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Blue Hawaii

Depressed Land Prices A Bargain for Mainland Investors

by Susan Thorne

In the 1980s, Japanese investors surged onto the shores of Hawaii like a tidal wave, buying up prestigious real estate and inflating property prices. As economic troubles at home in the 1990s have plagued many investors, that wave has been receding, causing property values to nose-dive and creating some excellent purchasing opportunities for those in a buying situation.

Chicago-based General Growth Properties is one company that seized such an opportunity. This past summer, General Growth closed the $810 million purchase of Ala Moana Shopping Center in Honolulu from the Japanese D/E Hawaii Joint Venture, a partnership of Hawaii Central Development and Daiei Hawaii Investments, a Tokyo-based property developer and Japan’s largest retail company.

General Growth bought Honolulu’s 1.8 million-square-foot Ala Moana Center this past June.

The sale of Ala Moana was precipitated by head-office troubles for the Daiei Corp.

“What’s happening in the Hawaiian marketplace is a direct result of events in Japan,” pointed out Scott Gomes, vice president of the Honolulu office of CB Richard Ellis, a financial and commercial real estate services firm. Gomes is also a member of the Asia-Pacific Advisory Group, a body helping Japanese investors with disposition of their Hawaiian properties acquired during Japan’s economic “bubble” of the 1980s.

“Daiei had an enormous debt, about $2 billion, most of it considered corporate — that is, not debt on a specific property,” he explained. “Attempted expansion into China and domestic grocery chains had weakened the company’s corporate position.”

The result: sale of its prime asset in Hawaii to raise cash to pay down debt at home.

That pattern is familiar to anyone following Hawaiian real estate news. Japan’s financial stagnation has resulted in the selling off of a number of prestigious resorts, hotels and golf clubs throughout this decade, among them the Grand Wailea Resort & Spa on Maui, the Kona Surf Resort on Hawaii, the Westin Maui in Kaanapali and the Kahala Hilton. These and other Japanese-owned properties were sold for considerably less than their former Japanese owners paid for them, “and in many cases for 25 cents on the dollar,” said Paul H. Brewbaker, chief economist with the Bank of Hawaii, Honolulu. He recalled the sale of the Hilton Waikoloa in the early 1990s, when the hotel, previously valued at $400 million, was purchased by Taiwanese interests for less than $100 million. But as the decade has progressed, prices paid have come closer to 1980s values, he said.

In the early 1990s, buyers of such properties included a number of Taiwanese, Chinese and Hong Kong investors, but Brewbaker said that with the Asia-wide financial crisis, more recent purchasers have been principally from the mainland United States — often institutional companies such as pension funds or insurance companies that have profited from real estate and equity gains in the strong economy there.

Hawaii has not shared in the 1990s boom of the other 49 states but instead has suffered stagnant growth and even periods of recession in the current decade, he pointed out. This has depressed property values and makes the islands an attractive investment target.

“As people look around the country for bargains, they see very few,” he said. “Hawaii offers pretty good value for a mainland investor.”

The unloading of Japanese investments abroad is not confined to Hawaii, as evidenced by the recent sales of Essex House in New York City and the ANA Hotel in San Francisco. But Japanese interests play a particularly significant role in Hawaiian real estate. Gomes estimates the total value of Japanese investment in that state at around $20 billion, compared with $75 billion for the entire United States and $10 billion in all of Australia. That investment tends to be focused more on hotel and resort properties than shopping center and retail real estate, however. Other than Ala Moana, just two malls have been owned and operated by Japanese, he said: Pearl Highland, which is expected to change hands in the next 12 to 24 months, and Windward Mall, sold in the mid-1990s.

Japanese retailers have a stronger presence in Hawaii than in the mainland United States. Daiei’s general merchandise stores, similar to Wal-Mart, do well in the Hawaiian market, Gomes said. Shiroken, part of the Tokyu Group, Tokyo, a transportation company, has a store in Ala Moana. The Japanese have bought some bakeries and juice businesses on the island as well, Gomes said, “but they are not real major players in shopping center or retail ownership.”

Shoppers visiting from Japan are an important component of Hawaii’s tourist shopping market, however. Tourists account for half of the $155.5 billion in annual retail sales in Hawaii, and high-spending Japanese visitors contribute a sizable chunk of that, pointed out Hersch Singer, CEO for SMS Research & Marketing, Honolulu. With the Japanese economic crisis, disposable income and, therefore, retail spending by Japanese shoppers dropped, both at home and abroad. The $8 billion spent by visitors in Hawaii’s stores in 1997 dropped by 10%, or $800 million in 1998, Singer said, and this affected retail property values negatively.

Although many Japanese investors are relinquishing ownership of Hawaiian properties, Gomes made it clear that this is no fire sale. “The assets are being marked to market, at the price that is justified by the cash that the property generates,” he said, including Ala Moana’s purchase price in that assessment. John Bucksbaum, CEO of General Growth, also is emphatic that the Ala Moana sale price was a fair one in the context of today’s property environment, although dramatically less than it would have been a few years ago. “Almost any type of commercial real estate is down relative to where it was,” he said. “You can make the argument that it was overpriced before, but that was what people were willing to pay — the market is what it will bear.” Today’s lower values are a correction of a previous overpricing situation, Bucksbaum said.

One question for purchasers like General Growth is whether property values will be further eroded, making today’s prices look overpriced tomorrow. Bucksbaum rejects that idea. “We think you’ve seen the bottom of cycle, or we’re at the bottom now,” he said. Ala Moana retains concrete value in terms of the high sales in the center, which average $900 per square foot for all shopping space, he pointed out. Forty-two million shoppers visit annually, generating sales of more than $1 billion. “Not many shopping centers can claim that kind of sales,” Bucksbaum commented.