Mon, Mar 18, 2002 page17

• Japan faces office building glut

  CONSTRUCTION INDUSTRY Insiders are saying that next year could be disastrous for the sector as demand is set to crumble and companies hold massive debts

  • AFP
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  Central Tokyo's blossoming skyline of skyscrapers is deceptive: buckling under the weight of debt and with massive overcapacity, Japan's construction industry is destined for a terrible 2003, analysts said.

  On huge building sites in prime areas all over the city, including Shiodome, Shinagawa, Roppongi and Marunouchi, office blocks are sprouting up like bamboo shoots in spring, ready to go on the market next year.

  "The vacancy rate will go up to 7 percent in 2003 and naturally, the rents will come down," predicted Toshihiko Okino, senior analyst at UBS Warburg during a panel discussion on the industry at the Foreign Correspondents' Club of Japan last week.

  

  Buildings under construction in Tokyo's Shiodome area. Japan's construction industry may suffer next year as the office-building sector is becoming saturated.

  PHOTO: AFP

  "That is going to weaken the supply/demand equation and discourage companies from ordering new buildings for some years to come," explained Mark Brown, his counterpart at ING Barings.

  When it comes to condominium complexes -- despite an increasing proportion of Tokyoites opting for inner city living over a long commute -- the situation is no better.

  There are currently 10,000 unsold units in the Tokyo metropolitan area, while "in suburban areas, sales performance is going from bad to worse," said Okino.

  On top of that, the other mainstay of the construction industry, public works contracts, have been severely limited under the administration of Prime Minister Junichiro Koizumi.

  Overall, construction "demand will decrease at a rate of 4 percent to 5 percent for the next four to five years," Okino estimated.

  Logically speaking such adverse statistics should trigger a massive reduction in capacity and a rapid consolidation of the industry. But not in Japan, where the construction sector carries a bigger weight in percentage of the nation's gross domestic product, employs more people and enjoys a stronger political sway than in any other industrialized country.

  Not that the industry is without its lame ducks, however. Okino recalled that "19 general contractors have seen their share price dip below ?100 (US$0.77)," a level considered beyond the pale for listed Japanese firms.

  If they were to disappear all at once, it would reduce overcapacity within the industry by 36 percent, he said, but it would also add 0.6 percent to the unemployment rate which is already hovering just below the post-war record high of 5.6 percent.

  Adding to the industry's woes, banking debts accumulated by the walking dead construction giants total around ?4.3 trillion.

  "I question the ability of banks to write off those debts at one time," said the UBS Warburg analyst.

  "It would be political suicide for [the ruling] Liberal Democratic Party to allow many construction companies to go under," he said.

  Construction corruption

  Japan's 550,000 contractors are infamous for funding old school politicians who are in power. Further-more, bankruptcy does not equal elimination, analysts said. Struggling builder Muramoto collapsed in 1993 under ?590 billion in debts. But "by the way, Muramoto is still in business," said Brown.

  Remarkably few construction companies go bust considering the industry's rotting finances.

  Brown has closely analysed the accounts of Japan's 11 lamest ducks listed on the stock exchange, whose combined liabilities of ?3.99 trillion exceed total annual orders received of ?3.43 trillion. The group had owed their survival to their banks which -- under political pressure -- wavered around ?2.29 trillion in loans. Of them, only two -- Aoki and Sato Kogyo -- have filed for bankruptcy protection.

  Japanese builders invested heavily in undeveloped properties during the nation's economic boom of the 1980s but a decade-long slump in land value has hit them hard.

  "Properties held by these construction companies have a recovery value close to zero," said Okino.

  "A 40 percent debt forgiveness doesn't make any sense, I always have a sense that debt forgiveness is too small," he said.

  Banks have enabled otherwise insolvent builders to keep their head above water but since their capital shrank, the ratio of debt-to-capital skyrocketed to around 300 percent, according to figures by ING Barings.

  The key fault is a refusal by the banks to turn off the credit tap to bad borrowers -- a trait endemic throughout the Japanese economy -- preventing the stronger companies from consolidating and restructuring the industry.

  As a result, among Japan's top 50 contractors the share of orders won by the nine groups regarded as relatively healthy such as Taisei, Obayashi, Shimizu and Kajima went as low as 38 percent in 1994 before recovering to 46 percent last year, the same level as 1992.

  By nature, construction is a flexible business, said Brown. "If the will is there, the way to reduce overcapacity should also be there but there is some question on whether the will is there."
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