, called his 29 years with Helmsley handling real estate, hotels and many of the stores that came up for rent in the buildings a "honeymoon." Helmsley would say to him, "Make believe it's your building and make the best deal you can.'"

Some years ago, when William G. Lillis was American Savings Bank's president and chief operating officer, he recalled his time employed by Helmsley from 1970 to 1976 to REW. "He's probably the most impressive man I ever met," Lillis said at that time. "He was terrific to work for and he was so bright in his field."

Lillis also described Helmsley as the greatest negotiator he ever knew. "At times, I felt like you should pay admission just to sit in on a meeting with him. I learned a lot, but I wouldn't tell him that."

Lillis said Helmsley was not a "paper guy. Everything you did with him was verbal," he explained. "But he never came back later and changed his mind or said, 'Gee, you weren't supposed to do that.' When you had a conversation with him, you knew it would hold up. He never looked back. If there was a problem he just said, 'Let's see what we can do to solve the problem.' There was never anything said like, 'Why'd we do that?' or 'How did we do that?' - it just wasn't his style."

Peter Ricker, now president of Peter R. Friedman, worked with Helmsley for 20 years - until 1987 - as the head of commercial leasing and management for the New York metropolitan area.

"He made deals with his handshake and his word was his bond," said Ricker, who at 28 was put in charge of leasing the 2.4 million square-foot brand new One Penn Plaza.

"I remember he was only mad once - and it was because someone was questioning his integrity," recalled Ricker. "He was a gentleman. If there was a question about going to the left or right, it was always go to the right. If there was any kind of rotator and college educator, it was him. He was a good teacher."

Those close to Helmsley say he respected developer Silverstein, who also made him laugh. Silverstein remembers Helmsley "as a consummate deal maker, and deal initiator. He had a facility with conceptualizing a deal and manipulating the numbers in his mind that was absolutely staggering. He had a computer for a mind that functioned spectacularly."

Silverstein conducts a teaching workshop at the NYU Real Estate Institute each fall where he invites other developers to come in and talk about their deals. In the mid-Eighties, when he invited Helmsley, Silverstein was reminded he wasn't good at formal speaking, but would come in and answer questions.

Real estate rockers on stage tomorrow

Top executives will sway the real estate biz for a little bit of show biz during a Real Estate Rockers in Relief concert, sponsored by Herrick, Newmark Knight Frank and The World-Wide Group.

The concert will raise awareness and funds for The Jewish Disaster Response Corps (JDRC) as part of an ongoing effort to pay forward the kindness that NYC enjoyed when volunteers from across the country came to New York after 9/11.

The Corp mobilizes volunteers to help communities of all faiths across the US rebuild and recover after natural disasters.

Featured Bands will include Square Feeet (with Jimmy Kuhn & Billy Mendelson of Newmark), Normal by Day (with Carl Schwartz of Herrick) and Midlife (with David Lowenfeld of Worldwide).

There will be special guest appearances by Randy Reiff of Macquarie Group, David Welsh of Normandy Real Estate Partners, Howard Glatzer of Lotus Partners, Billy Procida of Procida Advisors and Dennis Russo of Herrick, The concert takes place tomorrow night (June 16) from 6:30-11:30 p.m. at The Canal Room, 285 West Broadway at Canal Street.

Lone star help in Real Estate

Lone Star Partners has lined up an astonishing $5.5 billion of equity for its fifth opportunity fund in just over three months of marketing. The vehicle can not only lay claim to being the largest opportunity fund ever, but it can also boast of unprecedented success at raising equity quickly. By comparison, the typical fund has only $300 million of equity but needs nine months for marketing.

The Dallas fund operator already held the record for the largest opportunity fund. It raised $4.2 billion of equity two years ago for Lone Star Fund IV in a little more than a year--which was considered extraordinarily fast.

While Lone Star declined to comment, sources familiar with its plans said the operator would likely wind up capping the new fund at $5 billion. That means it would have to turn some investors away or reduce the size of commitments. The firm has not formalized most of the commitments yet, but investors have made clear how much they are willing to pledge.

Most of the interest comes from previous Lone Star investors, which will likely account for about 95% of the equity in Lone Star Fund V. Previous major investors include New York State Teachers, California State Teachers, Washington State Investment Board, Oregon Public Employees and Wisconsin Investment.

If the firm uses its usual leverage ceiling of 75%, a $5 billion vehicle would have total buying power of $20 billion--an amount few fund operators can fathom spending in the typical investment period of three to five years.

Lone Star Fund IV invested mostly in distressed loans in Asia, with some capital also allocated in Europe and the U.S. The new fund is likely to follow the same strategy.

Lone Star's fund series was launched in 1996 by veteran money manager John Grayken. The first Lone Star fund, with $400 million of equity, invested largely in mezzanine loans and operating companies. The vehicle also acquired some distressed foreign assets, including $475 million of loans from the South Korean government. It was followed by a $1.2 billion fund in 1998, a $2.2 billion vehicle in 2000 and then the $4.2 billion fund two years ago.