December 17, 2008 - Daiwa House Industry, Tokyo Japan

Daiwa House Cuts Home Prices as Japan’s Property Market Worsens

Daiwa House Industry Co., Japan’s biggest home builder, said it may sell some houses and apartments at a loss to lure buyers as a recession threatens to prolong the country’s longest housing slump.

Daiwa House has cut prices for some apartments by as much as 20 percent, Tetsuji Ogawa, executive vice president and chief financial officer, said in an interview. The Osaka-based company is also reducing land purchases by about two-thirds for the six months through March from a year earlier.

“We have to sell at a loss in some cases,” said Ogawa. “If we don’t generate cash flow, we won’t be able to make new investments.”

The number of unsold condominiums in Tokyo has been higher than 10,000 for a record 12 months as the prospect of the first recession since 2001 caused demand for homes to drop. Home sales account for about 50 percent of Daiwa House’s earnings and the company cut its profit forecast for fiscal 2009 by half last month.

“The housing market has become increasingly severe; we have seen order cancellations as original buyers lost their jobs due to restructuring,” Ogawa said in the Dec. 10 interview in Tokyo. “The gloomy market conditions will probably worsen next year and won’t recover until the year after next.”

Private Funds

Daiwa House plans to generate returns on its other investments by creating two private funds, worth as much as 60 billion yen in total, by as early as March to hold warehouses and distribution centers, Ogawa said.

The home builder in June canceled a plan to raise as much as 60.9 billion yen through the listing of a real estate investment trust, citing market conditions.

“Since we can’t raise money through an initial public offering of a REIT, the properties we have built are just sitting there,” said Ogawa. “We will need something to fill in the gap between now until the REIT market recovers which will probably take three to five years.”

Japanese REIT listings dried up late last year as the global credit squeeze undermined confidence in trusts that rely on borrowings to fund property investments. The Tokyo Stock Exchange REIT Index of 40 trusts has dropped by half this year.

As for rental residential properties that were built for investors, Daiwa House plans to add those properties into BLife Investment Corp., a Japanese residential real estate investment trusts when the market recovers in a couple of years, Ogawa said.

Daiwa House, which became the largest shareholder of the asset manager of the REIT on Nov. 27, plans to double the REIT’s assets to 100 billion yen, Ogawa said. He didn’t give a timeframe.

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Original Story - Bloomberg