Goldman walks away from Tiffany deal

Goldman Sachs has given up ownership of one of its most high-profile investments in Japan – the Tiffany Building in Tokyo’s Ginza neighbourhood – in a move that highlights the problems facing many foreign investors who acquired real estate in Japan before the global financial crisis.

Goldman, whose real estate fund acquired the building from Tiffany’s in early 2007 for Y38bn ($454m), exited the investment when the loans came due earlier this year, according to several people close to the situation.

As a result, the Goldman fund will have lost its entire equity investment, believed to be about Y7.6bn. The bankers to the deal, most of them foreign banks, are now in control of the sale process, these people said. Goldman declined to comment.

The decision by Goldman to walk away from the Tiffany Building, which is believed to have more than halved in value in the past three years, highlights the difficulties faced by investors who bought Japanese real estate at what are now seen to be peak prices in 2007 and 2008 – and their bankers.

Japan is not alone in suffering a real estate slump.

However, real estate loans in Japan typically come due in three years, so investors in the country are facing repayment earlier than in other markets.

Goldman and Morgan Stanley, which have been investing in Japanese real estate since the country’s asset bubble burst in the late 1990s, are among foreign investors who made some of the most high-profile property investments in recent years.

These include Morgan Stanley’s investments, through real estate funds, in a portfolio including 13 hotels acquired from ANA for Y281.3bn in 2007. It also acquired Shinsei Bank’s headquarters building for Y118bn in 2008 and Citigroup’s building in Tennozu Isle for Y48bn.

The Tiffany Building, designed by Japanese architect Kengo Kuma, was Goldman’s most eye-catching acquisition, not only because of the name of the tenant, but also due to its high unit price.

“That was a new high watermark for low-yielding real estate investments in Japan,” says one industry official, citing a yield believed to be just over 2 per cent.

Morgan Stanley’s real estate fund won a reprieve on its loan repayment after it agreed with creditors, including GIC, Singapore’s sovereign wealth fund, on a restructuring of the financing, according to a person close to the deal.

However, another fund managed by Morgan Stanley will soon face repayment of funds borrowed when it acquired Shinsei Bank’s headquarters building, in Tokyo’s Hibiya district.

While the building is in a prime location, Shinsei Bank, which occupies the building, is set to move out within months, leaving the owner without a stable tenant.