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Lone Star To Launch Japanese Real Estate Financing

TOKYO, July 23 (Reuters) – U.S. private equity firm Lone Star [LS.UL] will start extending loans for real estate deals in Japan, eyeing a rush of property to be put on the block by developers keen to raise funds, sources familiar with the matter said.

Lone Star, which has already established itself in the Japanese real estate market by buying golf courses, hotels and financial institutions, has now decided to branch out to provide mezzanine loans to property buyers, three sources told Reuters.

Lone Star will offer loans through a company called Star Finance Co Ltd, said the sources, who asked not to be identified because the fund has not yet publicly announced its plans for the new business.

Japanese megabanks such as Mizuho Financial Group Inc (8411.T: Quote, Profile, Research, Stock Buzz) and Mitsubishi UFJ Financial Group Inc (8306.T: Quote, Profile, Research, Stock Buzz), as well as overseas banks such as Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch and Co (MER.N: Quote, Profile, Research, Stock Buzz), are cutting their exposure to senior loans after being hit by the subprime loan crisis.

That is helping boost demand for mezzanine or junior loans, which are considered riskier but fetch higher interest payments than senior loans.

Lone Star hired Michael Griffin, a former real estate securitisation banker at Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) in Japan, to lead the fund's effort to find deals to finance, said the sources.

Overseas investors are raising funds to invest in Japan's real estate market, sensing an opportunity to buy assets cheaply with sector share prices sliding and developers looking to offload assets to stay afloat.

Last month MGPA, a private equity real estate investment firm that is half owned by Australia's Macquarie Group (MQG.AX: Quote, Profile, Research, Stock Buzz), said it planned to raise a new Japan fund worth more than $1 billion. [ID:nSP202816]

ING Real Estate also said last month it would launch a fund for Japan later this year. [ID:nSP48870]

Richard Price, the firm's Asia head, said the best investment opportunities in Asia would be in Japan, where rising borrowing rates and a cut in bank lending for property could persuade some owners to sell.

A handful of mid-sized Japanese real estate companies have in fact folded in the past few months, with apartment developers among the hardest hit by sluggish demand for housing as the world's second-largest economy slows.

Last week developer Zephyr Co (8882.T: Quote, Profile, Research, Stock Buzz) collapsed with 94.9 billion yen ($885 million) in debt, the largest failure of a listed firm in Japan in nearly five years. That followed Suruga Corp (1880.T: Quote, Profile, Research, Stock Buzz), a real estate firm that last month defaulted on its debt.

Companies keen to avoid the same fate have been rushing to shore up their finances by selling assets.

Pacific Holdings Inc (8902.T: Quote, Profile, Research, Stock Buzz), for example, has unveiled plans to nearly halve its assets in the next few months, and has reached out to Daiwa Securities Group Inc (8601.T: Quote, Profile, Research, Stock Buzz) for a possible capital injection. [ID:nT133167] ($1=107.20 Yen)

By Junko Fujita

(Editing by Michael Watson)