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Can't Sell the TV?...Sell the Office: Japanese Companies Fire Up Property Market

Tokyo, Japan
Tony Bonaventure | Photographer's Choice | Getty Images
Tokyo, Japan

Japanese blue-chip firms, from electronics giants to brewers, are selling prime real estate to shore up battered balance sheets, stoking a resurgent property market. Some are moving into new offices to take advantage of relatively low rents.

Big downtown office buildings are coming up for sale as Tokyo's property market regains growth momentum for the first time in almost five years, with plenty of interest among buyers, particularly Japan's public real estate trusts, experts said.

"Market sentiment is more positive now than at any time since the Lehman crisis," said Andy Hurfurt, executive director at the Japanese unit of CBRE Group, a global real estate services company. "This reflects a widely held view that the market has bottomed and will move to an upside cycle."

Looking to cash in on that market recovery, Sony said on Thursday it sold its 25-floor Sony City Osaki building near its central Tokyo headquarters for 111 billion yen ($1.12 billion) - the biggest deal of its kind in four years.

(Read More: Sony CEO: Why the Yen Decline Ins't Helping Us)

The company that gave the world the Trinitron TV and Walkman music player is shedding non-core assets - it has also offloaded its New York headquarters - as it seeks to halt a slump in its TV fortunes from competition from Samsung and others.

Osaka-based rival Panasonic is also selling a central Tokyo office it uses as its headquarters in the capital, sources said, and has promised investors it will generate 130 billion yen from asset sales to underpin cash flow. Sharp has sold a 9-storey building in Tokyo and is looking to sell more in the city, a spokeswoman said.

Abe Bounce

Japan's real estate market crashed in the wake of the global financial crisis, and rents in Tokyo have fallen ever since. But last year, vacancy rates in the city's quality buildings slipped for three straight quarters, according to CBRE. Monthly rents, which have dropped since early 2008, were almost flat in 2012.

Central Tokyo office rents - measured in tsubo, equivalent to 3.3 square meters or the size of two traditional tatami mats - peaked in late 1991 at 44,193 yen ($480) as Japan's bubble economy burst. Rents in January were 16,554 yen, according to Miki Shoji, a local real estate services firm.

(Read More: Sony's PlayStation 4: Streaming, Social & Mobile)

Market sentiment - from real estate to shares - has been buoyed by economic policies touted by the new administration of Prime Minister Shinzo Abe, who came to power in December. The benchmark Nikkei average this week hit a 4-year high and has been rising since mid-November on hopes of aggressive moves to tackle deflation in Asia's second-largest economy.

The Tokyo Stock Exchange REIT index has risen by a fifth in three months on expectations that real estate trusts will push up profits from rent increases. The higher REIT share prices rise, the easier it is for them to raise money from selling new shares - money to plough into more properties.

"As a sign of market improvement, property prices typically go up before rent increases because investors try to buy real estate assets in anticipation of higher rents," said Takeshi Akagi, head of research at Jones Lang LaSalle Japan.

Japan's public real estate trusts have raised over $1.8 billion in cash so far this year, almost 70 percent of the total they raised in the whole of last year, according to Thomson Reuters data. That aggressive fund raising is a sign that REITs will be strong potential buyers, experts said.

Nippon Building Fund, Japan's largest REIT by assets and the buyer of a 60 percent interest in the Sony building, raised about 70 billion yen in January from selling new shares. Kenichi Tanaka, CEO at Nippon Building Fund Management, which manages the REIT, said then the trust could afford to buy assets worth 100 billion yen, and was keen to invest quickly as now is a good time to buy properties in Tokyo.

"Tokyo rents have fallen to a very low level and I don't expect rents will stay at this level," he said at the time. "That will give us upside potential if we buy properties now."

More Than Just a 'Garage' Sale

That potential in Tokyo's office and commercial property market is also attracting foreign investors, said Ken Negishi, representative director at Deka Real Estate Lending, the local unit of a German bank. "Investors expect rental income will rise, backed by economic growth. When companies see stronger earnings, they can afford to pay higher rents and fulfill their needs to use bigger space. We're getting into that cycle now."

(Read More: Does Japan really Need $100 Billion in Spending?)

CBRE's Hurfurt expects more Japanese manufacturers to sell real estate assets. "I know of other firms that are reviewing their real estate holdings and examining more effective ways of using capital," he said.

Kirin Holdings, under pressure to expand abroad as Japanese
consume less alcohol, is looking to sell two buildings in Tokyo, while moving
into one of the city's newest offices where it can house group companies
currently dotted around the capital at several locations.

"Companies are offloading assets, and we see this trend as a good
opportunity for us to invest in new properties," said Tatekazu Nakamura,
executive manager at Mitsui Fudosan, one of Japan's top real
estate developers. "We have been trying to source potential deals."

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.