Urban’s collapse exposes links to US sub-prime crisis

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.

Poor show: The property sector index of the Tokyo Stock Exchange has been the worst-performing of all sectors in the past year

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.

Source : Business Times – 18 Aug 2008