Shopping for Property Bargains in Asia

High-flying Colony Capital Inc. has teamed up with two Los Angeles real estate firms with Asian aspirations--Oakwood International and Kennedy-Wilson Inc.--as part of its global push to invest more than $1 billion in the coming year, one of the most prominent examples yet of U.S. real estate investors prospecting for opportunities in troubled Asian markets.

Colony announced Monday that it has formed a joint venture with Oakwood to take its extended-stay corporate housing concept to Asia and has invested $26.2 million in Kennedy-Wilson, a leading property firm that has helped Japanese investors unload more than $2 billion worth of U.S. properties in recent years.

Separately, Kennedy-Wilson announced Monday that it is purchasing Heitman Financial Ltd.’s commercial property management unit, one of the largest in the U.S. Heitman is a division of United Asset Management Corp.

John Brady, a principal of Los Angeles-based Colony, said his firm’s new partnerships give it added expertise and a broader network of contacts in Asia, where it expects to devote much of its attention in the coming months.

“Colony has a tremendously powerful global franchise, but it’s very difficult to operate effectively in a highly dispersed Asia,” Brady said. “We try and find long-standing relationships with partners who are the very best at what they do.”

Asia’s troubles have proved to be a boon for savvy U.S. real estate investors, who are benefiting from the dramatically weakened currencies, declining real estate prices and a regional credit crunch.

Colony, which is reportedly close to finalizing $200 million in investments in Asia, is bullish about opportunities in the region in spite of predictions that the worsening recession in Japan or instability in Southeast Asia could spark another meltdown.

In May, Colony raised $1 billion for its Colony Investors III limited partnership fund, whose investors include 40 of the nation’s largest public and corporate pension funds, endowments, foundations and family trusts. The fund’s primary focus is real estate-intensive companies and residential or commercial development projects.

“Our infrastructure is in place to undertake a very aggressive capital investment program at a time when everybody else is leaving or in financial trouble,” Brady said. “The markets across all sectors of the economy are in dire need of fresh liquidity.”

Colony is far from alone. Its competitors include Wall Street giants like Bankers Trust and Goldman Sachs and smaller players such as Los Angeles-based Financial Capital Investment Co.

Financial Capital, whose previous focus has been investing overseas Chinese funds in U.S. real estate, recently formed a $100-million joint venture with Tokyo-based Nomura Real Estate Co. to invest in medium-sized Grade A office buildings in central Tokyo.

Richard Alter, managing director of Financial Capital, said he chose to team up with a Japanese firm that knew the players and could move quickly to identify solid prospects.

“We think we have about 12 months to do this and after that time, the Japanese investors are going to get back some courage,” he said.

Alter said some cash-rich U.S. funds are moving aggressively but not doing their homework. He warned that many Japanese properties are still overpriced, may have ownership interests controlled by yakuza, or organized crime, or the mortgage notes are worthless because they cannot be collected.

U.S. investors armed with the strong dollar may also encounter resentment in Asian countries that have suffered significant devaluations and dramatic slides in property and stock market values since last summer’s onset of the currency crisis.

Greg Karns, partner in charge of the Pacific Rim Group for Cox, Castle & Nicholson, a Los Angeles-based law firm, cautioned against rushing into Asian real estate. He thinks it will take up to a year for property prices in South Korea and Southeast Asia to reach a realistic level.

And in most countries, the governments are still in the process of setting up firms to liquidate billions of dollars in distressed property and amend laws that restrict foreign ownership of property or land.

But Karns said interested U.S. investors should start doing their homework immediately, given the complexity of Asian markets.

“Now’s the time to start if you think six to 12 months is the time to make the investment,” he said.

Colony Capital, a “vulture real estate” pioneer founded in 1991, thinks now is the time to begin making careful investments in Asia’s hardest-hit economies, according to Brady. The firm’s $3- billion portfolio already includes Asian properties, including a 30% stake in Amanresorts Ltd., a luxury hotel chain. It has also invested in the London-based Savoy Hotel Group and the newly opened L’Ermitage Hotel in Beverly Hills.

Since the beginning of this year, Colony has been on a buying spree. It has invested $75 million in self-storage owner and operator Public Storage Inc., $100 million in restaurant property financier Franchise Finance Corp. of America, and has agreed to buy Harveys Casino Resorts, owner of the largest gambling resort on Lake Tahoe, in a deal valued at $420 million.

In Kennedy-Wilson, Colony has chosen a veteran of Asia’s roller-coaster real estate market. Kennedy-Wilson has been doing business in Japan since 1989 and established a Tokyo office in 1994, which is run by the former president of Mitsubishi Real Estate’s Los Angeles office.

“While most of our business has been outside Japan in the past, the real growth opportunities now are the properties inside Japan,” said Kennedy-Wilson Chairman and Chief Executive William McMorrow.

Colony’s joint venture with Oakwood, known as Oakwood Asia Pacific, will provide management services in Asia, exporting the Oakwood concept of “serviced apartments” to markets such as Japan, Hong Kong and Southeast Asia, where there is a strong demand for expatriate housing.

By teaming up with Oakwood, Colony will be ensured that it has a strong management team to handle apartment or hotel properties it is acquiring in the region, where property management services are not as sophisticated as the United States, according to Brady.

And Oakwood, which counts 400 of the Fortune 500 firms among its clients, gets the capital it needs to begin building a global franchise. Oakwood, a division of R&B; Realty Group, is already the leading U.S. supplier of short-term corporate housing, managing more than 18,000 units across the United States.

But the firm has been stymied in its efforts to gain a foothold in Asia, where it opened an office in Singapore in 1995. At that time, Oakwood had formed a joint venture with Sydney-based Lend Lease Property Capital Services Ltd., which was interested in expanding its Asian real estate portfolio.

But when the Asian economies began to slow, Lend Lease lost interest in sinking more money into the region, according to Oakwood President James Klein. And he discovered that Asian property owners were reluctant to hire his firm unless he was willing to take an equity interest in the project.

“They wanted money up front and we weren’t prepared to do that,” he said. “That’s why you need somebody like a Colony who has the funds to invest.”

Klein is convinced the Oakwood concept will catch on in Asia, where business travel remains strong in spite of the Asian recession and there are just a handful of small regional players.

But Klein said Oakwood will be exporting a higher-quality product to Asia, where hotel customers are used to paying high prices but also expect top service.

In Tokyo, for example, a one-bedroom serviced apartment could easily cost $10,000 a month, compared with $3,200 a month for Oakwood’s most expensive apartment in Marina del Rey. But the Tokyo property would have much higher-quality furniture and much more extensive services, including daily maid service.

“In Asia, you must have five-star service,” Klein said.