The vultures may again be circling in Southeast Asia, where a deflating economy has left real estate investments mired in poor performance for investors and high costs for tenants.

For more than a year, vulture funds from around the United States have been searching for and buying up office buildings in Tokyo.

Vulture funds are those investment monies geared toward turning a quick profit after an investment of less than a year. In real estate, these ugly birds typically buy up under-performing assets owned by companies not living up to their debt obligations. By eating such “distressed” loans, the buyer gets a deal and flips it when the economy gets a bit better.

Some vultures mistakenly thought the Japanese economy would take a faster upswing than it has, and gobbled up a number of office properties in the last 12 months. And while the economic turnaround has been slow in getting started, signs of life are again attracting dirty birds to Tokyo.

Commercial office tenants in Tokyo face the highest occupancy costs of any major city in the world, according to CB Richard Ellis Global Research & Consulting. In fourth-quarter 1999, vacancies in Tokyo reversed a nine-month upward trend and declined to 5.9 percent citywide, which helped to keep occupancy costs at their previously high levels.

CB Richard Ellis projects stable vacancy rates throughout 2000 with modest rental declines as a result of the Japanese economy's deepening deflation. And while the decline in rental rates stands to hurt landlords, stabilized occupancy rates make the market attractive to bargain-hunters.

Other so-called vultures have developed a safer time-horizon of 10 to 15 years, during which they expect the Japanese economy to do a complete turnaround and pay off their investments in spades.

The biggest buyers of Japanese real estate have been major U.S. brokerages like Goldman Sachs & Co. and Morgan Stanley Dean Witter & Co. Foreign investors like these can pick up Japanese real estate at a pretty sum and achieve regular income streams out of rents. One U.S. fund, developed by Colony Capital and Kennedy-Wilson specializes in investing in Japanese real estate. About one-quarter of the funds investments will be in distressed real estate loans.

And just FYI, the other most expensive office markets, in term of occupancy costs, are Inner Central and Outer Central Tokyo, as well as the West End and City districts of London. Each of these markets costs more than $100 per square foot. The next-closest is only $76 per month in Mumbai (Bombay) India.

“Economic expansion continues to make its way around the world, and we've seen occupancy costs in downtown and key suburban markets increase in many cities as a result of very strong regional economies," said Bill Rothe, senior executive managing director, CB Richard Ellis Global Research & Consulting.

Tim Kirkus, director of research for CB Richard Ellis' Asia Pacific region, said that despite Tokyo's position as the world costliest office market, the most robust markets in the Asia Pacific region over the last six months were found in Australia with Sydney commanding the most attention.

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Published: February 23, 2000

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