Hawaii fund ruffles feathers in Tokyo

By upping its holding in a Japanese REIT, a Honolulu fund could endanger its tax breaks

TOKYO » Prospect Asset Management Inc., a Honolulu-based fund, has increased its holdings in Japan's FC Residential Investment Co., endangering the Tokyo-based real estate investment trust's eligibility for tax breaks.

Prospect Asset Management raised its stake in FC Residential Investment Co. to 34.73 percent from 33.52 percent, according to a filing yesterday with Japan's Ministry of Finance. Residential's three biggest owners now have 49.25 percent of the REIT. Japanese REITs can't claim tax breaks if their three biggest shareholders own more than 50 percent of the company.

Residential's shares rose 10 percent in the past six months, half the gain for the Topix REIT index. The real estate market is benefiting from Japan's longest economic expansion since World War II. Prospect, which runs its own Japanese REIT and has stakes in others, may seek to merge Residential with other trusts, said Junko Miyakawa, senior analyst at Shinsei Securities Co.

"One possibility is for them to combine some of the REITs into one," Miyakawa said. "They would have the option to keep it listed or take it private and sell the fund to institutional investors."

Prospect also raised its ownership in Japan Single-Residence REIT Inc. to 17.31 percent from 16.18 percent, according to today's filing. Japan Single-Residence's stock gained 11 percent in the past six months.

Alex Kinmont, the managing director of Prospect, declined to comment on yesterday's filings.

JPE Capital Management Ltd. is the second-largest shareholder in Residential with 8.08 percent and Nikko Asset Management Co. is the third-biggest with 6.44 percent.

"We strongly recommend the top three shareholders don't buy more than 50 percent of our stock because it will be a problem for other stakeholders," Ryuji Murakami, a spokesman at FC Residential said.

Residential shares fell 1.2 percent to 504,000 yen today, valuing the REIT at 16.48 billion yen ($134 million).

Prospect owns shares in other REITs including Crescendo Investment Corp., LCP Investment Corp., DA Office Investment Corp., Kenedix Realty Investment Co. and MID Reit Inc.

Japanese REITs are exempted from corporate tax provided they distribute more than 90 percent of profit to shareholders, have 75 percent of all their assets in real estate and as long as their three biggest shareholders own no more than 50 percent of the trusts shares.

"Smaller REITs don't have the ability to compete," Curtis Freeze, the founder and chairman of Prospect said on Feb. 19. "Sometimes mergers and acquisitions are needed."