Date: 27-May-05
Country: JAPAN
Author: Dominic Whiting

Signs of economic recovery have rekindled interest in Japan's moribund property market. A $20 billion market for real estate investment trusts (REITs) has been built from virtually nothing in the last five years.

But compared with other quake zones, such as San Francisco in the United States, insurance and the risk-metrics that guide investment, are scarce in Japan, even as government surveys suggest it is a near certainty metropolitan Tokyo will be hit by a major quake sometime in the next half-century.

So listed firms and rating agencies are trying to address investor concerns.

Nippon Building Fund, Japan's biggest property trust with 48 buildings, issues a statement after earthquake to reassure investors.

Like many REITs, it has a policy to limit earthquake risk by limiting probable maximum loss -- an estimate of how much of a property would be destroyed in a major quake. The trust will only buy a building if this level is 10 percent or less, according to Saturo Yamanaka, who helps manage the trust.

Even so, as the Kobe earthquake demonstrated, such estimates are often guess work.

"We once asked the seller of a building to spend one billion yen strengthening it before we would buy it," he said, referring to the Toranomon Building in central Tokyo.

HIGH RISK, LOW INSURANCE

In the broader Tokyo area, home to 35 million people, studies suggest a quake similar to one that hit in 1923, would kill thousands of people and cause more than $1 trillion of damage today.

Property firms tout modern engineering. But collapsed buildings killed over 6,000 people in the 1995 Kobe earthquake, causing $147 billion of damage, of which only $4.1 billion was insured.

Some insurers cover around half a building's value in Tokyo, up from only 15 percent before deregulation in the late 1990s.

But many landlords think it is too expensive -- as much as 40 times the cost of coverage in some high-risk areas in the United States, where such insurance is required by law in certain cases.

Without similar legal requirements to spread the insurance costs widely, any single earthquake insurance policy will cost more.

Sensing rising demand for quake-risk assessments from foreign investors, ratings agencies are considering ways to calculate property exposure.

Standard & Poor's and Moody's Investors Service put out notes after a strong earthquake near Fukuoka in March, saying listed property trusts and mortgaged backed securities were largely unaffected.

Shinsuke Tanimoto, senior analyst at Moody's in Tokyo, said his agency did not include "event risk" in assessments of property securities because it was so difficult to quantify. But earthquake risks were often discussed at in its ratings committee.

"You have to look at diversification of assets and their geographical concentration and assess potential support from banks and the government," Tanimoto said.

CONCENTRATED IN TOKYO

Japan's 17 property trusts have around 70 percent of their assets in Tokyo and tend to buy buildings not more than 15 years old.

Established developers Mitsubishi Estate and Mitsui Fudosan hold older buildings and are more at risk from earthquakes than the property trusts, analysts said.

Of the property trusts, Global One Real Estate is one of the least diversified, they said.

A new, Fukuoka property trust is expected to list this year, despite a recent earthquake there.

Many Tokyo offices coming up for sale were built before 1981, when the government raised construction standards following an earthquake in 1978 that killed 13 people and injured 9,300.

But the opportunity to buy cheap, old buildings and fix them up to increase rents has been a major draw for property funds, along with rock-bottom borrowing rates and a recovering economy.

Some say there is no point fretting over "an act of god", such as an earthquake.

"If we have an eight magnitude right

© Thomson Reuters 2005 All rights reserved