The Asian economic crisis has not intimidated U.S. real estate investors from pouring billions into foundering Pacific Rim economies.

So far in 1998, U.S. investors have spent more than $10 billion acquiring assets and portfolios of non-performing loans in Japan and East Asia. This number is expected to increase before the year is out, according to a study by E&Y Kenneth Leventhal Real Estate Group, a unit of Ernst & Young.

About $6 billion of the $10 billion in investment dollars flowed to Japan, the study concluded.

This $6 billion is almost as much as the $6.4 billion Asian investors placed in U.S. real estate assets from 1993 to 1996. It is five times the amount the Japanese invested in U.S. real estate assets in 1985, which was their first large-investment year in the United States.

"This is the first time in history that U.S. real estate developers and investors have exported such a huge amount of capital to Asia, and it couldn't come at a better time," said Jack Rodman, director of Asian real estate for Kenneth Leventhal. "Cash-strapped Asian economies are crying out for liquidity."

The study points out that U.S. real estate investors are using the same strategy in Asia as they did during the Resolution Trust Corporation financial bail-out here at home.

"Across the board, U.S. developers, opportunity funds, life insurance companies, banks, real estate companies, consultants, brokers and investment bankers -- many of whom made millions from RTC opportunities here in the U.S. -- are flocking to capitalize on what they believe will be a repeat of those investment successes, prompting the prospect of a recovery in many Asian markets by the end of the century," Rodman said.

Tough economic conditions have made Asia’s real estate markets virtually illiquid. Asian banks are holding about $1.5 trillion in non-performing loans, which is about six times the bad debt burden placed on U.S. savings and loans in the late 1980s.

In addition, many of the countries involved have restrictions on foreign ownership of real estate. This has made the market even more illiquid and prospects of a bailout dimmer.

What’s more, a massive overbuild just before the July 1997 devaluation of Thailand’s currency has boosted supply to the point that it will outpace demand for another decade. Before the currency devaluation, spec real estate deals had been growing out of control for 10 years.

The Kenneth Leventhal group points out that opportunities for U.S. and European investors go beyond the purchase of non-performing loans. Real estate and real estate portfolios are being sold at far below replacement cost. Teams from U.S. investment firms are monitoring the Asian situation and gauging the opportunity for high-yield investment there as the U.S. markets stabilize.

But many foreign investors are waiting with the belief that real estate assets in Asia still are overvalued. Asian real estate owners are reluctant to sell at the going rate, which often is 50 percent below peak value.

Asia has learned from the savings and loan follies of the United States, according to the report. Because the financial crisis is similar to what was seen here 10 years ago, RTC-derived programs are being used as a model for similar sales initiatives in Japan, South Korea, Thailand, Indonesia and Malaysia.

In addition, several Asian countries finally are implementing financial reforms, recognizing international accounting and asset valuation standards, restructuring government banking regulations and developing transparent financial reporting standards.

Japan's city banks have taken the lead and have disposed of more than $28 billion in non-performing loans.

Thailand is aggressively selling the assets of former finance companies and is currently marketing a $12 billion loan portfolio to international investors. South Korea also is actively preparing loan portfolios for sale.

Published: November 24, 1998

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