Morgan Stanley to Sell $2.9 Bln Japan Property Debt

Morgan Stanley plans to sell about 343 billion yen ($2.9 billion) of bonds backed by office buildings, hotels and other real estate in Japan, a record sale, according to two people familiar with the transaction.

The bonds will be sold with credit ratings ranging from AAA to BB, two levels below investment grade, said the people, who asked not to be identified as the sale hasn't been made public. The sale by New York-based Morgan Stanley, the world's biggest underwriter of property-backed debt in 2005, is almost as much as the firm raised in five Japanese transactions last year.

Land prices in Japan's three largest urban areas rose last year for the first time since the bubble economy burst in 1990, spurring increased property lending by investment banks. By packaging those loans into bonds that can be sold to investors, the banks can reduce risk.

``Real estate lending is a hot market in Japan,'' said Brett Hemsley, a senior director at Fitch Ratings. ``Loans to property investors and real estate companies have continued to expand and more banks are interested in participating.''

Morgan Stanley spokeswoman Sumiko Iwadate declined to comment.

Real estate funds in the world's second-biggest economy almost doubled their property assets to 7.8 trillion yen last year, according to STB Research Institute Co.

Growth Boosts Land Prices

Japan's economy grew 5.4 percent in the three months ended December, outpacing expansion in the U.S. and helping boost Tokyo land prices for the first time in 15 years. Tokyo office vacancies fell for the ninth straight month in March to 3.41 percent, the lowest since September 2001, according to broker Miki Shoji Co.

Investors including Goldman Sachs Group Inc., Morgan Stanley and Lone Star Funds were lured to Japanese real estate in the late 1990s as prices neared the bottom of a plunge that erased three- quarters of the value of property in the nation's six biggest cities. Goldman spent more than $6 billion on Japanese property since 1997 and Morgan Stanley bought $8 billion of Japanese real estate last year.

Tokyo is the world's largest office market with 840 million square feet, according to a report distributed by the Association for Real Estate Securitization in Tokyo. Rents for commercial properties in the city were the world's fourth highest, following Taipei, London and Beijing, according to a report by the Japanese Association of Real Estate Appraisal.

Tokyo vs London

Rents for new office buildings in Tokyo have started to rise as economic growth drives demand. Mitsubishi Estate Co., Japan's second-largest developer, said earlier this month the highest rent in its new 39-story building facing Tokyo's main railway station will be about $170 a square foot. Tenants pay an average $178.67 for equivalent space in London's West End, according to a report by CB Richard Ellis.

Morgan Stanley's sale will exceed a 230 billion yen offering by Citigroup Inc. in September, a record debt sale by an overseas company in Japan. It will also top Matsushita Electric Industrial Co.'s record 300 billion yen corporate bond offering in 2002.

The bonds are backed by more than 120 nationwide properties owned by local and overseas investment funds including a Morgan Stanley real estate fund, the people said. Standard & Poor's and two other rating companies will rate the bonds.

`Benchmark'

Morgan Stanley was the top global underwriter of commercial mortgage-backed bonds in 2005, handling more than $32 billion, according to data compiled by Commercial Mortgage Alert. The investment bank sold 361.6 billion yen of Japanese property-backed bonds last year.

``A deal of this size will create a benchmark to enhance liquidity of similar securities,'' said Howe Wu, a Tokyo-based portfolio manager for the MassMutual Financial Group.

Sales of commercial mortgage-backed bonds -- loans to investors and owners of Japanese commercial properties that are repackaged into bonds -- doubled to a record 1.42 trillion yen in Japan in 2005, according to Deutsche Bank's securities unit in Tokyo. Most such sales are less than 100 billion yen.