Tightening lending criteria hitting Japanese commercial property market

Some of Japan's biggest property investors may have to sell some of their holdings because of the credit crunch and this is likely to drag down commercial real estate prices, analysts are warning.

Property managers need to re-finance as much as $18 billion in debt in the next two years according to an estimate by Koji Kumamaru, managing director of structured finance at Moody's Japan.

One problem is that some of the banks that previously lent to these customers, such as Lehman Brothers, are no longer in business. Those that remain have become more cautious due to the financial crisis affecting the whole world.

The latest available figures show that real estate lending fell 19% in the three months to the end of June.

'Delinquencies and refinancing failures are rising,' said Kumamaru who added that property managers may fail to refinance about 40 billion yen in loans this year because of tighter credit conditions.

This is expected to have an impact on Japan's commercial mortgage-backed securities markets where bankers bundle mortgages and then sell them to investors in the form of bonds.

It will also affect land prices as property managers sell assets as finance dries up. Some arrangers are having trouble finding investors in commercial mortgage backed securities amid concern that the financial turmoil will continue to push land prices lower, said Masahiro Mochizuki, an analyst at Credit Suisse.

He predicts about 1 trillion yen of debt will come due next year. 'Sales pressures are expected in Japan's real estate market which may push property prices lower,' he said.

Japanese banks are actively reducing their exposure to real estate. 'It's a very difficult environment for real estate financing. It is also unclear how long this tighter lending environment will persist,' said another analyst.