Concerns over health of Japan's property, banking sectors

August 18, 2008
Concerns over health of Japan's property, banking sectors
Urban's collapse exposes links to US sub-prime crisis
By ANTHONY ROWLEY IN TOKYO

THE failure last week of mid-size Japanese property developer Urban
Corporation - the latest in a series of such collapses - was more
than just another in a growing list of corporate bankruptcies in
Japan.

It has stirred fears among investors and regulators that serious
problems could be brewing again in Japan's property and banking
sectors which were at the heart of the bubble economy collapse in the
early 1990s.

Urban Corp's collapse has also revealed unexpected links between the
US sub-prime mortgage crisis and asset classes in other countries
that have so far escaped relatively unscathed from the financial
turmoil in the world's major markets, analysts say.

Urban was the fifth publicly traded Japanese property company to file
for court protection in the past month.

The Hiroshima-based developer collapsed suddenly, after Japanese
banks withdrew support in what marked an accelerating retreat by
financial institutions from financing property development in Japan
as the nation's economy falters and sales of many properties slump.

Urban's bond ratings were also downgraded sharply recently, leaving
it at the mercy of bank financing.

But a little-publicised aspect of Urban's failure - which marked the
biggest bankruptcy in six years by a listed Japanese company - was
that it was also a victim of the drying up of foreign investment
funds in the wake of the sub-prime crisis. The company had renovated
commercial properties for sale to international funds that were
hungry for real-estate investments until recently.

Other property firms in Japan and in other Asian countries could find
themselves in similar difficulties as international real estate funds
draw in their horns, analysts say.

The Tokyo Stock Exchange's property sector index has been the worst-
performing of all sectors in the past year and the exchange's Reit
(real estate investment trust) index has halved from its 2007 peak,
they point out.

Around one-third of all Japanese corporate bankruptcies in July
occurred in the property sector, according to Tokyo Shoko Research.
The number of such failures more than doubled from their level a year
previously to reach 60, the company said.

Several Japanese regional banks have announced that they expect to be
unable to recover loans to Urban Corp, which filed last Thursday for
protection from creditors with debts totalling 256 billion yen
(S$3.28 billion) in Japan's biggest corporate bankruptcy so far this
year.

Two other mid-size Japanese property development firms - Suruga
Corporation and Zephyr Company - also failed recently.

These failures have stirred concerns not only over the health of the
property sector, which had shown a sharp recovery in major Japanese
cities in recent years after more than a decade of slumping values,
but also about the soundness of Japanese regional banks. Urban's main
lender, Hiroshima Bank, has suffered heavy loan writedowns in the
wake of the collapse.

This may be only the tip of an iceberg, according to banking
analysts. Losses related to bad loans jumped by nearly two-thirds at
large Japanese banks during the second quarter of this year, Japan's
Minister for Financial Services Toshimitsu Motegi revealed last week.

Non-performing loans at the top 11 banks jumped by 62 per cent to 234
billion yen in the second quarter of this year compared to the
corresponding period of 2007.

Meanwhile losses among 110 regional banks leapt by nearly 80 per cent
to 149 billion yen.

'We will closely follow the impact of the economic environment on
financial firms,' Mr Motegi said.

Japanese banks are expected to increase loan-loss reserves, in
anticipation of more corporate bankruptcies amid the economic
slowdown.

But if they restrict lending, a number of companies in the real
estate and other sectors could face funding difficulties, and this
may worsen the overall economic situation, analysts say.

Because of the deteriorating economic and credit situation, Japan's
Financial Services Agency is considering holding talks with regional
banks to ask them to ensure stable supply of funds to smaller local
companies.